There is little doubt that blockchain and digital asset technologies will engender greater financial inclusion and economic growth—but to realize the full potential of this technology, clear regulatory frameworks are needed.
One such framework, New York’s BitLicense, was introduced in 2014 by Benjamin Lawsky, then New York State Superintendent of Financial Services. Lawsky is currently a director on Ripple’s Board.
BitLicense is the common term used to describe New York’s business license governing companies in the digital asset space. It defines what constitutes a digital asset business and establishes certain requirements for operation.
At Swell, Lawsky joined Ripple General Counsel Stuart Alderoty to discuss the origins and design of BitLicense and how lessons learned from the BitLicense may help inform future regulatory frameworks.
Civil War-era Regulations
In 2014 when Lawksy and his team began the design for BitLicense, there was no precedent for digital asset regulation. Lawsky remarked that New York laws written during the Civil War-era were being applied to this newly developing technology.
Additionally, Lawsky’s team knew it was stuck between competing worlds. “FinTech was a world of innovation, which has led a thousand flowers to bloom and basically has no regulation, colliding with the world of financial services, which is the most conservatively, fully-regulated area we have,” explained Lawsky.
On reflection, Lawsky considers BitLicense to have been largely successful, pointing to the numbers as evidence. According to his count, 22 companies obtained a BitLicense and continue to operate successfully in New York to this day. On the flip side, 15 companies declined to secure the license and left the state. Of those 15, he says seven have suffered either a hack or endured money laundering issues.
That outcome is what Lawsky had hoped for—to craft a framework that could provide the confidence that licensed companies have sufficient capital, cybersecurity controls and consumer protections. As Lawsky explained, having a BitLicense is a competitive advantage because of the confidence it signals to investors, partners and customers.
Lessons of BitLicense
Today, Lawsky is surprised that more U.S. regulators have not crafted their own frameworks. He had hoped more clarity would emerge over the last year, but said the lack of momentum in the U.S. has opened the door for other countries to take the lead. In particular, he is excited about the progress and traction generated by Singapore.
For him, one of the more interesting aspects of Singapore’s guidance is the creation of two separate licenses, including one designed for smaller companies that allows them to limit the time and cost burdens of a full license. Lawsky acknowledged this lack of bifurcation was one of the shortcomings of the original BitLicence and something he’d like to see addressed by other regulators. As Lawsky put it: “We don’t want to create regulation that doesn’t allow startups to start up.”
Similarly, Lawsky points to issues like multi-signature and tokenization as shortcomings that were impossible to predict at the time, but that now make sense for regulators to incorporate into new frameworks.
Looking ahead, he expects that other important and influential state regulators such as California to adopt new regulations that could help generate a model for other states or the federal government to adopt.
Lawsky also predicted that a comprehensive regulatory framework would pave the way for large financial institutions to also enter into the space. Lawsky believes they are eager, but simply cannot do so without some indication from regulators on the rules of the game.
Ultimately, he predicts this will become a globally regulated space with countries beyond Singapore like Japan, Hong Kong, UAE and a number of Latin American countries playing an important role.
This global viewpoint is inevitable because, in Lawsky’s words, “The genie is out of the bottle.” Specific proven use cases like RippleNet’s On-Demand Liquidity will drive what he envisions as sweeping changes in financial services.
And with strong guidance in place, Lawsky is optimistic those changes will result in an improved financial services sector able to continue evolving in safe and regulated ways.
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