For those just tuning in, the “BitLicense” is a special regulation aimed at Bitcoin businesses, which the New York Department of Financial Services (NYDFS) issued in June, 2015. When New York’s then-Superintendent of Financial Services Benjamin Lawsky first encountered Bitcoin, he sent subpoenas to everyone in the Bitcoin world and went on TV talking about “narcoterrorists.” But by the time he concluded the matter, he thought differently. In fact, immediately after his office finalized the “BitLicense” regulation, Lawsky decamped to a private sector consultancy where his website now boasts that he was one of 2014’s “Top Ten Most Influential People in Bitcoin.”
Since imposing the “BitLicense” requirement, the NYDFS has licensed (or “chartered”) a whopping five companies (as of January, at least). The NYDFS has chased off four other companies trying to provide Bitcoin services in New York. They join the many more firms that suspended services in New York after the regulation was finalized.
Enter Theo Chino. While the big Bitcoin companies steered clear or meekly complied with the BitLicense – they expect to be repeat players before the NYDFS, of course – Mr. Chino opted to stand and fight. First filing a pro se petition against the regulation, he now has counsel to carry forward what is known as an Article 78 action against the “BitLicense” regulation.
An Article 78 proceeding in New York allows aggrieved parties to challenge regulatory actions, including actions taken that are beyond the jurisdiction of the regulatory body or officer. That is one basis for Chino’s challenge: that the NYDFS was never given authority by the legislature to regulate Bitcoin.
Another argument is that the action was arbitrary and capricious or an abuse of discretion. In theory, administrative regulation assigns expert, neutral lawmakers to the task of taking arguments from the public and figuring out the very best rules. This doesn’t seem to be what happened in the BitLicense rulemaking.
As I described to the New York Supreme Court in an affidavit filed by Chino’s counsel this week, the NYDFS stated that “extensive research and analysis” supported the “BitLicense” regulation. But when I asked for it (wearing my hat as the Bitcoin Foundation’s Global Policy Counsel), the agency first promised to share it, then delayed sharing it, and then never shared it.
As a point of comparison, at this time the European Banking Authority had produced a 46-page analysis of benefits and risks from Bitcoin. The results were far from perfect, but the methodology allowed for reasoned debate about the need for regulation and what any regulation might address. The EBA demonstrated part of what an administrative rulemaking process should entail. The NYDFS either didn’t do any analysis to speak of or declined to make its analysis public, denying itself feedback from Bitcoin experts.
Not only do the defects in the NYDFS’s processes bode well for Theo Chino’s Article 78 challenge to the “BitLicense,” the results do, too. The BitLicense made New York a pariah jurisdiction for Bitcoin, denying consumers access to service providers in this highly innovative field. The world’s financial capital has made itself a Bitcoin backwater. Other regulators, looking on with interest, have not followed New York’s lead.
Thanks to the persistence of Theo Chino and his counsel, the “BitLicense” is in the dock and heading for trial. The case will have many twists and turns, but hopefully the idea of special, restrictive regulation aimed at digital currency will get the electric – er, the electronic chair.