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Not everyone loves New York.
Cryptocurrency exchanges and attendees at the world’s largest blockchain conference staged an impromptu airing of grievances against the state’s regulations May 15.
Executives from two of the industry’s most prominent crypto exchanges based outside the state—Kraken and ShapeShift AG—told an audience of several thousand people in midtown Manhattan that they wouldn’t restart operations in New York until licensing rules put in place in 2015 were axed. The state-granted license, which mandates consumer protection and cybersecurity requirements for virtual currency businesses, is too expensive and asks too many questions about their customers, they said.
“I think frankly the regulators here want to treat every financial entity like a bank,” Erik Voorhees, founder of ShapeShift AG, said on a panel at the New York City conference. “We don’t want to do anything like banks.”
Their criticisms and the audience’s supportive reaction spotlighted New York’s precarious position as it doubles down on efforts to become a talent hub for the emerging technology while featuring what companies believe is one of the country’s most rigorous financial regulatory frameworks. The New York attorney general also sent April 17 inquiries that asked 13 crypto exchanges to submit information about their operations and internal controls.
The license, created by the New York State Department of Financial Services, allows the industry to thrive, Maria T. Vullo, the department’s superintendent, told Bloomberg Law in a statement. “By setting strong standards, DFS has made it possible for startups and traditional financial services providers to pursue innovation, while ensuring that competition is not a race to the bottom,” she said.
The anti-New York sentiment came one day after the New York City Economic Development Council (NYCEDC) made an opening keynote in the same conference room trumpeting a series of blockchain initiatives, including building a resource center to accelerate startups and foster conversations with policymakers about creating a supportive regulatory environment.
NYCEDC President and CEO James Patchett said in his speech the city needs to establish itself as a blockchain hub because the technology is disrupting its financial services sector, which accounts for 20 percent of the city’s economic output and 18 percent of its tax revenues.
“That is not a risk that we can afford to take,” Patchett said. “The reality is the stakes are high for us.”
Blockchain could thrive along with some of New York’s largest industries as well, Patchett said. The emerging tech’s ability to streamline transactions and record-keeping has attracted a slew of early use cases and pilots in the financial services industry, real estate, and insurance, for example.
The conference was part of Blockchain Week NYC, a public-private partnership that the city entered to foster job growth and establish itself as a blockchain stronghold. Venture capital invested in New York-based blockchain companies has grown from $20 million in 2015 to almost $200 million in 2017, and the city has more postings for blockchain jobs than anywhere else in the U.S., Patchett said.
The virtual currency industry, which leverages blockchain as its underlying technology, has frequently criticized the state’s regulations related to its businesses. In 2015, the New York State Department of Financial Services enacted its industry license, called the BitLicense, to oversee virtual currency businesses and protect investors from fraudulent or unsecure coin exchanges and companies.
The state’s financial services department has approved six companies for BitLicenses, said the spokesperson.
Licensing cost is one of the major issues, the executives said at the panel. Kraken CEO Jesse Powell said his company would have to spend about $100,000 in legal costs associated with applying for the license.
“Every major financial institution in the world is looking into it. Every Fortune 500 company is trying to figure out what to do about blockchain,” Vorhees said. “And those startups are not happening here.”
Panelists also snubbed the New York attorney general’s inquiry. Powell last month in a Twitter statement said his company wouldn’t answer the office’s questionnaire because it no longer operated in the state and thought it was burdensome. ShapeShift was not queried in the probe.
Amy Spitalnick, press secretary for the attorney general disputed that the questions were burdensome. “Legitimate entities generally like to demonstrate to their investors that their money will be protected,” Spitalnick told Bloomberg Law in a statement. “This is very basic information that any credible platform should have on hand and be willing to share with their investors.”
Still, there are efforts underway to lighten the regulatory load for the market. In March, New York Representative Ron Kim (D-40) introduced legislation ( A9899A) that would create a new system of approval for financial technology products and prohibit licensing fees. The bill is currently in committee.
The bill comes as other states like Wyoming push to create a more friendly legal environment for companies to operate.
“I think you’ll start to see the dominoes fall as more states come in and decide in order to remain competitive, they need to cater to the industry or you’re going to be losing people,” Powell said.
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