Bitcoin, the California Legislature, and the Future of Cryptocurrency Regulation

Executive Brief

The California Legislature missed a deadline to pass AB 1326, also known as the "California BitLicense" bill. This would have placed regulations on Bitcoin businesses in California similar to those already in place in New York State and under consideration in other states. While there were many industry advocates who cheered the apparent demise of this incarnation of the bill – insisting that the young industry needs to be free from regulation altogether - a more somber perspective might be in order. Regulation is coming whether cryptocurrency supporters want it or not, so the real question is this: will stubborn resistance to any attempt at regulation actually do more harm than good?

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When New York passed the BitLicense law requiring Bitcoin businesses to go through a rigorous licensing process to serve customers in the Empire State, most observers recognized that action as the opening salvo in an inevitable battle over regulation of cryptocurrency-related activities. For many ardent supporters of the new digital currencies, that battle was seen as an unnecessary attempt to destroy the nascent industry before it can develop and demonstrate its true potential. When California began to make serious moves toward adopting similar legislation, those digital currency advocates were more than a little alarmed.

California’s AB 1326 - popularly referred to as "California's BitLicense" – would have required Bitcoin businesses doing business in the state to apply for a special license. In that respect, it was very similar to the legislation put into effect in the Empire State. The bill had received a great deal of ongoing criticism from individuals and groups such as the Electronic Frontier Foundation (EFF), and call campaigns were launched to pressure lawmakers in the state to kill the legislation. Much of the opposition was premised on two primary arguments:

1) It is too early in the development of digital currencies such as Bitcoin to risk stifling their evolution with regulations.
2) Passage of California’s proposed law would have led to an effort to pass the same legislation in other states.

Most people familiar with the industry can see the merit in both of those arguments. Obviously, no one who has digital currency’s best interests at heart wants to see a situation develop where government agencies race to see who can implement the most draconian regulatory regimes. That could stifle the sort of innovation that is so essential to the industry’s survival, and make it prohibitively expensive for new startups to begin operations. At the same time, however, any effort to prevent that sort of outcome requires much more than reactionary opposition to every proposed attempt at regulation.

For those who oppose any type of regulation, it is important to remember why many of these regulations are proposed in the first place. Yes, in some instances, there are entrenched money interests pursuing strong regulatory schemes to limit the amount of competition their own industries face from the rise of digital currency. And yes, there will always be the occasional politician seeking attention for acting to “protect the public interest.” But it is naïve to assume that those agendas are motivating everyone who supports regulations for the industry. It’s also counterproductive to make such assumptions.

It is vital to put everything into context. As much as cryptocurrency advocates wish it were otherwise, there have been instances of abuse in the industry. Some consumers have lost money due to criminal activity, and various criminal enterprises have used Bitcoin to facilitate their crimes. Now, reasonable people understand that the vast majority of financial crimes are committed using recognized fiat currencies such as the dollar, but that fact is not persuasive to those who see cryptocurrency as a tool for potential crime. Neither is the fact that cryptocurrency is actually more useful for law enforcement – since every transaction leaves behind a digital record, unlike the standard suitcase full of cash that is all but untraceable. Until more people gain familiarity with the true nature of digital currencies and the blockchain, misconceptions about its superiority as a tool for crime are certain to continue.

With that in mind, advocates for a more Wild West approach to crypto need to remember that they are engaged in a battle for perception, and it is a battle that the industry is not yet winning. The forces favoring regulation are on the ascendency, and they have the backing they need to force through regulation of one sort or another. The only real question involves the amount of input the industry manages to garner as these regulations are being developed.

That’s the real issue at play in all of this. Those who opposed California’s proposed law did so with the best of intentions, but they also seem to be willfully ignoring something that we would all do well to remember: if the legislators do not craft regulations, regulatory bodies will. In California, that regulatory body -the Department of Business Oversight (DBO) – made clear less than a year ago that it believed itself to have the authority to regulate digital currency. The only question was how it would do so and when. Despite the EFF’s stated belief that the DBO would not be able to enact any sort of regulatory scheme fast enough to actually impact the industry, there is no reason to believe that to be the case.

One thing is clear: the legislature is ready to regulate, and it will happen. Without AB 1326 or similar legislation, California’s money transmission laws will be enforced by the DBO, potentially resulting in exactly the type of innovation-stifling results that the law’s opponents are trying to prevent. Broadly interpreted licensing laws and confusing compliance requirements could do more to kill progress than anything contained within the California bill.

Passionate advocacy on behalf of the industry is to be applauded wherever it is found. That does not mean, however, that strategy should go by the wayside. Digital currency advocates must always remember that this is a long game that will not be won with reactionary opposition to government or other industries. After all, digital currency has its advocates like South Carolina’s Republican Congressman Mick Mulvaney, and others at every level of government and throughout the varying sectors of the marketplace. Their arguments on behalf of the digital currency revolution will ring hollow if the industry’s default position is perceived to be little more than extreme opposition to what many consider common sense regulation.

When a proposed regulatory law is too restrictive, then advocates should argue for changes. If, however, their argument essentially boils down to a demand for no regulation of the industry, then they should recognize that they are going to lose that argument each and every time it is made. The best way to prevent regulations from harming the industry is to actively work with legislators and others to assist in the crafting of the law.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Ken Chase

Freelance writer whose interests include topics ranging from technology and finance to politics, fitness, and all things canine. Aspiring polymath, semi-professional skeptic, and passionate advocate for the judicious use of the Oxford comma.

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