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California Bitcoin License Draws Criticism from Crypto Community

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Similar to New York’s BitLicense, which has caused the closure of many prominent bitcoin startups and exchanges like Kraken, Localbitcoins.com, Shapeshift, etc. in the state of New York, the California Senate is planning to pass a bill called AB 1326, a licensing requirement for bitcoin startups and exchanges in California.

AB 1326, like BitLicense will require bitcoin startups to pay tens of thousands of dollars to operate “legally.” The application process includes a non-refundable application fee, compliance costs, regulatory management costs and most importantly, a ready-to-submit database of sensitive customer information.

Bitcoin, like the internet in its early stages, is still growing and being innovated. New core technologies and networks are being built and the number of merchants and small businesses accepting bitcoin has increased substantially over the last few months.

However, AB 1326 completely disregards the decentralized nature and the peer to peer protocol of bitcoin. Due to the incompetence of the California Senate to regulate digital currencies properly and appropriately, Task Force, Fight For the Future and Electronic Frontier Foundation have launched an online campaign nobitcoinlicense.org, to inform everyone in the bitcoin community about the poor efforts of the government to regulate digital currencies.”’

On August 29, 2015, cryptographer Ryan X Charles tweeted, “Say No to the California Bitcoin License” in support of the nobitcoinlicense.org campaign.

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According to the campaign, “AB 1326 bill is Bitcoin-specific, attempting to write a law that is tailored to how Bitcoin works. It ignores how other virtual currencies differ—even though other virtual currencies, both current and future, would be affected. AB 1326 is also technically inaccurate. The bill refers to businesses that have “full custody and control” over virtual currencies “in this state.” But virtual currencies don’t exist in a single physical location. Instead, cryptocurrencies’ “existence” often reflects the location where keys are stored—which might be in the cloud, on a server in your house, or in several other geographic places all at the same time.”

The biggest problem with the bill, as explained by Shapeshift founder and CEO Erik Voorhees, is that it requires bitcoin startups to maintain a record of sensitive customer information in a private database to pass on to law enforcements on demand.

However, there are two main problems to this “requirement:”

  1.   Private database of sensitive information could be vulnerable to hacking attacks
  2.   Costs of running a database of customer data

“We’re not going to spy on thousands of people purely to make their job a little bit easier,” Voorhees said of law enforcement in an interview with CNBC.

Such requirements for bitcoin startups in New York has forced both prominent and small / boutique bitcoin exchanges to leave the state. If AB 1326 bill passes the Senate, it could bring the same effect as it did for New York based startups to California based bitcoin exchanges and startups like Kraken, a leading bitcoin exchange headquartered in San Francisco. 

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