New York State has decided to issue a regulatory structure for Bitcoin, meaning that businesses in that State can be sure of what they can and cannot do. This is excellent news of course, the regulatory uncertainty is most certainly holding back development of all cryptocurrencies. However, there is one tiny problem with the regulations as they've proposed them. They actually make running a Bitcoin bank illegal. Which, if you're trying to encourage people to develop new banks is probably something of a bad idea.
There's much to like about the initiative. I'm particularly taken by the way in which Ben Lawsky, of the NYDFS, took to the Reddit Bitcoin forum to ask the Redditors what they thought of the regulations proposed. That's real engagement with the user base going on.
The aim is to develop "BitLicenses" which detail what a company may do with Bitcoin, what it must do, capital adequacy ratios and so on. All useful stuff during the development of part of the financial system. However, as the excellent Matt Levine points out there is a problem with part of the suggestions:
What this means is that if you're in the business of bitcoinery -- "receiving Virtual Currency for transmission or transmitting the same; securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others; buying and selling Virtual Currency as a customer business; performing retail conversion service ... or controlling, administering, or issuing a Virtual Currency" -- and you owe bitcoins to customers, then you need to have 100 percent of those bitcoins sitting in your bitcoin vault. And you can't borrow against them. And you need to have some extra cash in dollars, just in case (in case what?). And you need to have however much capital Ben Lawsky decides you should have.
That is, to be a Bitcoin bank you cannot actually be a bank.
To explain: we can have many different definitions of a bank, the financial world one, the regulatory one (Goldman Sachs was not before 2008 even though everyone knew, other than the regulators, that it was, sorta , a bank) but the one I want to use here uses the economist's one. As Brad Delong has been saying for years now, banks borrow short and lend long. That's just what banks do: if you borrow short and lend long you're a bank, if you don't, you're not. If you're not borrowing short and lending long you may be doing many things but you're not doing banking.
Another name for this is maturity transformation, yet another is fractional reserve banking. They're not all exactly the same things but they do all come as a package. And what the proposed NY BitLicense rules out is the possibility of doing that fractional reserve banking. It allows only 100% reserve banking. And that in turn rules out maturity transformation: which means that you're not borrowing short and lending long. You are, therefore, by this definition of banking, not allowed to be a Bitcoin bank.
As Levine goes on to point out you can, if you are already a bank (in the regulatory sense) extend your banking activities to Bitcoin and sidestep those regulations. But only if you are already a bank. Thus you cannot set up a Bitcoin bank with just a BitLicense, you need to go to all of the expense of a full NY State banking license. Which probably isn't the way to encourage entrepreneurial start ups in the cryptocurrency world really.
