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Will the Bitlicense Go Global After Its New York Introduction?

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Will the Bitlicense Go Global After Its New York Introduction? Will the BitLicense go global after its New York introduction? By Netanella Treistman (Yigal Arnon & Co) 7 June 2017 Netanella Treistman of Israeli law firm Yigal Arnon & Co examines the growing pressure on global governments to issue bitcoin licenses to manage the cryptocurrency-related concerns… Last month, hackers executed a global cyberattack, reportedly attacking over 150 countries, including public and health care systems and individual computers. The attackers demanded payment in bitcoin to unlock computers and return the data. For any newcomers, bitcoin is a non-conventional, decentralised cryptocurrency, based on open-source software, invented by Satoshi Nakamoto in 2009. All bitcoin transactions are stored in the blockchain, a distributed ledger and record-keeping system. Around the time of the attacks in mid-May, the market capitalisation for bitcoin was around $28 billion. Payment with bitcoin is assumed to be a transparent and neutral payment method, with lower transaction fees, which is available wherever the internet is available – without the need to disclose a party’s identity. Some of blockchain’s advantages can also be considered challenges, particularly issues relating to digital identity, privacy and cybersecurity. Additionally, bitcoin’s market value is very unstable, which can result in substantial financial risks. This raises the question whether the use of bitcoin should be regulated and if so, to what extent? Some governments require a license for digital currency activities, while others are contemplating it, in order to manage the cryptocurrency-related concerns stated above. The US approach New York State requires businesses engaged in virtual currency activities that have a place of business or provide services to persons located in New York, to obtain a license for digital currency activities (BitLicense) In New York, for example, where virtual currencies are considered a commodity, individuals can open an online bitcoin account, however New York State requires businesses engaged in virtual currency activities that have a place of business or provide services to persons located in New York, to obtain a license for digital currency activities (BitLicense). The BitLicense was introduced in 2015 by the New York State Department of Financial Services (NYDFS), which, by some, is regarded as controversial. Applying for a BitLicense is reported to be expensive (including a $5,000 non-refundable application fee) and compiling the application includes extensive paperwork, which may require legal and other outside services as well as many hours of work (which reportedly may result in a total expense between $50,000 – $100,000), making it challenging for smaller companies and startups to apply for the license. The BitLicense includes several obligations including hiring a compliance officer, consumer protection, anti- money laundering (AML), cyber security, business continuity, disaster recovery, and capital requirements. Applying for a BitLicense is reported to be expensive (including a $5,000 non-refundable application fee) and compiling the application includes extensive paperwork The NYDFS reported to have received 22 BitLicense applications following the filing deadline (August 2015). Shortly following the first applications, Circle Internet Financial Limited (Circle), a mobile payment app using bitcoin (through blockchain), was granted the first BitLicense in New York, followed by Ripple and Coinbase (in 2016 and early 2017 respectively).Following introduction of the BitLicense requirements, certain virtual currency businesses, such as Genesis-Mining, Kraken, ShapeShift and Bitfinex, did not apply for the BitLicense but rather left New York and took their business elsewhere in order to avoid the obligation to apply for the BitLicense. A boon for growth? In 2016, online payments app Circle received an electronic money license from the Financial Conduct Authority (FCA) in the UK, a license for e-money providers (not digital currency specific). A partnership with Barclay’s enabled Circle to provide cross-currency transactions (between GBP and USD). The FCA is considering if the current regulation can be applied to blockchain or if blockchain specific regulation is required. Other states are expected to follow and issue similar requirements. In 2016 the Bank of England published a working paper revising the consequences of the issuance of a central bank digital currency, implemented via distributed ledgers (such as blockchain), that competes with bank deposits as a medium of exchange. The paper concluded that under certain circumstances, such digital currencies could improve the central bank’s ability to stabilise the business cycle and raise GDP. In the EU, virtual currencies (considered units of account) do not (yet) require a license, although they will be subject to the EU Anti-Money Laundering Directive, following its recent revision resulting in customer due diligence which will need to be applied to virtual currency exchange platform. A new regulatory framework proposed in Singapore may require digital currency exchanges to obtain a license from the Monetary Authority of Singapore (MAS) in the future. On the other hand, the MAS recently announced that it has completed a proof of concept (POC) in partnership with R3, a distributed ledger technology company, in collaboration with various banks, intended to establish a digital representation of the Singapore dollar for various purposes, including cross-border payments. As per a recent revision to Israeli legislation, virtual currencies will be included in the definition of a ‘financial asset’, and provision of service relating to a financial asset will require a license in the near future. Striking a balance Therefore, it appears that regulators will need to find the balance between facilitating development of innovation and alternative payment methods, while ensuring the economy’s and consumers’ protection, possibly by way of issuing licenses to companies providing or facilitating (financial) services by using bitcoin. Assuming the POC conducted in Singapore will indeed prove to be successful, and considering the working paper published by the Bank of England, the Israeli regulator may consider implementing new technologies, such as distributed ledger technology, facilitating transactions with digital currencies, in order to assist in (among other things) lowering transaction fees and expedite (international) transactions, while ensuring the consumer’s (cyber) security and privacy by implementing sufficient know your customer and AML regulation, tailored to manage distributed ledger related concerns. This article has been published in FX-MM The online version can be found here .
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