Open Letter to Mr. Ben Lawsky of New York on Bitcoin Regulation
The World is Watching: New York and Mr. Lawsky please use caution with Bitcoin Regulation
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ROUGH DRAFT (PLEASE DO NOT USE OR PUBLISH UNTIL FINALIZED)
Superintendent of Financial Services Benjamin M. Lawsky
New York State Department of Financial Services
One State Street
New York, NY 10004-1511
Dear Mr. Lawsky,
Recently tens of thousands of us took time out of our day to eagerly watch your hearings covering digital currency. Please accept this letter and comments humbly presented for your consideration.
I represent a newly created group called the Bitcoin Financial Association and the undersigned represent both new members of the organization and other interested parties who are not members.
I come from a 22 year career in the investment business having served as a FINRA General Securities Principal for many years and as founder of Atlantic Financial which became the first full service investment firm to use the Internet in 1994. So I have seen and been through the challenges faced when embracing new technology related to financial services. Like many in our industry I have ties to New York, having lived there, trained there and been registered in your state and served clients there over the years.
The regulatory challenge we face today
In the early 90s a new technology; the “information superhighway” was coming into mainstream use. We faced questions about how we could possibly know our customers when they were not face-to-face, how we could prevent fraud and money laundering and whether this new technology was simply a fad. Fortunately, regulators had a fairly hands-off approach to the Internet and financial services during its early formative years. This enabled small firms to grow and large firms to adopt new technologies and methods of servicing clients.
The Internet grew rapidly and created many jobs but could have done even better. There were many bottlenecks: regulations made it difficult for private citizens to access stock quotes, we had uncertainty about the ability of registered representatives to use email. Tradition bound procedures relied heavily on triplicate forms, faxes, file cabinets and other antiquated technologies. Delays in recognizing the values of mobile offices and other issues took time for the regulations to catch up to technology and undo old conventions placed in motion before this technology was conceived of.
Today we face similar questions and, given the interwoven nature of Bitcoin with the financial world, even more need for flexibility, understanding and regulatory clarity.
The following are some points we hope that you will consider in your deliberative process:
A “Slippery Slope” of Making Actions Criminal Solely Because of Their Relation or Facilitation of Other Regulated Actions
During the hearing, it was mentioned that it is may not be worth having “1000 flowers bloom” if one money launderer goes free. We would gently push back at this notion. Noting first that the choice is not binary: lack of regulation for Bitcoin does not necessarily mean that a money launderer will go free. There are many ways to catch criminals. Modern investigative methods combined with time tested police techniques can, will and should be applied to new technologies in order to catch those who violate the rights and liberties of other citizens.
With new technologies come new criminal methods. For much of American history, we have allowed these new technologies to flourish and had enforcement and investigative methods, not necessarily regulation, keep pace with new criminal techniques. Just as automobiles and mobile telephones enable criminals to commit more crimes in an easier manner than they would without those tools, in and of itself, we suggest this ease may not be a morally justified reason for new laws and regulations. The ability of technologies to make the job of criminals easier only exists because those technologies also make the lives of everyone else easier. In these cases, the benefit of the technologies outweighs the drawbacks in every case.
The “1000 flowers blooming” is the very thing that makes America great. In your great state many flowers have bloomed over the last couple centuries – making New York City a great financial center for the world. As a regulator you have the ability to stamp out many flowers – but the drawbacks are significant. Clearly you could wipe out 99% of existing money laundering and banking fraud by driving the existing, established financial sector away from the state- but this is not what you seek and serves no one. Being home to Wall Street makes New York home to many of the world’s highest profile financial crimes, but it is a price well worth the benefits. Economic growth, jobs and stability are key in reducing overall crime and these come from innovation and growth.
The Core Overall Moral Issues in Enacting Various Types of Bitcoin Regulation
Regulation, as you know, comes with drawbacks: the law of unforeseen consequences, and ultimately the use of force required to enforce them. Even the most well-meaning law or regulation is, at the end of the day, backed by force and violence. Clearly this is not new information to you, but it cannot be stated enough whenever citizens, legislators, or regulators consider the price of new rules governing the public.
It seems that one logical way of approaching Bitcoin from this moral angle is to consider what harm is actually done and who the victim is. By focusing on victims of actions which might violate their human rights, we can strive towards the most fair and clear outcomes. We suggest Bitcoin regulation focused on those direct crimes with the clearest victims over those regulations which are further removed from victims.
Consideration of the Various Costs of Regulation
A key point with emerging technology is that, when stifled, hampered, or delayed, sometimes new businesses are never even started and new ideas are never even created.
If the regulatory environment is overly burdensome for new Bitcoin related companies, your opportunity cost will be not just measured in the short term lost jobs, economic growth and opportunity. It will be measured not just in the floundering of our global competitive advantage versus countries who are more progressive and business friendly. Our collective opportunity cost will also include the cost of losing ideas and intellectual capital which could have been created but never are.
The Effect of Regulation on Crime Relative to the Effect of Regulation on Honest Businesspeople
As we’ve seen for many years, a cliché with a solid ring of truth is that criminals do not follow laws.
Regulations often overwhelmingly affect those who wish to run honest and compliant businesses. In the financial industry we see gross violations of fraud regulations, penny stock pump and dump schemes, illegal promotion of stocks, market manipulation, elder fraud, foreign beneficiary letter scams, computer hacking, and theft. All of these very damaging actions are overwhelmingly committed by people outside of the regulatory system. These crimes are committed by criminals who do not particularly care what the new regulations are because they will not follow these regulations; criminals will lie to their victims, forge prospectuses and evade regulatory authorities at every turn. Foreign beneficiary letter scams, for example, are so common that they are essentially unenforced due to the difficulty in tracking the perpetrators.
Existing provisions within the financial industry, such as the tracking of email by registered representatives, for example, present huge compliance cost burdens for honest, well-intentioned and ethical companies. While the costs to efficiency, economic growth and jobs is significant, the reward in terms of crime prevented or prosecuted is minimal. Clearly the worst criminals or even criminal elements within existing established financial structures, will simply ignore such regulations and establish email addresses outside of supervisory structure. The now infamous case of Bernie Madoff is a prime example of someone who was violating existing rules and laws where all the new regulations we could imagine would not have prevented his criminal actions, only better enforcement of existing rules.
The Difficulty in Rolling Back Regulations and Unforeseen Consequences
In this nascent technology we are really in an early experimental stage. None of us knows how this may unfold and new innovations are being created every day. Regulations are often much easier to create than rollback. There is a significant danger in creating regulations now which become far more detrimental or have unforeseen consequences as this technology evolves.
A Focus on the Most Effective Areas of Government Involvement
Even the most small-government minded among us generally feel there are some excellent and legitimate areas of involvement of the government in this technology. For example, existing laws about theft and fraud could be better enforced to protect Bitcoin holders. We’ve heard reports of people who have had Bitcoin stolen and then presented evidence of possible perpetrators to law enforcement, only to have law enforcement ignore these reports because they do not understand the technology. Existing laws preventing computer hacking and violations of physical security related to Bitcoin holding companies and individuals involved in Bitcoin are areas that most of us would be happy to see solid enforcement action on.
Although unlikely and expensive, a significant organized and directed attack against Bitcoin companies or the blockchain itself by hostile powers is a possible threat to the Bitcoin community and ultimately a portion of the overall US economy. Most in our community would welcome noninvasive and nonregulatory-based actions by the federal and state government to protect the network from large-scale aggressive hostile acts as well as an environment which is friendly to mining and other activities which offer more stability to the overall system when performed on our own soil.
The Nature of the Technology and Exactly What is Regulated
It is key to remember that Bitcoin is not just a digital currency, the blockchain and the concept of a decentralized ledger is a new and significant invention. This invention has many uses of which the concept of Bitcoin and other alt currencies is just one application.
Regulation affecting Bitcoin, the digital currency, also has implications on this blockchain technology itself. An idea, a new concept, a new invention is a very difficult thing to regulate without having even more drawbacks than regulation in another area.
At the end of the day, Bitcoin Technology is about Communication
Bitcoin is a means of communicating information.
Should Bitcoin be regulated heavily and I were to stand on a box in Washington Square Park with a megaphone and say a private key I do not believe the regulation of such action would be in line with what you wish nor in line with the First Amendment of our Bill of Rights. The manner and method by which we speak these numbers is the core of what this discussion is about.
An anonymous person named Satoshi Nakamoto has invented a new means of communication just as someone once invented the letter and email. It seems very much in line with our national values to encourage such a new means of communication.
Conclusion – The World is Watching
Many of the best and brightest minds in our country, people who have been responsible for tens of thousands of jobs and untold economic growth, believe that this invention is significant, disruptive transformative technology. We would urge you to think of this in these big picture terms beyond just the scope of your office while keeping in mind the very foundation of what makes this country great.
Mr. Lawsky, the world is watching. Thousands of us are altering the course of our lives because we believe in this new invention and this technology. We may be wrong but our pursuit of this opportunity is a fundamental feature of our great American pioneering spirit. Your role is not to foster innovation or American economic growth but your actions can indeed harm it.
We who have had the pleasure to be involved in this community and attend events have seen a level of energy, innovation and excitement unlike anything else. We are eager to create new jobs new innovation and do things that have never been done before. All we ask is that you allow us to do so without fear of losing our property our reputations or our freedom.
For over a century New York has led the world in many areas.
Some say that the best days of the United States are behind us, some say that the ease of doing business and innovating and other emerging markets will cause us to continue to lose competitive advantage and market share in the global economy.
We can be better.
We can serve as a shining example for innovation in the world. You may choose more regulation or more freedom, with either path there will be a price. Encouraging freedom and fostering innovation is a path with the greatest potential rewards and a path in line with our nation’s greatest ideals.
Thank you very much for your time and for your consideration during your hearings and beyond. I am of course most happy to meet with or speak with you or your staff at any time.
and the undersigned