Introduction that is specifically designed for virtual currency

Topic: BusinessComparative Analysis
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Last updated: December 22, 2019

Introduction On July 17th 2014, the New York State Department of Financial Services (NYSDFS) announced that they will issue a regulatory framework that is specifically designed for virtual currency businesses operating in the state of New York (Anderson, 2014). This regulation is known as “BitLicense”, and after series of revision and commenting periods, it was formally issued in June 2015 (Harper, 2017). The evolvement of the BitLicense traces back to 2013, two years prior to the official issue of the regulation—and the two years were spent on regulatory inquiry such as enormous number of fact-findings, research and debates by the department and its agencies, virtual currency experts, banks, scholars, public and media (Rizzo, 2015; Lawsky, 2015). Before getting into the analysis of the regulatory framework “BitLicense”, it is crucial to understand what Bitcoin is, and more broadly what cryptocurrency/virtual currency is. We have relied on centralized entity for legitimacy and control over the supply of currency, and there is a monopoly on issuing money (Karlstrom, 2014). We have an accounting recording system with regular, state issued currencies that tells us who owns what, who owes how much to whom, and this system required someone who could record the transactions and keep the accounting ledger as a trusted third party (government and banks) who guaranteed that the currency was real and how much it was worth (Cannucciari & Smith, 2016).

Cryptocurrency is not backed up by any national or international banks, but simply based on the confidence of the users who exchange these bitcoins computer to computer (Cannucciari & Smith, 2016). Unlike regular currencies, cryptocurrency like Bitcoin does not require third party to record transactions, guarantee that the currencies are real and how much of a value they have—cryptocurrency entails a way of recording transactions and values, but they do so digitally so that people can send them directly to each other and everything is recorded in an open ledger (Cannucciari & Smith, 2016). In more technical words, cryptocurrency is created and stored in the blockchain electronically, overseen only by peer-to-peer internet protocol, free of all government oversight (BlockGeeks, n.d.

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). Because it monitors and update the ledger in a collective consensus-based system, it doesn’t require someone in the middle who has to be the repository of all the information—this is why no transaction fees are required, cut down on inefficiencies caused by intermediations, and ultimately allows us to avoid corruption and risk that are associated with centralizing information (Cannucciari & Smith, 2016). Bitcoin is by far the most famous type of cryptocurrency, as of current there are over 1300 known cryptocurrencies in the world in December 2017 (Cryptocurrency Market Capitalizations, n.

d.).  “BitLicense” is a set of regulation that is created to oversee and govern all digital currencies operating in the state of New York, and it required any person or entity that operate digital currency businesses, or have any activities involving digital currencies and New York or New York resident to apply for a license, and established minimum standards of conduct (DeWaal et al. 2015, p,1). For the simplicity purposes, I employ the definition stated by Karlstrom in his article, I use the term “virtual currency” to refer to Bitcoin-like currency which has the characteristic of the following three aspects: 1) the supply of the money is managed by computer software algorithmically instead of institutionally by central banks; 2) there is no hierarchical supervision of transactions, it is distributed amongst traders and investors; 3) the person who owns the “wallet” of the currency can and always remain anonymous (Karlstrom, 2014, p.27)Involvement of ExpertsBenjamin Lawsky was the Superintendent of Financial Services in the state of New York who led the main investigation and is known as the creator of the regulation (Merced, 2015).

  During the regulatory inquiry, Lawsky held a 2-day-long hearing by experts on January 29th 2014, prior to the first publication of the proposal in the agenda setting stage (NYDFS Virtual Currency Hearing, n.d.).  In the opening statement, he stated that “…over the last six months, our agency has been conducting an extensive inquiry into virtual currencies. We’ve had dozens and dozens of meetings with a wide range of industry participants. We’ve spoken to leading academics and law enforcement officials.

Today’s public hearing is the next step in that inquiry” (“Benjamin M. Lawsky, Superintendent of Financial Services Opening Statement”, 2014, p.1) Later in the statement he states “We believed that it was important to hear from law enforcement and regulators. But we also wanted to bring in investors, technologists, merchants, and a number of other individuals on the ground floor of this fledging industry to provide their views. We believed that it was important to hear from law enforcement and regulators. But we also wanted to bring in investors, technologists, merchants, and a number of other individuals on the ground floor of this fledging industry to provide their views” (“Benjamin M. Lawsky, Superintendent of Financial Services Opening Statement”, 2014, p.

1) He also mentioned at the beginning of hearing to let the participants know that this is a place for them to be as clear and vocal as possible, and that they can take as much time to explain or clarify their views – implying that the hearing was held genuinely to gain more perspective and take advice from experts in the field (“NYDFS Virtual Currency Hearing”, 2014). The opening statement is a clear evidence that the NYSDFS sought for expert knowledge in technicalities and engineering side as well as law enforcement officers and consumer protection experts of the cryptocurrency situation at the time at the agenda-setting stage (“NYDFS Virtual Currency Hearing”, 2014).Experts’ TestimonyThe experts who attended the hearing wrote formal written testimony, which included their answers to a set of eight questions. These questions were designed to ask experts about “what kind of regulation” rather than whether the regulation was needed at all. The questions in the testimony include but are by no means limited to professional opinions about feasibility of the regulation that is specifically designed for transaction of virtual currency, if regulations were to be implemented if there are any entities that require specifically tailored consumer protection guidelines, and investor’s perspective of pricing, volatility and security of the virtual currency (“NYDFS Virtual Currency Hearing”, 2014). Investors of cryptocurrency mainly advocated for against regulation. They saw the benefit of the anonymity and “unregulated” aspect of virtual currency.

Jeremy Liew, a Partner at Lightspeed Venture Partners at the time of hearing, addresses in his hearing as well as written testimony that the beauty of Bitcoin and any cryptocurrency is that its lower transaction fees, its ability to allow micro-transactions (transactions less than a dollar) and facilitate smart contracts, and solve for double spending problem (Liew, 2014, p.1-2). Liew, while recognizing the danger of money laundering and certain security breaches of cryptocurrency and therefore the need for clearer framework and guidelines for virtual currency, believes that ecosystem of Bitcoin—for instance payment system of Bitcoin exchanges is one area where new guidelines and regulations can help  (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014).

However, he states that the regulators should treat Bitcoin and other cryptocurrencies just like other existing currencies, and recommend using the existing regulatory frameworks to prohibit bad behavior such as money laundering rather than developing new guidelines specifically tailored towards cryptocurrency (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014). Fred Wilson, a partner at Union Square Ventures says that the regulation would be inevitable, but strongly advise all parties trying to enforce regulation to be mindful of the fact that most companies in the industry are start-ups, very young and short on staff, usually just two to three people operating the company from coding to responding to customers—and because of this, they would not be able to do what big banks and firms can do, forcing them out of business if regulation was to be issued  (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014). It is unclear if any investors had any affiliations with certain political parties, however, the absence of government control over currency is clearly affiliated with libertarian views—Jeremy Liew, aforementioned expert, when asked by Lawsky, stated that the virtual currency has attracted different kinds of people for different purposes over time (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014). When it started out, characteristics that make it interesting was decentralized open source, and it attracted radical libertarians and they took it from ideas to commodity, and second wave of people were attracted to the pseudonimity, those who thought that they could and wanted to conceal their behavior behind the Bitcoin (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014). The third and most recent (at the time of hearing) wave of people are attracted to dramatic low transaction costs and its characteristic of being programmable, so there is a change in the nature of Bitcoin population— and what this reveals is that the market of radical libertarians and criminals are not big, but the values of it being free and programmable expands the market to everybody who invests and uses virtual currency all over the world (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014).Key Issues at StakeBased on the written testimonies by experts and questions asked and answered during the 2-day hearing, it is apparent that the issue of the regulation that were most concerning the experts was that the nature of cryptocurrency allowed for Bitcoin investors and cryptocurrency related business owners to operate around the unregulated aspect of the virtual currency – its uniqueness of pseudonymity and to be exchanged electronically without centralized accounting authority, that is not affected by any government, able to avoid corruption of the central government or banks and high transaction fees and across any international jurisdictions, yet the BitLicense was designed to significantly reduce the benefits of the unique characteristics and strengths from virtual currencies, indicating massive loss for those based in New York (“NYDFS Virtual Currency Hearing”, 2014). Law enforcement and regulatory experts were concerned of the framework and protocols NYSDFS would outline, being aware of the inability to identify criminals to prosecute (“NYDFS Virtual Currency Hearing”, 2014).

  Lawsky and his regulators on the other hand were concerned with virtual currency related crimes and the level of anonymity provided by digital currency, namely money laundering, drug trafficking, gunrunning and other illegal activities (“Benjamin M. Lawsky, Superintendent of Financial Services Opening Statement”, 2014, p.3).  Paradox of Politics and ScienceMany experts, journalists and people who had extensive knowledge into the history of Bitcoin stated that in order for virtual currency to go mainstream, there has to be a law enforcement or regulators weigh in on the matter (Cannucciari & Smith, 2016). Katheleen Moriarty, an attorney for a virtual currency capital management company Winklevoss Trust said that those people who expect a very powerful utility like Bitcoin to escape regulation entirely are either naïve or extreme optimists (Cannucciari & Smith, 2016). Benjamin Lawsky was one of the first, very crucial regulator in the financial sector to politicize the growing controversies surrounding virtual currency (Cannucciari & Smith, 2016). Lawsky has been characterized as “The Sheriff of Wall Street” by media and has been known as a major player in many major bank scandals, market manipulation, money laundering, accounting fraud, and in appropriate mortgage servicing (Dayen, 2014).

Lawsky has spent the entire two decades of his legal career in government, and was the main proponent and designer of the BitLicense (Silver-Greenberg & Protess, 2015). Paradoxes of science in politics is captured in the paradigm of those investors who advocated strongly against the regulation, virtual currency business owners such as Winklevoss brothers who anticipated long before the inevitability of regulation and tried to maneuver the regulation into something that does not give Bitcoin a dead-end, and Lawsky, who resigned his position as the Superintendent shortly after the official issue of the BitLicense and right away started his own consulting firm that will provide risk and compliance management advice to those in battle with data breaches and other relevant technological challenges (Weingart, 1999; Cannucciari & Smith, 2016; Silver-Greenberg & Protess, 2015). Weingart lists “justification for unpopular policies” and “clarification of conflicting interests” as functions of scientific expertise (Weingart, 1999, p.155). In Lawsky’s opening statement as well as throughout the hearing, Lawsky expressed his concerns for potential dangers that are provided by anonymity associated with virtual currency, and he legitimized the regulation for virtual currency by emphasizing that the department has been actively regulating the traditional banking sectors as well (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014).

In fact, Lawsky and his department has been actively involved in bank settlements and they had been pushing up the penalties that banks were required pay for alleged regulation violations and money laundering (Chon, 2015). As noted in above section, while recognizing the inevitability and parts of ecosystem of virtual currency as in need for new guidelines, experts ended up emphasizing the anonymity and lack of central authority as the fundamental and unique characteristics of Bitcoin, thus giving Lawsky evidences to justify for the unpopular policies and stirring conflicting interests of the potential criminals and innovative investors over the anonymity and programmable aspect of virtual currency. Perhaps the most controversial politicization of science surrounding the issuing of the regulation is the departure of Lawsky as the Superintendent just few weeks after the regulation was issued and announcement of his start up firm to advise companies on the very regulation he introduced (Freifeld, 2015). In the interview held at American Banker’s digital currencies conference in New York, he stated that he cannot work on anything, for his life, whatever he worked on at the NYDFS (Roberts, 2015). However, his company website says “the firm provides in-depth counsel and strategic advice on financial services regulation, cybersecurity and cyber-risk, new financial technologies, compliance, consumer protection, privacy, anti-money laundering controls, crisis management, and investigations in the banking, insurance and other related industries” (“About the Lawsky Group”, n.d.). It does not have to take an expert to understand that the services listed on the websites are amongst what he and his department worked on during his tenure at NYDFS.

Many Bitcoin experts say that he has created a revolving door for himself, and harshly criticize his moral implications for starting a firm that helps to virtual currency companies to navigate New York’s virtual currency regulatory environment – the regulation he himself has created (Faggart, 2015). Scientification of politics is observed in actions taken by those experts who saw the inevitability of the regulation and tried to navigate the regulation as much as possible to the favor of those in the industry. Cameron and Tyler Winklevoss, twins who are entrepreneurs as a team in the field of virtual currency, owning several start-ups and funds related to virtual currency were known example (Condon, 2014). In both written and in-house hearing, the twins took the position of favoring the regulation framework, while recognizing the characteristics of virtual currency saying that Bitcoin has particular risk-return profile that appeal to many investors, stated that regulation will play the biggest role in Bitcoin’s forthcoming evolution, and acknowledge that the regulatory environment must be both certain and carefully constructed for Bitcoin users and start-ups (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014; Winklevoss, 2014). Recognizing the anonymity and thus opportunities for bad people to commit crimes behind virtual currency, the twins went on to state that the regulation is inevitable in the wild west, finding a dialogue in the middle ground where they can establish a firm understanding where they don’t lose innovation but at the same time don’t permit crimes. They suggest for a concept where if investors or companies register and let the government know what activities they are engaging in for a certain period of time, then the startup companies can build technology and platforms for virtual currency and investors can focus on making investments and making profits, rather than all of them having to pay millions of dollars for regulatory compliance purposes (NYDFS Virtual Currency Hearings, Day 1, Panel 1, 2014). They weren’t the only proponents of the regulatory framework.

Fred Ehrsam, Co-Founder & President of a start-up called Coinbase, also saw that virtual currency will not stay wild west for much longer (Wilson, 2014). He simply stated in his written testimony that it’s reasonable to require regulatory oversight, however emphasize that the guideline needs to be across states or federal basis due to the Bitcoin’s transactions being conducted from peer-to-peer across the world (Wilson, 2014). By making their argument as entrepreneurs in the virtual currency while recognizing the inevitability of regulation that might affect them, Winklevoss brothers emphasized the need for an environment where start-ups and businesses can survive and will not stiffer innovation after the regulation takes place.

This is an evidence of Winegart’s statement where interests of scientist taking various forms – investors who strongly opposed the regulatory framework were advocating for a position in a controversy, while the entrepreneurs and business owners were interested in protecting their businesses and their business communities (Winegart, 1999, p.156). Law enforcement officials and experts expressed their concerns around the anonymity of virtual currency therefore being unable for the prosecutors and police to collect information about criminals, and emphasized the need for clear guidelines and protocols of regulation for the prosecutors to follow in case of virtual currency crimes (NYDFS Virtual Currency Hearing, 2014). Academic experts held rather neutral position where they recognized the uniquely decentralized characteristic of virtual currency but at the same time it is addressing what aspects of virtual currency government should be paying attentions to in creation of regulation (NYDFS Virtual Currency Hearing, 2014).Knowledge RegimeDespite the outcome and the content of the regulation, the two-day hearing held by Lawsky consisted of five different panels with different perspectives is an evidence of cooperatist knowledge regime to gain 360 degree view of the virtual currency community (Campbell & Pedersen, 2015; “NYDFS Virtual Currency Hearing”, 2014).

Five panels are organized as follows: one that consists of investors and business owners; one consisting of regulatory agencies and experts; one of law enforcement officials and lawyers; one of virtual currency commerce and consumer protection experts; and one consisting of academic experts such as professors (“NYDFS Virtual Currency Hearing”, 2014). Many experts argue that the very existence and creation of Bitcoin around 2008 is a product of Great Financial Crisis in 2008 after the entire conventional financial system nearly collapsed and was created by those who grew skeptical of the traditional currency and wanted to invent alternative—what the crisis showed was that there was major flaw in the existing system, and people were hungry for some kind of alternative (Cannucciari & Smith, 2016). Campbell and Pedersen states that US cooperatist model of knowledge regime evolved around a number of partisan ideology clashes and partisan affiliated research institutions, starting amongst those who saw the credibility problems and their growing inability to tackle the nation’s most pressing policy problems such as welfare and federal government’s fiscal deficits (Campbell & Pedersen, 2015, p.687). Because of the diversity of professionals and number of individuals that were invited for the hearing, whether any of them had particular partisan affiliation is unknown.

However, virtual currency is a global phenomenon, and a very rapidly growing and evolving that it has high potential in providing both financial innovation and serious crimes (“Benjamin M. Lawsky, Superintendent of Financial Services Opening Statement”, 2014). For this reason, investigation held by Lawsky involved players from different perspectives and professional opinions—from experts with much libertarian view of economy, academics with more neutral, theoretical knowledge to financial regulators and law enforcement officials—and it supports the cooperatist narrative presented by Campbell and Pedersen.Concluding RemarksErik Voorhees, a CEO of blockchain asset management company says that Bitcoin and virtual currency raises a battle of ideas and issues such as whether people should be as free in their handling of money as they are in their handling of speech or religion (Cannucciari & Smith, 2016).

Debora Stone borrows Stuart Mill’s lens and states four elements of liberty in American political thought—first being the single criterion by which the interference by the government can be justified is harm to others, second being the harm should be distinguished clearly between the behavior that affects others and behavior that does not, third being liberty refers to an attribute of individuals, and not social roles or groups or organizations, and forth, it sees liberty in a negative way as it lacks in interference with actions of individuals (Stone, 2012, p.109). The uniqueness of virtual currency is the very attribute of anonymity and being completely free of state intervention, and this is why it traveled quickly all over the world and attracts investors, business owners and ultimately innovation (Cannucciari & Smith, 2016; Liew, 2014; Winklevoss, 2014). However, these unique characteristics are the reason Lawsky saw the need for regulation – realm of virtual currency as a wild west with no guidelines or frameworks, which attracted terrorist funding, money laundering and many other security breach issues (Cannucciari & Smith, 2016; “Benjamin M. Lawsky, Superintendent of Financial Services Opening Statement”, 2014). To summarize, the hearing of experts of virtual currency regulation BitLicense by NYSDFS during Lawsky’s tenure provided cooperatist knowledge regime to the state government of New York, while capturing politicization of science and scientification of politics in its narrative around business owners and investors in virtual currency trying to maneuver regulation for the longevity and survival of their businesses,  law enforcement officials and regulators who believe that the state intervention is necessary due to the potential harm to the economy and financial sector, and Lawsky, the creator of the regulation designing the position only to start a firm that provides services for the businesses with regulatory expertise and advise.


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