Superintendent Ben Lawsky hasn’t shied away from maintaining an open dialogue with the community.
While the early days of the web provide an intuitive roadmap for how the emergence of digital payment protocols and the ecosystem that surrounds them will evolve over time, there’s one defining difference between the evolving state of finance today and the Internet of the 80s: Regulations.
There’s a lot more at stake when transferring value versus information. It’s why finance is the most heavily regulated industry on the planet. It’s also why the internet-of-value has taken such a long time to materialize. The bar is just that much higher.
As these emerging technologies push us further into uncharted territory, navigating these regulatory waters has become a core component of our mission here at Ripple Labs. And as creators of an open source protocol, we’re committed to being transparent about that process. To provide insight on our perspective, we’re publishing our BitLicense comments (pdf), which we recently submitted to regulators.
The Ripple Labs perspective
Our position on regulations is straightforward. An effective regulatory framework opens the door to mainstream adoption. The goal is to provide necessary protections for end users without stifling innovation by burdening developers and small businesses. Instead, smart regulations can level the playing field, legitimize a burgeoning industry, and empower entrepreneurs.
But getting regulations right is an immense task. That’s why it’s pertinent that Ripple Labs works regularly with regulators, our numerous stakeholders, and the industry-at-large in helping to collectively shape the rules that will define the way forward.
It’s incredibly encouraging that the U.S. government appears up to the task with Superintendent Ben Lawsky of the New York State Department of Financial Services leading the way by maintaining an open dialogue and recently, drafting the first proposal of BitLicense, a set of rules that aim to bring clarity to how government officials and businesses deal with cryptocurrencies.
As the only U.S. regulator to step up to the plate—at both state and federal levels—Superintendent Lawsky should be commended for assuming this monumental responsibility. BitLicense elevates the industry as a whole, putting next generation firms in the same club as the big banks. Most of all, throughout Lawsky’s numerous interactions with the community—including his speech at Money20/20 in Las Vegas last month—it’s clear that New York’s first Superintendent of Financial Services not only comprehensively understands and respects the awesome potential of these new technologies but also what’s at stake.
Indeed, the implications of BitLicense will have far broader implications beyond the crypto-community, as Lawsky alluded to during his Vegas keynote, noting that his framework for Bitcoin regulations will eventually serve as a model for all regulated institutions. Along those lines, this isn’t merely about the future of Bitcoin or Ripple, it’s about the future of finance as a whole—one in which the lines between new technologies and the existing system continue to blur.
Again, for his fearless and influential leadership, Lawsky deserves to be commended. Even so, he could do more—especially if he and the rest of the state’s ruling body want New York to become a hub for technological innovation. Below is a summary of our comments and suggestions that we believe could help BitLicense reach its ultimate goals while still maintaining an environment that supports and fosters innovation and small businesses.
Reduce barriers of entry. New York should support developers who need the freedom to build. Costly compliance requirements create huge barriers of entry for small businesses. To accommodate innovation, we suggest a “registration regime” versus a “licensing regime” with a threshold for smaller firms, significantly reducing potential upfront costs and waiting around that often deters new businesses. This way, entrepreneurs can begin the regulatory process in good faith and start their business right away.
Create a level playing field. A key criticism of the initial BitLicense proposal is that it didn’t create a level playing field between cryptocurrencies and everyone else. There are arguments to be made why digital currencies should be held to a higher standard because of their unique properties, but if that’s the case, those arguments need to be explicitly mapped out, where each special feature is properly defined relative to existing rulesets. With the initial draft, it’s often unclear why increased controls are being implemented only for new technologies.
The rules regarding information security is one example, which requires third-party code verification. In this case, rather than opting for a more balanced approach, Lawsky went from 0-60 with baseline regulations. While it may be true that this new rule could very well be a “coming attraction for all banks,” emerging technologies shouldn’t have to serve as the canary in the coal mine and solely assume the cost of experimental rules. If a new rule is believed to be beneficial to the public’s interests, it should be applied to all relevant parties on day one, rather than arbitrarily to just the new kids on the block. Otherwise, BitLicense undermines a sense of fairness by appearing to favor established interests.
The overall scope is too broad. Such is the nature of emerging technologies with few past precedents—they can be difficult to properly define. But even under that context, the way BitLicense defines these new technologies is far too general and vague. If the purpose of regulations is to provide clarity, the proposal as it currently exists risks further muddying the waters by leaving ample room for subjective interpretation. The first step then is to provide a concise definition of the technology at hand. The approach we prefer is to highlight the technology’s fundamental distinctions. In the case of virtual currencies, this is the first time we’ve seen assets exist in a digital context (as opposed to liabilities).
Beyond reaching consensus on a proper definition, we believe that limiting the scope of these new regulations requires a more balanced and organic approach to how we assess risk. It’s logical to focus on the risks added by new technologies, but it’s equally as important to consider existing risks that innovation helps to mitigate. In that sense, BitLicense should not only temper negative characteristics, but also foster and expand positive ones. As it stands, the former is, at times, over the top, while the latter is often lacking.
The way forward
Overall, the development of BitLicense represents a huge step in the right direction, despite being imperfect as regulators and industry participants continue to work together toward a meaningful and mutually beneficial consensus. That governments are dedicating these resources toward legitimizing new businesses is a huge stamp of approval for technologies that only a few short years ago didn’t even exist.
At Ripple Labs, we’re deeply cognizant of our responsibility to our partners, our community, and the industry, and we take great pride in participating in this ongoing process, one we believe will have a huge impact on our ability to deliver these breakthrough technologies to people around the world.
That last part is key. Even if the U.S. will, at times, lead the way, the scope and reach of Ripple and other digital payment protocols in general transcends borders. As such, our regulatory work extends to a global scale. Last Friday, our team submitted a letter to the Australian Parliament regarding the regulation of digital currencies, which is available on their website for download. (We are submission #21.) We are also in the process of engaging with other foreign regulators.
As always—as an ongoing conversation and an evolving process—we are open to any and all feedback. We look forward to hearing from you.