There is no doubt that blockchain and digital asset technologies will lead to greater financial inclusion and greater economic growth. However, in order to realize the full potential of this technology, a clear legal framework is required.
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 of directors.
BitLicense is the common term for the New York business license for companies in the digital asset space. It defines what constitutes a digital assets business and sets certain requirements for its operation.
At Swell, Lawsky discussed the origins and design of BitLicense with Stuart Alderoty, General Counsel of Ripple, and how lessons from the BitLicense can help shape future legal frameworks.
Provisions from the time of the civil war
When Lawksy and his team began drafting BitLicense in 2014, there was no precedent for regulating digital assets. Lawsky noted that New York laws written during the Civil War applied to this newly developed technology.
Also, Lawsky’s team knew that it was caught between competing worlds. “FinTech was a world of innovation that bloomed a thousand flowers and basically has no regulation. It collides with the world of financial services, the most conservative and fully regulated area we have,” Lawsky explained.
According to Lawsky, BitLicense was largely successful, citing the numbers as evidence. According to his count, 22 companies have received a BitLicense and are still operating successfully in New York to this day. On the other hand, 15 companies refused the license and left the state. Of those 15, he says, seven have either suffered a hack or endured money laundering problems.
That was the outcome Lawsky had hoped for – creating a framework that would build confidence that licensed companies have adequate capital, cybersecurity controls, and consumer protection. As Lawsky explained, a BitLicense is a competitive advantage because it instills trust in investors, partners and customers.
Lessons from BitLicense
Today Lawsky is surprised that more US regulators haven’t created their own framework. He had hoped there would be more clarity last year, but said the lack of momentum in the US opened the door for other countries to take the lead. In particular, he is excited about the progress and traction that Singapore is getting.
For him, one of the most interesting aspects of Singapore’s guidelines is the creation of two separate licenses, including one for smaller companies, that allow them to limit the time and cost of a full license. Lawsky admitted that this lack of forking was one of the shortcomings of the original BitLicence and something he would like to see other regulators address. As Lawsky put it, “We don’t want to create regulation that doesn’t allow startups to get started.”
Similarly, Lawsky points to issues like multiple signature and tokenization as shortcomings that weren’t foreseeable at the time, but which now make sense for regulators to incorporate into new frameworks.
Looking ahead, he expects other key and influential state regulators, like California, to pass new regulations that could help create a model for other states or the federal government.
Lawsky also predicted that a comprehensive legal framework would pave the way for large financial institutions to step into the space as well. Lawsky believes they are eager but simply cannot do so without a hint from regulators about the rules of the game.
Ultimately, he predicts that this will become a globally regulated space where countries outside of Singapore such as Japan, Hong Kong, the United Arab Emirates and a number of Latin American countries will play an important role.
This global view is inevitable because, according to Lawsky, “the spirit is out of the bottle”. Specific best-practice use cases like RippleNet’s on-demand liquidity will drive what he envisions as profound changes in financial services.
Lawsky is optimistic that these changes will result in an improvement in the financial services sector, which can develop in a safe and regulated manner.
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