After startups, bitcoin enthusiasts, and tech policy experts warned Benjamin Lawsky, superintendent of the New York State Department of Financial Services, that his BitLicense would crush small startups looking to work in the cryptocurrency, his office announced it was considering a transitional bitlicense for small companies and startups.
The Wall Street Journal in the announcement notes the “barrage of complaints” from the bitcoin community over proposed regulations. Digital privacy advocacy group EFF panned the regulations. “The proposal creates expensive and vague new obligations for start-ups and infringes on the privacy rights of both Bitcoin businesses and casual users,” the group wrote in a statement.
The main justifications for the regulations are to protect consumers and to fight money laundering. However, as with most proposed regulation, very few people are talking seriously about the tradeoffs required.
“There has to be a way for startups to start up and play by the rules without getting crushed by huge compliance costs,” Lawsky said at the Money20/20 conference in Las Vegas. This reveals that Lawsky understands that enforcing money laundering laws comes at the expense of innovation. The question then becomes, is it worth it?
Compliance Costs
First, let’s look at everything that the proposed legislation costs. The first cost is compliance. The Economist has estimated the annual costs of anti-money laundering efforts in Europe and North America to be in the billions.
Then you have to take into consideration the loss of privacy. As EFF explains, one of the most exciting things about bitcoin is the new opportunities for increased privacy in transactions. The reasons this is exciting are myriad.
Consider an NSA employee who wants to donate money to EFF, a teenager who wants to buy contraceptives for the first time, or a grassroots political organization raising money for the legal defense of a political prisoner. In each case as well as countless others, there are legitimate reasons why someone may want to spend money without having that fact linked to his or her identity for a decade.
Anti-money laundering laws, including bitlicense, exist to invade this privacy, seeing it as a threat instead of an innovation to help protect a right.
Not only are the transactions recorded for authorities, but the innovators also have to give their private information to the government under the guidelines. This is a pretty big hoop to have to jump through for privacy-concerned entrepreneurs.
So what are we getting in return for all the innovation hampered through privacy violations and compliance costs? Well the first thing to note is that the vast majority of money that’s laundered is associated with non-violent crimes such as drug dealing, gambling, and prostitution. How well does money laundering legislation work to thwart violent crime like terrorism? The Economist calls it a costly failure.
It’s the high compliance costs which prompted Lawsky to consider the transitional bitlicense to begin with. But then if the government can achieve the same security with lower costs, why propose the high-cost license at all? Something here doesn’t make sense. And that something is that the math just doesn’t add up.
Money laundering legislation is extremely costly in terms of privacy and compliance. And what it costs us, ultimately, is innovation. Making it harder to start bitcoin businesses will slow down what many are predicting will be a revolution in banking and finance. And all for a fool’s errand. These laws don’t even stop money laundering. Lawsky should abandon the entire premise of a license and allow the bitcoin marketplace to innovate freely.
