Regulatory Initiative on Virtual Currencies is Heating Innovation

Mar 11, 2015

The third and with a high likelihood last public comment period for the BitLicense Framework, a legal framework for the regulation of virtual currencies in the State of New York, is currently open. It is a clear sign, that the enforcement of the corresponding legislation in Q 2 2015 or latest in early Q 3 2015 is becoming more and more likely.

Originally, the BitLicense initiative was launched in order to increase the protection of consumers of crypto currencies. In the preparatory phase of the first draft of the BitLicense Framework, an impression has emerged that the regulation is all about virtual money for computer games and for handling gift cards and does not affect the financial system too much. During the regulatory process, it has become obvious that creating the possibility to issue private currencies in the form of virtual currencies will have a significant influence on the overall financial system. Moreover, the acceptance of some crypto currencies (e.g. bitcoin) on the consumer side has increased substantially before the regulatory process has finished. Therefore, the individual paragraphs have been strengthened and were adopted to the requirements of traditional financial institutions. For example, the obligation to programs for anti-money laundering (AML), the requirement for Cyber Security and Disaster Recovery and as well the obligation to report modifications in the product offering were clearly defined.

Particularly in the US, the New York regulatory initiative already has triggered substantial venture capital investments. In June 2013, there were merely $17.1 million dollars invested in seven Bitcoin related startups. As of July 2014, that number has swelled to over $240 million dollars for over 49 different companies – a year-over-year increase of roughly 1,200%. (source: Coindesk, State of Bitcoin Q2 2014, presented at the July 10th, 2014 CoinSummit Conference in London). Currently there are more than 400 companies in the Bitcoin environment alone.
Venture Capital investments around virtual currencies and related topics in the FinTech have increased dramatically over the last few weeks. The average volume per round indicates that the enforcement of the BitLicense regulation is strongly expected. For example, we have seen a closing of a round with a volume of USD 75 M at CoinBase (focus on Wallet and Exchange) in February, USD 30 M at Ripple Labs (focus on Payment Network) and a closing with a volume of USD 116 M at 21 Inc. (focus on components to create and use Bitcoin) in March.

The implementation of a sophisticated regulatory framework creates the necessary confidence to justify such venture capital investments. The often expressed criticism and fear about over-regulation is justified where startups will be considerably hampered to get a license to act under this new framework in order to keep such new market participants out. Voiced criticism to secure the founding myth of crypto currencies through excluding the State influence over all will not prevail because of the above mentioned confidence that is created through the regulation.
Rather it should be emphasized the chance that comes with the allowance of private issuers of virtual currencies. This State regulated extension of the current monetary system through additional virtual currencies is the novel in addition to the new technologies what creates the environment for real innovation in the sense of new currencies and financial services applied globally.

Peter Reuschel, Berlin/Germany, March 2015

Author:

Peter Reuschel

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Peter Reuschel is co-founder and COO of Leondrino Exchange, Inc. and has a background as serial entrepreneur and in venture capital. After completing his studies in computer science, he gained professional experience at IBM and SAP.