'Nail in the Coffin': The Day US Regulators Stifled Bitcoin Startups
Reflecting on this piece, I feel like part of an older generation of bitcoin – even though when I entered the space in 2012, my impression was that I was late to the game.
Many crypto enthusiasts had already been active in it for years, mining away, and I still had much to learn about the blockchain. It's interesting to look back now, since in 2012, I was entering an industry that was completely unregulated and still in its "Wild West" infancy.
Most bitcoin exchanges were sketchy, and I set out to build a reliable US-based exchange called Coinsetter (since acquired by Kraken, which I highly recommend). In that process, I witnessed the emergence of a new regulation that would impact the entire industry…
18th March, 2013, was the day that the US federal government came out with regulatory guidance that marked most bitcoin companies as money service businesses.
Being the optimist that I am, I viewed this announcement as a positive development – an opportunity to legitimize our company and the broader bitcoin industry.
In hindsight, the policy would become the slow "nail in the coffin" that would prevent bitcoin from disrupting consumer payments at mass. With 50+ new regulators to report to, compliance became a concern for most companies. Know-your-customer (KYC) rules were just the beginning of compliance, and frankly, the easy part.
Regulation became much more challenging in the areas of licensing (impossible to obtain), transaction monitoring (impossible to comply with the status quo requirements), banking relationships (impossible to maintain), reporting and capital requirements.
In March 2013, most of the industry's leaders had little understanding of these topics.
After bitcoin companies hired lawyers, consultants, dedicated countless hours to completing paperwork and spent tons of money, most regulators did the following:
Pushed off taking action, leaving companies in a legal gray area.
Closed bank accounts, thereby cutting companies off from the global banking system.
My experience with the "BitLicense" was a direct example of this behavior.
New York introduced a "framework" for bitcoin companies to apply for regulatory licensing and thus obtain a path towards operating with legal clarity. The BitLicense formation process took years and was ultimately a way for the state regulator, Ben Lawsky, to attract positive press for himself. He left shortly after BitLicense applications were due and didn't stay to approve any of them. Only a few companies ever received licenses, and most applications are still in limbo years later.
It's frankly stressful running a bitcoin or blockchain company in the US. For our team at Coinsetter, even when we reached out proactively, most regulators politely denied us a path toward full compliance. Living in an undefined regulatory environment, we always had the dangling fear that we could be penalized at any regulator’s sole discretion.
You didn't have to be doing anything wrong to feel that way, either.
Has the regulatory situation improved?
In some areas, yes. But the banking issues Bitfinex and other exchanges experienced recently are a lingering, direct consequence of these policy decisions made four years ago.
Today, the challenges bitcoin companies previously faced are hitting blockchain projects. It's unfortunate, since these organizations are building the modernized infrastructure that will create a more secure digital future for everyone in the world. I believe they'll succeed, but anyone starting these companies will have to deal with similar regulatory uncertainties like bitcoin faced a few years ago.
I hope companies will take a strong public stance against stifling regulation as it comes up. For those in the US, it is important to remind regulators that technology companies are going overseas because of the current regulatory environment. Billions will be invested in blockchain startups – will the US choose to benefit from it?
But to me, 18th March was the start of it all. It drastically changed how bitcoin and blockchain companies would need to operate going forward within a regulator-influenced paradigm.
The industry hasn't been the same since.