Gem CEO: Bitcoin Regulations are Trying to Fit a Round Peg in a Square Hole
Regulation has always been a contentious issue in the Bitcoin industry. Some members of the community wish to avoid any regulation at all costs, while others want to work closely with regulators to bring clarity to the space as soon as possible. A panel on Bitcoin regulation was recently featured at the American Banker Digital Currency Conference, and it was during this discussion that GemCEO Micah Winkelspecht, Chainalysis VP of Business Development Jonathan Levin,Chamber of Digital Commerce President Perianne Boring, and Bitcoin FoundationRegulatory Affairs Committee Chairman Marco Santori were able to discuss the various challenges for Bitcoin startups in the face of impending digital currency regulations around the world.
Is the BitLicense Too Broad and Flexible?
The BitLicense has been the center of attention when it comes to Bitcoin regulation since it was first announced by Former Superintendent of Financial Services for the State of New York Benjamin Lawsky, so it made sense that it was used as an example piece of regulation throughout the panel discussion. During an early portion of the conversation, Santori offered his thoughts on one of the core issues with the BitLicense, which is the broad nature of the language found in the regulation:
“What is the difference between a pure software play and a custodial wallet? What kinds of exchanges do act as custodians? These are highly fact-specific questions, and the way that the BitLicense is drafted — for better or for worse — it seeks elasticity. It wants to be flexible. I think that’s, on one side, good drafting. On the other side this speaking in metaphor makes it difficult to apply.”
One of the clearest signs that Bitcoin is difficult to regulate is the elasticity with which the regulation was drafted. As Santori mentioned, there may be unique situations where it is unclear whether or not a startup needs a BitLicense.
Fitting a Round Peg in a Square Hole
Winkelspecht took the issue of broad regulation in another direction when he discussed multi-signature addresses. After explaining what multi-sig addresses are and what they can accomplish, he noted how this kind of innovation could force changes in various legal definitions:
“When you think about this new definition of what it even means to own something, it totally transforms the way we think about solving these problems. One of the problems that we have with the regulations the way they’re written is that they’re really geared for trying to fit a round peg in a square hole, in that they don’t take into account the fact that the entire definition of custody and control can change. And so, what does custody or control mean?”
It’s difficult to force Bitcoin into the current legal framework because, as Winkelspecht noted, certain aspects of the peer-to-peer digital cash system may require completely new legal definitions. Winkelspecht provided one such example during the panel discussion:
“We’ve actually pushed — so for the legislation in California — we’ve actually written to the senate to try to get them to add a line, which just defines what they mean by custody or control. That was actually left out of the recent legislation.”
Raising Startup Costs Decreases Innovation
The problems associated with stifling innovation through regulation were also brought up by Winkelspecht during this part of the conversation. The Gem CEO explained some of the issues that small startups face when it comes to regulatory uncertainty in the Bitcoin industry:
“It’s still very, very murky and very unclear, so from a startup company who’s trying to figure out where you fit in the eyes of the law, it’s very difficult . . . Not having that level of clarity makes it extremely hard to do things like raise investment and actually try to build a sustainable business around it . . . We work every day with brilliant developers who are building solutions, and these are the guys who are actually innovating on things. They need the flexibility to try a lot of things and fail at a lot of things. If you raise the bar of what it takes to just get started, you are massively decreasing the innovation that’s going to come out of that space.”
Boring discussed ways in which a nonprofit incubator could bring along smaller new businesses before they had the ability to comply with the BitLicense. The Chamber of Digital Commerce had submitted the incubator idea to the New York Department of Financial Services as a possible solution to the regulatory issues troubling Bitcoin startups during the second comment period for the BitLicense, but the concept was never rolled into the final draft. During his own remarks, Winkelspecht went out of his way to support Boring’s suggestion.
For now, it appears there is plenty of work to be done in creating more regulatory clarity for Bitcoin companies and ensuring that innovation is not halted in the name of various legal costs.