by Joseph Young
On January 18, the New York Department of Financial Services (NYDFS) officially granted Coinbase with the BitLicense, a frequently criticized regulatory framework designed for Bitcoin due to its impractical requirements and policies.
Only two companies have obtained the BitLicense to this date since its introduction in August 2015. Although nine companies including Xapo, Bittrex, and Bitstamp applied for the license to operate in New York, it has only been granted to Circle and Ripple. Coinbase is the third company to receive permission from the NYDFS to function in the state of New York legally.
Juan Suarez of the Coinbase Legal team said that the company prioritized the process of acquiring the BitLicense to remain on par with national regulations on Bitcoin and cryptocurrencies in general. Suarez reaffirmed the vision of Coinbase, that is to operate the most secure and compliant bitcoin exchange globally.
“The Bitlicense, which authorizes Coinbase’s continuing virtual currency business operations in the state of New York, is an important validation of our highest priority: to operate the most secure and compliant digital currency exchange in the world,” said Suarez.
The announcement from the Coinbase legal team came only four days after the release of Coinbase CEO Brian Armstrong’s blog post discussing the company’s legal conflicts with the Internal Revenue Service (IRS). Armstrong described the efforts of the IRS to unjustly punish Coinbase as an unfair consequence for a company that has allocated a significant amount of resources and capital in remaining compliant with local regulations.
Armstrong further emphasized that Coinbase is one of the very few bitcoin exchanges that is compliant with virtually every region within the US, regardless of the inefficiency or impracticality of regulatory frameworks in some areas or states.
In his blog post entitled “Coinbase and the IRS,” Armstrong said:
“This heavy-handed approach by the IRS punishes one of the good guys. Other digital currency exchanges operating abroad (while still serving U.S. customers) are unlikely to demonstrate a similar commitment to working with the IRS, yet we were the only company (as far as I know) to receive a subpoena for all customer records.”
To a large extent, Armstrong’s claims have proven to be true over time. Not only did a handful of companies apply for the Bitlicense but many prominent Bitcoin exchanges including Kraken and Bitfinex terminated their services in New York due to their disagreements with the NYDFS.
The financial aspect of the BitLicense also came as a big challenge for Bitcoin startups or exchanges that have relatively small profit margins. For large-scale operations, the acquisition of the BitLicense cost over $100,000, which is a substantially large fee to deal with for any bitcoin company.
At the time, San Francisco-based bitcoin exchange Kraken’s legal department stated that the requirements of the BitLicense and the demands from the NYDFS were not analogous to the size of the bitcoin market in the state. Kraken reaffirmed its unwillingness to comply with such an impractical regulatory framework that fails to understand the value of its market.
“While we’re sure that the protection from New York law enforcement is valuable, it comes at a price that exceeds the market opportunity of servicing New York residents. Therefore, we have no option but to withdraw our service from the state,” said Kraken’s legal team in a statement.
The Kraken team hinted that the company may attempt to obtain the BitLicense if it becomes “significantly nerfed” in the future but as of now, the NYDFS has no interested in nerfing its license for bitcoin companies.
Regardless of the decisions of its competitors and prominent bitcoin exchanges, Coinbase applied for the BitLicense and underwent necessary procedures to obtain it, even if the cost of BitLicense went past hundreds of thousands of dollars for legal and compliance fees.
In August 2015, Bitstamp called the process of BitLicense application as expensive and arduous and emphasized that it is impractical for bitcoin startups of any size. Coinbase continued to push for the implementation and remained compliant with the state of New York.
At this point, it is likely that the IRS may reconsider its proposition, considering the efforts of Coinbase in remaining compliant with every local regulatory framework on bitcoin. Especially, considering that the only two companies that do have the BitLicense do not operate bitcoin-based operations in New York any longer, it can be said that Coinbase will be able to overtake and exert some control over the entire New York bitcoin market until a new contender emerges.