Can New York lead in cryptocurrency?

After becoming an early adopter of regulatory policy for cryptocurrencies, New York may finally be ready to usher in a real renaissance of crypto activity this year. Since 2015, virtual currency businesses and exchanges operating in New York have been required to be approved with a BitLicense from New York’s state Department of Financial Services – a development that some say has resulted in an exodus of bitcoin startups from the state because of the slow, bottleneck process of applying and being approved for a license.

But with recent developments in the sector – including the announcement of a cryptocurrency task force to study, among other things, how the state might regulate cryptocurrency – the outlook for attracting crypto startups to New York may soon be brighter.

Assemblyman Clyde Vanel, who introduced the bill for a crypto task force that was signed by Gov. Andrew Cuomo late last year, said that the BitLicense has been important in protecting consumers and investors in an industry that has been susceptible to hacks, but that it’s now time to take another look at how the state should regulate cryptocurrencies and blockchain technology. “A lot has changed in blockchain, a lot has changed in cryptocurrency,” Vanel said. “At the time that we came out with that regulation, we only were dealing with Bitcoin. There was no Litecoin, there was no Dash, there was no Zcash, and there were no other kinds of tokens. There were no utility tokens, there were no security tokens. So a lot has changed.”

Bitcoin, one of the earliest and best known cryptocurrencies, was conceived as a way to make digital transactions without the authority of a centralized third party – for example, a bank. Since the public release of Bitcoin in 2009, blockchain technology – the digital ledger system that maintains a record of all transactions – has evolved to show uses for health care, voting and other non-financial transactions. While government is known to move at a much slower pace than technology, these additional uses for blockchain have been known for a while now, making the time ripe for reevaluating regulation. “New York state has a burgeoning blockchain industry that is not only associated with cryptocurrency,” Vanel said, referencing companies that specialize in transferring other types of stored data.

Jalak Jobanputra, founder and manager partner at Future\Perfect Ventures – whose affiliate Future\Perfect Labs will help manage the recently opened NYC Blockchain Center – said that while the BitLicense was an important early step for New York establishing itself as a leader in blockchain, the policy has led to real problems in practice. “In some ways, New York was progressive by doing that,” Jobanputra said. “The challenge around the BitLicense is, there's a large fee to apply that kind of weeds out companies that are just starting up, so it's really the more established exchanges are the ones that can move through the process of getting the BitLicense.” She also noted that the crypto community has lamented the slow process of applying for and receiving a BitLicense, which can serve as another deterrent.

The BitLicense is issued by the Department of Financial Services and requires any company that wants to do virtual currency business in the state to submit detailed applications that include a $5,000 non-refundable application fee and often subsequent legal fees. So far, DFS has given out only 14 licenses or charters for virtual currencies since the regulation was introduced in 2015.

The flight of cryptocurrency startups from New York is something that concerns Vanel as well, given New York’s reputation as the financial capital of the world. Financial technology – or fintech – should be a part of that reputation too. “We're losing talent, we're losing companies to New Jersey, to Connecticut,” he said. “So that's why it's important for us to really figure out how to clearly have a clear, fair regulatory regime in New York.”

Still, the prospect of looming regulation can be a deterrent for startups, Jobanputra said. “There's also just a perception that New York is potentially going to regulate or overregulate the market, and while that hasn't happened other than the BitLicense requirement, a lot of entrepreneurs have decided not to start up their businesses here because they're concerned about what future legislation may be onerous,” she said. The NYC Blockchain Center, which her company will help operate, was announced by the New York City Economic Development Corporation this January as an education and access center for both industry professionals and those curious to learn about blockchain.

Blockchain and cryptocurrencies are a lot like other rapidly advancing technologies – artificial intelligence and data mining included – in that they can be harnessed for social good, improve health care and boost efficiency at work, but that they also represent somewhat unknown quantities. Cryptocurrencies, for one, can be vulnerable tocostly hacks.

The new task force will include technologists, consumers, investors and academics appointed by the governor and state Legislature, which Vanel said he hopes to announce by the end of February. The group will explore how cryptocurrency and blockchain should be regulated and can possibly be incorporated into other uses. The task force will then make a report on their findings by December 2020.

Both Vanel and Jobanputra have predicted that there will need to be acknowledgement of the various uses and definitions of blockchain technology. “If you believe in tokenization, you believe that there is more that's going to happen around crypto and tokenization, and we're going to need a broader, more comprehensive definition and delineation around these things,” Jobanputra said.

In the launch of the task force, Vanel said he wants to strike the balance between fostering growth of fintech and other crypto companies in New York, while still protecting consumers and investors from the technology’s vulnerabilities or potential for abuse – a tough task given the constantly evolving nature of the tech.

“We have to protect New York investors, we have to protect New York consumers. At the same time, we have to have a burgeoning economic environment for blockchain and cryptocurrency in New York,” Vanel said. “We have this golden goose, we don't want to break open the goose and take out the eggs. We want to be able to have guardrails to protect the goose so that it can grow properly, but have the proper guardrails for it so it doesn't get killed on the highway.”