To really understand what is special about Bitcoin, we need to understand how it works at a technical level. We’ll address the important questions about Bitcoin, such as: How does Bitcoin work? What makes Bitcoin different? How secure are your Bitcoins? How anonymous are Bitcoin users? What determines the price of Bitcoins? Can cryptocurrencies be regulated? What might the future hold? After this course, you’ll know everything you need to be able to separate fact from fiction when reading claims about Bitcoin and other cryptocurrencies. You’ll have the conceptual foundations you need to engineer secure software that interacts with the Bitcoin network. And you’ll be able to integrate ideas from Bitcoin in your own projects. Course Lecturers: Arvind Narayanan, Princeton University
New York's BitLicense Proposal
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Bitcoin and Cryptocurrency Technologies
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From the lesson
Community, Politics, and Regulation
We'll look at all the ways that the world of Bitcoin and cryptocurrency technology touches the world of people. We'll discuss the community, politics within Bitcoin and the way that Bitcoin interacts with politics, and law enforcement and regulation issues.
Meet the Instructors
Arvind NarayananAssociate Professor
Computer Science
7.8, I want to talk about New York State's BitLicense Proposal.
I've talked so far about regulation in general.
I've talked about a few forms of regulation.
I've talked in general about why regulation might be justified in some
cases, why it might make good economic sense.
But now I want to talk about a specific effort by a specific state to
introduce specific regulation of BitCoin.
We'll dig a little bit into what the BitLicense Proposal would do.
This is an issue that is current as of the filming of this lecture that will be
current as of the release of this lecture.
And it gives you a snapshot of the kinds of things that regulators are doing.
So the BitLicense Proposal was issued in July of 2014.
Down at the bottom of the slide here, there's a URL where you can go and
read it if you'd like.
Here's the heading on it, the New York State Department of Financial Services.
That's the part of the state of New York that regulates the financial industry, and
of course, the State of New York, it has the world's largest center of
the financial industry in it, and so it's a part of the New York state government
that is used to dealing with relatively large institutions.
It's a proposed set of codes,
rules and regulations that has to do with virtual currencies.
So this is a new regulatory proposal from the State of New York and
there's a lot of text here but let's walk trough it, it's worth talking about.
What the regulation fundamentally says is that you will need to get something called
a BitLicense from the New York Department of Financial Services
if you wanted to do any of the things listed on this slide.
If you wanted to engage in virtual currency business activity,
that means any one of the following things.
If you're dealing with New York or a New York resident.
So if you're doing any one of these five things and any of your customers are in
New York, then perhaps consult your lawyer if you have business partners or
other aspects of your business in New York relating to this, you need a BitLicense.
The first thing is receiving currency for transmission or
transmitting virtual currency.
Second, securing, storing, holding or maintaining custody or
control of virtual currency on behalf of others.
This might cover something like wallet services or other sorts of things or
perhaps exchanges.
Buying and selling virtual currency as a customer business,
you can apparently buy and sell it for yourself.
But doing it as a customer business, you need a BitLicense.
Performing retail conversions services, including conversion or
exchange of fiat currency, or other value into virtual currency conversion or
exchange of virtual currency into fiat currency or the conversion or
exchange of one form of virtual currency into another form of virtual currency.
So if you're trading virtual currency for fiat currency or virtual currency for
virtual currency.
And finally, controlling, administering or issuing a virtual currency.
If you're doing any one of those things In the state of New York or
operating with a New York state resident then you need to get
a BitLicense from the New York Department of Financial Services if
this regulation goes in Into effect.
You would have to apply for a license.
To apply for a license, there's detailed language in the proposed regulation,
which you can read, but roughly speaking,
you have to provide information on the ownership of your enterprise,
on your finances and insurance, on your business plan.
Generally to allow the Department of Financial Services to know who you are,
how well backed you are, where your money comes from and what you're planning to do.
You would have to pay an application fee.
You would have to pay.
A licensee would have to do the following thing once you had a license.
You have to provide updated information to the Department of the Financial Services
about the things I talked about before, Ownership Finances Insurance and so on.
You have to provide Periodic Financial Statement so they can keep track of how
you doing financially, you'd be required to maintain a financial reserve.
The amount of that would be set by the Department of Financial Services based
on various factors about your business, what's the nature of your business,
how well financed it is, who it is, how big it is, etc, etc.
The DFS would be able to set rules about that.
There are detailed rules about things like how
you would keep custody of consumer assets.
There are anti money laundering rules which might or
might go beyond what's already required.
There are rules related to cyber security, having a cyber security plan and
penetration testing and so on, there are rules about disaster recovery,
you have to have a Disaster Recovery Plan that meets certain criteria.
There are rules about record keeping, you have to keep records and
make them available to the DFS on certain circumstances for some length of time,
about certain kinds of activities.
You have to designate a Compliance Officer, someone within your company,
your organization, who is in charge of compliance and has responsibility and
authority to make complaints have.
You have to have written policies about compliance in about certain
kinds of things that are satisfactory to the NYDFS.
And there's a requirement that you disclose risks to consumers so
the consumers understand what are the risks of doing business with you.
The exact rules on that are not exactly clear at this point, but
you might imagine something like the sort of prospectus that comes along
with a mutual fund or with a publicly traded stock.
Perhaps that's what the DFS has in mind.
So these are fairly substantial requirements for
companies that have a BitLicense.
And anyone with a BitLicense would be required to do all these stuff.
The state of the BitLicense Proposal right now,
the situation that it's in as of this filming, which is August 2014.
It is been proposed by the New York Department of Financial Services.
It's been formally proposed.
You can go read the document, the proposal at the URL that was on the earlier slides.
The DFS has solicited public comments.
They have asked members of the public to write in and
give them comments about the proposal.
Do you like it?
Do you not like it?
What's good?
What's bad?
What are you proposed changed?
And so on.
And lots and lots of entities are gearing up to send comments to the NYDFS.
After all the comments are in,
in accordance with the normal regulatory process, the NYDFS will decide what to do.
They'll decided whether to withdraw the proposed regulation, whether to issue it
in modified form, whether to issue it in exactly the original form.
And along with that decision, they'll issue some kind of a document that gives
the rationale for deciding what they decided to do.
Now, various parties have asked the NYDFS to grant an extension
on the original date for comments.
And NYDFS has signaled, they haven't definitively stated, but
it seems pretty clear at this point that they're going to grant an extension.
Because of that I don't currently know the date.
I can't tell you the date by which you have to comment.
But you can go and look at the NYDFS website to get the current status.
If you're an interested party by all means I would encourage you to comment.
I would encourage you to get together with others and comment together.
And I would advise you to make comments which are thoughtful and
constructive in giving NYDFS reasoned arguments, comments of the sort that this
is the coolest thing every or you guys are total idiots.
You don't know what you're doing.
Might make you feel good but there not going to affect what the NYDFS does.
My prediction at the end of the day is that some kind of bit license is likely
to be put into place by the NYDFS.
Maybe it will be reduced from the scope or
changed from what was originally proposed, but some kind of BitLicense that
caught some kind of licensing regime which calls itself BitLicense.
I predict will be put in place by the New York Department of Financial Services.
If this happens or if New York doesn't do it and somebody else
does something similar, the result will be that if you want to do business in
any of the business sectors that we talked about in the previous slide,
you would need a BitLicense from the state of New York in order to operate.
And if this goes into effect,
this would really be a major step in the history of BitCoin.
You would have a situation where not only NYDFS but
perhaps other jurisdictions would start to step in and regulate and
you'd start to see BitCoin businesses get closer to the model of regulated financial
institutions that traditional financial institutions have been in.
This would be a step that really is in some ways contrary to some of the initial,
a cipher punk or cyber libertarian ideas about what BitCoin was supposed to be.
But in a very real sense, I think it's inevitable that as soon as BitCoin became
really valuable, that BitCoin businesses became big businesses, that government got
interested, it was more or less inevitable that regulation would ensue.
Because BitCoin businesses touch real people,
because they touch the fiat currency economy because Bitcoin is big enough to
matter, government is paying attention and Bitcoin is getting regulated.
This, on the one hand,
represents a retreat from what the original advocates of Bitcoin had in mind.
In another way it represents the BitCoin ecosystem growing up and integrating
into the regular economy which is much more regulated.
Regardless of whether you like it or
don't like it, this is the thing that's starting to happen.
And if you're interested in starting a business in this area,
you need to be paying attention to this trend.
Will this be a success, will it be good or bad?
Well I think there's one barometer we can look to to understand
whether a regulation like the BitLicense is actually successful from a public
policy standpoint at improving the quality of BitCoin businesses.
And that's this.
If something like BitLicense goes into effect, and if companies start advertising
to customers outside New York that we have a BitLicense, therefore you can trust us.
And if that argument that we're regulated therefore you can trust us is convincing
to consumers,
if consumers see regulation as a positive In choosing a company, then I think
the regulation will be working in the way that its advocates wanted it to do.
Whether that will happen and
how this affects the future of BitCoin is something that we'll have to wait and see.
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