Should new BitLicense proposals contain “Barbershop Rules”?

Should new BitLicense proposals contain “Barbershop Rules”? New York Department of Financial Services (NYDFS) issued, on July 17th 2014, new proposed Digital Currency (“BitLicense”) regulations issued for review and commentary by the marketplace. Now that I have had a chance to go over these, I see that they include a rather unusual stipulation when it comes to the definition of NCR (Net Capital Requirements) which are minimum fund balances that must be maintained by all prospective licensed businesses. Per the proposals, it appears that the only funds held in “Traditional Asset Classes” (Stocks, Bonds, Commodities, Cash, Money Market, Real Estate, Etc) can be included in arriving at this figure. Thus, any balances held in Bitcoin digital currency itself will not be deemed to be allowable. Whilst I realize that the debate still rages as to what Bitcoin actually is (Property, Commodity, Digital currency Etc) it certainly cannot be considered or given an ongoing arbitrary “worthless” valuation as this new regulatory framework would propose. The three Badges of a Currency are considered to be: Medium of Exchange, Unit of Account and Store of Value. By excluding ENTIRELY any balances held in Bitcoin from being from inclusion in NCR calculations by newly licensed companies, the regulator is saying that Bitcoin is not a Store of Value. This is wrong and if passed as law will hand down a very onerous and damning precedent. A more realistic, prudent and fair approach to this Net Cap issue would be to write-down (“give a haircut “) to any digital currency balances when computing ongoing net capital. This could be done using a historic basis of say, last 90-day average price in the underlying market and/or a straightforward write-down percentage. For the record, this is traditionally how most existing financial regulators calculate “Net Cap” for member firms, subject to the class, quality and liquidity of assets under valuation. For those interested, the complete proposal document issued by NYDFS can be viewed and/or downloaded here.

Leave a Reply

Your email address will not be published.