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Regulation, the Blockchain and Programmable Money

One of the truly interesting presentations at this year’s Money2020 was the speech by Ben Lawsky, superintendent of New York’s Department of Financial Services. Lawsky’s remarks focused on his department’s BitLicense proposal and demonstrated the struggle Lawsky and his team face as they create regulation for Bitcoin and math-based currencies (MBCs) in general.

Released in July, the NYDFS proposed “BitLicense” regulatory framework requires comprehensive reporting, background checks and identity proofing of business leaders, as well as mandatory bonding for all BitLicense holders at rates specified by the NYDFS. The first version was roundly criticized by Bitcoin advocates as overbearing and costly, causing some to declare they’ll do business anywhere but the state of New York. Other stakeholders view the BitLicense as a set of necessary controls appropriate to entities handling citizen monies. But it’s not an easy binary choice.


In response to that early criticism, especially around its dampening effect on innovation, the NYFSD extended its comment period and has floated the idea of a “transitional BitLicense” designed to let start-ups get into operation without having to meet what are essentially bank-grade compliance requirements.

The second comment period is about to end and the “final final” BitLicense language is expected to be released in January 2015. Companies and entrepreneurs using MBCs are waiting its arrival as are 47 other state regulators wondering how to address MBC regulation in their own domains.

In a gray area are the builders of blockchain 2.0 technologies whose goals have little to do with currency and investing and far more to do with advanced asset transfer applications – think “smart contracts” and “programmable money” – and the potential benefits they can deliver. These schemes use a side chain, another block chain, to potentially keep track of assets other than currency such as stocks, bonds, land titles, trusts, and other assets.

Programmability is powerful. For example, consider a hypothetical bequest from me to my (currently hypothetical) granddaughter. I want to leave her five bitcoin. Using a provider of a sidechain-based service, we set up a contract, in software, that will automatically execute the transfer of five bitcoin once two, publicly discoverable conditions are met. One, I have to be dead. Second, my granddaughter has to be 25. One those conditions are met, the five bitcoin under my control would be transferred to a bitcoin address under hers.

A complicating reality is that most of these approaches utilize a currency transaction recorded in a blockchain as mechanism to ensure record permanence. Theoretically, even a transaction as small as a single satoshi (0.00000001 btc) could suffice when it points to information located on a separate blockchain.

Lawsky has suggested that this form of currency, given its low value and non-transactional role – think of it as an asset placeholder – would not fall under his BitLicense rules. But it is a murky situation with implications for both innovation and sound financial regulation. Programmability of asset transfers has enormous potential to save money and simplify public and private transactions. A hallmark of any regulation should be its ability to accommodate that kind of innovation.

This post was written by Glenbrook’s George Peabody.

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