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‘BitLicense Refugees’: ShapeShift, Kraken Talk Escape from New York

If you wanted to hear red-meat rhetoric about New York State’s regulatory approach, a fireside chat Tuesday between two of the cryptocurrency industry’s most outspoken leaders delivered.

For example, the audience at Consensus 2018 in New York City cheered when ShapeShift CEO Erik Voorhees invoked a local icon to make the case that the state’s BitLicense was a case of regulatory overreach.

Here we are two miles from the Statue of Liberty and you cannot sell CryptoKitties in the state without that license. That’s the absurdity of what’s happened here,” he said.

And Jesse Powell, the CEO of Kraken, got some laughs at the expense of former New York Attorney General Eric Schneiderman.

When Scheniderman’s office sent a request for information to Kraken (along with several other exchanges) earlier this year – three years after his company stopped doing business in New York – it felt like “a slap in the face,” Powell said.

But then “it turns out this asshole actually slapped people in the face,” he quipped, referring to the allegations of physical abuse that forced Schneiderman to resign shortly afterward.

Yet between these zingers and applause lines about the BitLicense – which both executives blame for driving their companies out of state – there were subtler points made. The conversation highlighted the challenges facing both the industry and regulators worldwide as governments come to terms with the ramifications of cryptocurrency.

Powell, for example, pointed out the tension between anti-money-laundering regulations and customer privacy protections. In the case of the BitLicense, he said, Kraken would have had to “disclose all the information about our entire global client base to the state of New York.”

That was not only distasteful, Powell said, but “potentially illegal” under the privacy laws of other countries.

“To service New York today, what we’d have to do is create a special purpose entity just to service New York and completely firewall off” all the exchange’s other users to protect their privacy, he said.

Alternative models

Widening the lens, Powell contended that the U.S. “has really failed” by leaving it up to local regulators to figure out how to deal with cryptocurrencies.

“In others parts of the world, it’s an issue that’s being taken seriously by heads of state – presidents, prime ministers. It’s not something that’s relegated to individual regulators at a state level,” he said. “It should be treated as a national economic and national security issue, maybe even an international issue.”

Powell cited Japan’s Virtual Currency Act as an example of “reasonable” regulation. Although the law is “not perfect,” he said, “we’re already seeing an explosion of business in Japan” as a result of the clarity it brought.

Voorhees, however, held up a different U.S. state as an example of how to do things right: Wyoming, which recently passed a package of five blockchain-related laws.

The two most important ones, in his view, were a law that excludes tokens from being automatically categorized as securities, and another that excludes digital asset companies from being automatically classified as money transmitters.

“That’s the model people should be looking at, they’ve done it the best,” Voorhees said.

And despite using the phrase “statist oppression” early in the conversation to describe his feelings about New York when the BitLicense was created, Voorhees later clarified that he thinks regulators generally have good intentions.

But their aims can be met today by means other than imposing bureaucratic, bank-style regulations on businesses that want to be nothing like traditional financial institutions, he argued.

“The crypto industry and regulators can find common ground in realizing that this incredible new technology can achieve many of the noble goals of the regulators such as protecting consumers,” Voorhees said.

Regulatory hopscotch

Ultimately, though, the two executives depicted cryptocurrency as a highly mobile activity that can easily relocate when any jurisdiction starts to appear heavy-handed.

Powell said Kraken’s main office is located in San Francisco only as a convenience because that’s where he lived when he started the company. Crypto businesses can basically pick up and move anywhere in the world they want to be, he said.

And users need not always move to another place, use a VPN to mask their IP address or even break the law to get around restrictions; Powell shared a tip for New York residents who feel deprived because of the way the BitLicense has limited their cryptocurrency trading options.

“If you’re here stuck in New York and you can’t trade how you want to trade, set up a Wyoming LLC and you can trade through that and have your business trade for you,” he said.

Further limiting regulators’ power, Powell said, the rise of decentralized exchanges will give users even more alternatives.

“If they can’t do what they want on Kraken they’re doing to do it on a decentralized exchange,” he said.

And Voorhees said “regulatory hopscotch” by exchanges and other businesses that move from one country to another is only a symptom of a broader phenomenon that won’t easily be resolved.

He concluded:

“Bitcoin basically broke down the borders of how value moves across humanity. There is no way that an invention like that doesn’t run straight into the jaws of regulations. And that conflict is going to be one of the great themes of my lifetime.”

Photo via Wolfie Zhao for CoinDesk. Left to right: CoinDesk research director Nolan Bauerle, Jesse Powell and Erik Voorhees. 

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Cryptocurrency Investors Need to ‘Look Out for Themselves’


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Jesse Powell, co-founder and chief executive of San Francisco-based cryptocurrency exchange Kraken, has some words of wisdom for investors. While securities regulators are looking for ways to protect investors from any fraudulent activity that might arise in unscrupulous ICOs, Powell, while speaking to CNBC at the World Economic Forum in Dubai, put the burden to investors. But he also offered a bullish take on the cryptocurrency market in 2018, pointing to a future combined market cap worth $1 trillion.

“I think ultimately consumers need to look out for themselves, look into the fundamentals of any coin and not rely on any particular exchange to protect them from market volatility,” Powell said.

It’s not that Kraken, the largest bitcoin exchange based on euro volume and liquidity, doesn’t have traders’ backs. The exchange has a rigorous vetting process for any new coins looking to list there. But considering that Kraken is one of the leading exchanges that ICOs want to list their tokens on, along with the likes of Bittrex, Poloniex, and Binance, that’s no small feat.

“We make no promises about the future of any coin, things can change when you raise $1 billion in 10 minutes,” he added.

The comments come on the heels of a multiple-day systemwide outage that Kraken suffered in January while they were upgrading their trade engine, an event that was supposed to take a couple of hours. And while Kraken wasn’t hacked, the outage spooked cryptocurrency traders.

Powell’s remarks on the risks associated with cryptocurrencies come as policymakers around the world are grappling for tighter control over the market. EU regulators, for instance, just issued a joint warning to investors about “highly speculative” cryptocurrencies, urging them to refrain from investing more than they can afford to lose.

Bullish Call

While sobering, Powell’s remarks weren’t all cautious. He also believes total cryptocurrency market cap could reach $1 trillion in 2018. He is bracing for an “acceleration” in the market whose catalyst is a rising generation of talent.

“You’ve got a lot more kids graduating from crypto programs at universities now. I think we’re just going to see it continue exponentially from here,” he told CNBC.

His sanguine view, particularly in light of the bumpy start that cryptocurrency trading got off to amid a heightened regulatory focus around the world, is music to the ears of investors and echoes a similarly bullish call from the Winklevoss twins. They predict the potential market cap for bitcoin alone at $4 trillion, though that’s over decades.

Cryptocurrency market cap has been all over the map year-to-date, most recently hovering at approximately $433 billion.

Featured image from Shutterstock.

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