Innovators Speak Out Against Proposed Bitcoin Regulations

Tim McCormack of Boston purchases virtual currency at a South Station bitcoin ATM, which was among the first in the nation.
Tim McCormack of Boston purchases virtual currency at a South Station bitcoin ATM, which was among the first in the nation.
Steven Senne/AP

As New York takes its first stab at regulating the shady online currency Bitcoin, Massachusetts innovators say that such regulations could permanently stifle innovation and even push it overseas.

Bitcoin purchases are currently anonymous. Proponents say that fosters innovation and speedy transactions. Others say it harbors drug deals and even hitmen for hire.

The New York Department of Financial Services last week proposed a plan aimed at raising the curtain that now shrouds bitcoin sales, thereby making online currency trading far more transparent and accountable.

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If accepted, the regulations would make New York the first state to have virtual currency legislation on the books, according to TIME.

The proposed regulations would require any company that wants to peddle bitcoin to obtain a licence to do so. They would also force the company to keep detailed books and adhere to rules intended to prevent fraud and money laundering.

“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation,” wrote Benjamin Lawsky, the superintendent of the New York State Department of Financial Services, on Reddit last week.

Boston entrepreneurs disagree, saying that such regulations if adopted elsewhere, such as in Massachusetts, would reverse the strides the state has taken to encourage innovation.

“The proposed NYDFS regulations would absolutely stifle innovation with this emerging technology, or at the very least, ensure that the innovation takes place overseas,” says Dan Elitzer, founder and president of the MIT Bitcoin Club. “Students and entrepreneurs would be prevented from even tinkering with basic applications and services that touch Bitcoin in any way.”

Chris Yim agrees. He was one of the founders of Liberty Teller, a Boston company that installs bitcoin ATMs.

Yim grew up around Boston as the internet boom was sweeping through the city and says he saw firsthand the influx of jobs and capital fostered by online innovation.

“I and many others think we could see history repeating and Massachusetts becoming a major global bitcoin center,” he says.

Boston already has a tech savvy populace that has begun to embrace the currency. The city now has multiple bitcoin ATMs—including one located in the bustling atrium at South Station and another perched on the second floor of the Harvard Square Clover. Some establishments, such as Cambridge restaurants Veggie Galaxy and Thelonious Monkfish, have also begun to accept bitcoin.

According to Yim, “overly onerous regulations” modeled on the New York plan could threaten those bitcoin initiatives.

Massachusetts has not yet attempted to instate virtual currency regulation, but it has demonstrated some reluctance to endorse bitcoin.

The state Office of Consumer Affairs and Business Regulation expressed doubt this spring over whether bitcoins are the safest way to satisfy the demand for a “faster and more efficient” commercial payment system.

Under current law, bitcoin kiosks, such as the ATMs that Liberty Teller installs, do not need the approval of the Division of Banks. But new regulations tailored expressly to virtual currency might close those loopholes and open bitcoin up to further scrutiny.

Advocates for increased regulation say that the New York proposal might help prevent the scams, which have wracked the industry since the currency made its debut five years ago.

Earlier this year, hackers stole millions from an online Bitcoin exchange called Mt. Gox. Without a regulatory framework or record of the purchases, owners had little way to reclaim the stolen money.

The Massachusetts Office of Consumer Affairs and Business Regulation subsequently issued an alert warning people about the dangers inherent to Bitcoin trading. As BetaBoston wrote earlier this year, bitcoins can be stolen or lost and are subject to drastic price fluctuations.

Yim downplayed those risks saying that bitcoin “is significantly more transparent than cash, which is the most appropriate analog.” Cash transactions, he pointed out, are rarely recorded.

Nonetheless, the hazards have prompted regulators and investors alike to urge reforms. Even millionaire investors Cameron and Tyler Winklevoss, who have contributed heavily to bitcoin, have endorsed the most recent effort to regulate the industry.

Yim says that it is important for customers to feel safe. “Bitcoin is still new for many Americans and we want to make sure people understand, trust, and use it.”

But he notes that private companies are already implementing security protocol.

“We already manage fraud, cybersecurity, and money laundering risks, and keep detailed books,” Yim says. “A license could officialize that, but may create costs that we’d ultimately have to pass on to customers.”

Elitzer agrees, adding that regulators should be focusing their energies elsewhere.

“If anything, they should be looking to thoughtfully craft exemptions to existing regulation to encourage innovation and enable students and entrepreneurs to more easily realize the advantages of this new technology,” Elitzer says.

The Massachusetts Division of Banks, the branch of the consumer affairs office that deals with bitcoin, refused requests for an interview.