Sean King

My photo
Knoxville, Tennessee, United States

Wednesday, July 30, 2014

Eight Questions for Lawsky and the NYDFS Regarding the New Bitlicense Regulations

1)  Do you realize that any use of the Internet involves the transfer of units of data "by or through" one or more "third parties"?  Reference your proposed definition of "Transmission".

2)  What do you mean by the phrases "digital unit" and "medium of exchange"?  Subject to the limited exceptions noted in your proposal, do you intend for your regulation to cover the "transmission" of all TCP/IP packets, which are "units of data", represent the "medium of exchange" of data on the Internet, and are obtained by "computing effort"?  Seemingly so since you insist that the definition of Virtual Currency be "broadly construed" and key terms are undefined.  

3)  Assuming all other conditions are met, do you realize that your definition of "Virtual Currency Business Activity" would seemingly cover the transfer of bitcoins from me to my friend in her capacity as the individual trustee of my family trust?  Per your definitions of "Transmission", "Person"and "Virtual Currency", I (one Person) would be "transmitting" Virtual Currency to another Person (my non-professional trustee).  See 200.2(n)1.  Thus, assuming all other qualifications were met, I would be required to obtain a license just to be able to transfer bitcoins to my own trust.  

In this instance, my trustee would be "receiving Virtual Currency" and would thus also need a license.  See 200.2(n)1.  Additionally, my trustee would be "holding or maintaining custody or control of Virtual Currency on behalf of others", the beneficiaries of the trust, and for their benefit.  See 200.2(n)2.

4)  Do you realize that you define "Virtual Currency Business Activity" to include any transfer of bitcoin from one Person to another that meets the criteria of 200.2(n) unless a bank is involved or the transaction is between a merchant and its customer and for the sale of goods or services?  Further, do you realize that you do not define "merchant" or "customer" or "sale" or "goods or services"?

Thus, taking these words at their ordinary meaning, making a charitable donation to my alma mater, or to Wikipedia, using bitcoins constitutes a Virtual Currency Business Activity for which both donor (the Transmitter) and the donee (the receiver) must obtain a license.  Likewise for making a gift of bitcoins to an individual (for instance, for his or her use in buying flowers for a friend's funeral).  Likewise for "tipping" with bitcoins.

Or, suppose that, for convenience, my friend purchases dinner and, for convenience, I reimburse him for my share using bitcoins.  Assuming all other conditions of the regs are met, both my friend and I must obtain a bilicense, for I have "transmitted" coins from one party (me) to another (my friend).  My friend is not in this case a "merchant" and the transfer was not, at least directly, "for the sale of goods or services".

5)  Do you realize that very nominal amounts of bitcoins (essentially so small as to be worthless, being currently valued at far, far less than a single sheet of notebook paper) can be "tagged" to represent title to real world goods, or a claim to real world services, and transferred between individuals in lieu of paper "deeds", "bills of sale",  or "coupons"?

For instance, as a CPA, I could "tag" a single satoshi (the smallest unit of a bitcoin, representing 1/100,000,000 of a single bitcoin, or currently about .000006 percent of a US Dollar) to represent a coupon for $500 off preparation of a US Federal Tax Return.  By transferring that satoshi to the highest bidder at a charity auction, I would be transferring the right to the discount to another party, even though the underlying satoshi, the token on the Bitcoin blockchain that represents the coupon that can be "redeemed" by transferring it back to me, is for all intents and purposes totally worthless, worth less in fact than the sheet of paper I might use to create a coupon the "old way" instead.

Via the "colored coin" project, the Mastercoin project, and many others, the "tagging" of nominal and mostly worthless amounts of bitcoins to represent rights or claims to real world goods and services is one of the highest growth areas in the bitcoin ecosystem and holds the most promise for future innovation.  

6)  Do you realize that, as written, and assuming the other conditions of the regulation are met, your proposed regulation would require both me (the sender of the coupon noted in 5 above) and the receiver of the coupon to obtain "bitlicenses"?  See again 200.2(n)1 and note that none of the reg's stated exceptions apply.  

7)  Given the limitless number of use-cases for even nominal quantities of bitcoin, do you see how requiring a bitlicense to engage in the transactions described in 4 and 5 above might be an unreasonable imposition on Interstate commerce by the State of New York in light of ALA v. Pataki?  Even if not, do you at least see how requiring a bitlicense in this instance might drive innovators and innovations away from New York and make Virtual Currencies unsuitable for many types of "micro transactions"?

8) What do you mean by "controlling, administering, or issuing" a Virtual Currency?  See 200.2(n)5. These terms are undefined.  Would New York Resident (someone living there or, per the definition, perhaps even just visiting) be a controller of Virtual Currency merely because he or she possesses the private key that controls bitcoins reserved for his or her own personal use?  Seemingly so, and such person would be required to obtain a bitlicense.  What about a person who doesn't control any bitcoins but rather just participates in the bitcoin network by operating a "full node"?  Would such person be deemed an "administrator" by reason of his or her participation in sustaining the Bitcoin network?  How about developers who assist in writing, and re-writing, the code upon which the Bitcoin network runs? Are they "administering" a Virtual Currency?   Is there such a thing as an "issuer" of a distributed virtual currency?  If so, who qualifies?

3 comments:

Carter K said...

I love it! Thank you for being so concise.

Carter K said...

I love it! Thank you for being so concise.

Dan said...

Hello Mr King,

After reading your post, I'm working on a website to draw attention to how bad the Bitlicense regulation is from a technological perspective and basically distill the arguments here into something that is easily accessible, and make it easy to submit comments to NYDFS. I'd appreciate it if you could take a look at my draft and provide feedback. You can find a draft here (https://github.com/savethecoins/savethecoins-www - download SaveTheCoins.pdf) or reach out to me via email at danmane@gmail.com

Kindly don't approve this comment onto the blog since I'd rather not have this all on your blog yet.

Thanks.
Dan