Today, EFF filed a second round of comments to the New York State Department of Financial Services (NYDFS) on its proposed regulatory rules for digital currencies like Bitcoin. EFF, the Internet Archive, and reddit filed initial joint comments to NYDFS back in October 2014, opposing the first draft of the “BitLicense” proposal. Thousands of concerned EFF members and friends also used our website to send in comments. In response to the deluge of public comments received on the initial regulations, the Department issued revised regulations on February 25, 2015. But while the second draft of the BitLicense proposal is better, it is still not great.
On a positive note, NYDFS did fix one of EFF’s greatest concerns with the original proposal. Namely, the first draft of the BitLicense proposal did not include an explicit carve out for those who merely develop or disseminate software. This threatened to place great recordkeeping burdens on software developers who create programs that enable people to store and transact with digital currencies, digital currency miners whose computing efforts are the source of digital currency, and even the Bitcoin Foundation and core members of the Bitcoin development team. The revised proposal explicitly fixes this through providing that “[t]he development and dissemination of software in and of itself does not constitute Virtual Currency Business.” This change is a step in the right direction for ensuring that the BitLicense regulations do not stifle innovation in the digital currency space.
But EFF still has other qualms with the proposal.
Most significantly, as we’ve said before, it’s too soon to regulate digital currency—an industry in its infancy. It’s premature to craft extensive regulations for an industry so new and still in flux. We think that New York should wait and see what the market does before rushing in to regulate. Implementing regulations now will only serve to stifle innovation.
In addition, the regulations—even as revised—do not sufficiently protect privacy, free expression, and innovation. Quite the opposite: the regulations affecting anonymity on the blockchain threaten user privacy, and the proposed BitLicense recordkeeping requirements are not only unduly burdensome, but they also create a massive consumer privacy risk as companies are forced to stockpile unnecessary mountains of data about digital currencies users. If NYDFS does move ahead with its plan to implement digital currency regulations, it needs to rethink these regulations and take care to build in safeguards to protect digital rights. As is, the proposed regulations undermine the unique civil liberties benefits digital currencies can offer.
The remaining problems with the proposed regulations may stem from the fact that NYDFS is moving far too quickly to enact digital currency regulations. This is evidenced by the fact that NYDFS provided only 30 days for public comment on its revised BitLicense proposal. This is simply not enough time for the public to comment on the unprecedented issue of digital currency regulation. NYDFS needs to slowdown its process and ensure that any regulatory framework is adopted with prudence—not haste.
We hope that NYDFS will again rethink its proposed regulations and allow more time for the public to weigh in on this important issue.