Bitcoin Advocates Split Over California Bill

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By Kery Murakami

Aug. 13 — Legislation in California designed to regulate virtual currency is spurring heated debate among Bitcoin advocates over whether new rules would give the nascent industry more certainty or if they would squash young startups.

Illustrating the emerging divide, the Electronic Frontier Foundation (EFF), a San Francisco-based digital rights advocacy group, launched an online petition Aug. 7 opposing the California bill that would require virtual currency companies to be licensed.

Coin Center, another industry advocacy group, responded the same day by saying EFF has a “misunderstanding of the state of the law in this space.” Its research director Peter Van Valkenburgh said in a statement to Bloomberg BNA Aug. 14 that he's disappointed the center's ally against New York state's regulations opposes the California bill's “cautious and well-researched approach.”

The debate over California's approach reflects a broad philosophical disagreement. Groups such as EFF oppose any regulations on the virtual currency industry in its infancy and emphasize the need to create an even playing field for both startups and established entities, while groups such as Coin Center and Coinbase argue legislation can help the industry by providing much-needed regulatory certainty.

“You’ve got Coinbase and some of the bigger guys on one side, while the little small startups have coalesced and they are opposing the bills Bitcoin operators are pushing,” Jeremy Kudon, a partner with Orrick, Herrington & Sutcliffe LLP, which advises companies including Coinbase about virtual currency regulation, said during a July 20 webinar. Established players such as PayPal are “staying on the sidelines” while the Bitcoin advocates fight amongst themselves, Kudon said.

EFF Concerns

EFF argues the California bill (AB 1326) “is designed for established Bitcoin businesses—companies with the significant financial and administrative resources needed to navigate the licensing process,” according to an Aug. 7 blog post.

The group, which says it is representing the interests of smaller firms, said the proposed $5,000 license application fee and reporting requirements would disadvantage smaller operators who lack adequate resources.

“The biggest problems with this legislation aren't for large, established Bitcoin companies that have the resources to engage in Sacramento,” EFF activism director Rainey Reitman said in an Aug. 13 e-mail to Bloomberg BNA. The proposed rules would impact “all the other creators and innovators in the virtual currency space ... who would have to go through the application process, and who would be completely at the whim of a Commissioner with total power,” Reitman said.

EFF has other concerns about the California bill, including a definition of custody so vague it could capture a wide range of ancillary businesses, Reitman said.

Coin Center rejected the idea it’s choosing sides among virtual currency players.

“If the big companies—and it's a good question what qualifies as big in the Bitcoin space because they are all young start-ups—but if these companies wanted to keep out the competition then AB 1326 wouldn't be the way to go,” Van Valkenburgh said in an Aug. 13 e-mail to Bloomberg BNA. “Everyone, big or small, would benefit from legal certainty. The existing money transmission law provides no company or individual with a sense of whether they will need to license, and only the big companies can pay a lawyer to find out.”

Ceasing Operations

The debates come as a number of Bitcoin businesses say they are ceasing operations in New York, citing the cost and requirements of the state's new BitLicense.

The latest, LocalBitcoins.com, said the “BitLicense is time consuming, expensive and difficult to obtain for anything but large companies” in an Aug. 12 blog post explaining its decision.

A New York State Department of Financial Services spokeswoman told Bloomberg BNA Aug. 13 that 22 businesses had applied for a BitLicense since it went into effect June 24.

Jad Mubaslat, CEO of BitQuick, which also pulled out of doing business in New York because of that state's new Bitcoin regulations, said in an Aug. 14 e-mail to Bloomberg BNA that he opposed the California bill because it is “rushed, vague, and an overall negative for innovation.” The company, which does business in California, allows customers to buy and sell bitcoins on its website.

Coin Center, which like EFF, criticized the New York regulations, said California lawmakers have taken a better approach than the BitLicense on issues including anti-money laundering. Coin Center backed the California measure after lawmakers added an amendment saying only businesses with “full custody” of currency need to get a license, which the group says exempts a number of other players including software developers.

Coin Center said California bitcoin businesses could be in far worse shape without the bill. The measure passed the state Assembly June 3 and awaits action in the state Senate.

Worse Alternatives?

In a perfect world, Bitcoin businesses would remain unregulated, Coin Center Executive Director Jerry Brito wrote in the Aug. 7 blog post responding to EFF’s opposition to the California bill. “This is a nascent industry, regulating prematurely could stunt it, and an absence of rules would not necessarily be a bad thing,” he wrote. However, he said the alternative to the bill would not mean being free of regulation.

Should the California bill fail, Brito predicted the Bitcoin companies would likely be subject to the state’s money transmission act. Unlike those laws, the bill exempts software developers from licensing requirements and allows startups with less than $1 million in outstanding obligations, and deemed to have low or no risk to consumers, to be able to get a provisional license for $500, instead of $5,000 for other Bitcoin businesses.

The state’s money transmission laws would also require bitcoin companies to hold securities equal to the total value of the virtual currency they secure.

“Want to offer a Bitcoin wallet product? Prepare to invest a dollar into state treasury bonds for every dollar in bitcoin a customer stores using your product,” Brito wrote. “If this bill fails, we may end up with the aggressive and industry-stunting regulation that we’re all seeking to avoid.”

EFF's Reitman told Bloomberg BNA Aug. 7 the exemption for startups is no cure and would still leave them at risk of having to meet licensing requirements they cannot afford.

She wrote in her post that DBO “has an amazing amount of discretion with the provisional license, just as he does with the primary virtual currency license, so it’s ambiguous who will even qualify for a provisional license and how it will operate.” Because of the volatility of bitcoin’s value, companies could find themselves exceeding the $1 million threshold for a few days, she said. “Since virtually all cryptocurrency businesses carry some risk to somebody, this exception could swallow the provisional license provision entirely.”

The bill's sponsor, Assemblyman Matt Dababneh, said in an Aug. 13 statement to Bloomberg BNA that “the creation of a start-up license for small companies is unprecedented” and predicted it would be a model in other states.

Despite EFF's calls to leave the industry alone, Dababneh said, “In the last several years consumers have lost over half a billion dollars in virtual currency scams and data hacking. What exactly is the dollar amount necessary for consumers to lose for it to be appropriate to regulate companies that hold virtual currency?”

To contact the reporter on this story: Kery Murakami in Washington at kmurakami@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com