Regulation has been a hot topic in the Bitcoin community since the FINCEN guidance in March, and in the Bitcoin conference that took place this past weekend an entire quarter of the conference was dedicated to economic and regulatory issues. The guidance evoked strong feelings of both relief and uncertainty throughout the Bitcoin community; although ordinary Bitcoin users are now almost certainly clear of regulation, a fact that has allowed the Humble Bundle and the Electronic Frontier Foundation to feel comfortable accepting the currency, Bitcoin exchanges will now likely be required to have money transmitter licenses in all 48 states to operate across the country – an extremely onerous procedure that has repeatedly stymied even businesses outside the Bitcoin space. Many figures have been thrown around as to just how much that process costs; a common understanding was that it takes millions of dollars of legal effort and surety bonds, and Jeff Berwick said in his resignation from the Robocoin Bitcoin ATM project that the main obstacle too US participation was “a $25 million “insurance bond” necessary as being deemed a “money transmitter” in the US.”
However, a deeper examination into the issue at play shows that things are not nearly so bleak. The requirements for becoming a money transmitter largely fall into two separate categories: bureaucratic legal effort and surety bonds. With surety bonds, a common requirement is that you need to be insured for 2% of the total volume that you plan to be processing over the next year. If you go over, you need to buy more surety bonds. The cost is thus less prohibitive for small businesses, although there are usually minimums; the Florida regulations specify a minimum of $50,000. In order to get insured for this amount, most insurers charge about 2%, so a money transmitter in Florida would need to pay at least $1000 per year in order to operate. Other states have similar requirements, and altogether the minimum amounts add up to about $7 million. Of course, one also needs to convince surety bond brokers to deal with Bitcoin exchanges, although some are appearing now specifically to serve the legal industry. The other onerous burden is the legal effort. “The more you spend,” Tradehill’s Ryan Singer explains, “the better lawyers you can get and the faster you get your applications.” You can spend only a medium amount of money (in business terms; for a basement startup, it is still very much prohibitive) and get the licenses in several years, or you can spend more to get them faster. Tradehill currently has two lawyers per engineer hired to work on compliance issues.
Just how far along to 48 are leading businesses? The answer from every major exchange in the US (except perhaps MtGox’s US subsidiary) is, surprisingly, quite far. BitInstant’s Alex Waters has even provided a precise figure: 30 states. BitInstant’s progress in getting these licenses is particularly impressive because, technically, they do not even need them; because the company only acts as an intermediary for other exchanges, they are actually classified as a payment processor, a category for which there is a specific legal exemption. However, BitInstant nevertheless wants to be on top of things. “We’ve been registered as an MSB [money services business, the federal license for money transmission] since 2011,” Waters explains. “We take finance and regulatory issues seriously … we’re doing things the way they should be done.”
This should qualify as another piece of highly positive news for Bitcoin. Although regulators certainly are watching Bitcoin exchanges, as the Department of Homeland Security’s recent seizure of MtGox’s Dwolla account clearly shows, no other major Bitcoin business has yet been caught in government crosshairs. Furthermore, the MtGox seizure was justified solely by federal law, which MtGox was not compliant with but which every other major Bitcoin exchange has been compliant with for a long time – BitInstant, as mentioned above, has been a licensed money services business since 2011. In March, there may have been a public perception that exchanges were suddenly scrambling to meet the new requirements. In reality, however, the exchanges have been working on acquiring these licenses since long before the guidance was out, and the day may not be too far away when at least these legal worries are behind us.
