Bitcoin Regulation Will Be a Matter of Defining Jurisdiction

By Aug 22, 2014 6:06 AM EST

NEW YORK (InsideBitcoins) — Establishing jurisdiction is one of the biggest concerns bitcoin businesses will face.  Last month, Benjamin Lawsky, the superintendent for New York’s Department of Financial Services, proposed regulating bitcoin. The so-called BitLicense hinges on jurisdiction, so much so that some members of the cryptocurrency community are threatening to block New York users — or even pack up and leave the state.

The largest bitcoin exchanges in China, reportedly responsible for 60% of global bitcoin transactions,  have said that by serving just a single New York customer they will be forced to comply with the New York regulations – which could include stringent recordkeeping, providing access to proprietary information and even handing over employee fingerprints to the FBI.

Pushing firms to “shadier jurisdictions”

In a recent blog post, Jeremy Allaire, co-founder of Circle, a self-described digital currency company, argued the BitLicense law, as proposed, will provide few protections to address fraud and money laundering.

“As it stands, the BitLicense is likely to have the opposite impact—radically limiting those who can participate in this industry, pushing firms offshore and into sometimes shadier jurisdictions,” Allaire warned. “Furthermore, as currently written, it would be technically impossible to comply with the BitLicense proposal. Without some material changes, Circle will have no choice but to block New York customers from accessing our services.”

Allaire’s largest concern is the ambiguity of jurisdiction over the Internet. Courts have set conflicting precedents, making it difficult for online businesses to determine if they are subject to a state’s regulations.

Evaluating the regulatory risk

Realizing the concerns of its constituency, the Bitcoin Foundation has issued a white paper to educate the bitcoin community and help users and businesses “evaluate and reduce the risk of being subject to unfavorable laws.”

Jim Harper, Global Policy Counsel for the Bitcoin Foundation, commissioned the jurisdictional white paper to address the issues facing the bitcoin industry.

“There is plenty of opportunity for Bitcoin businesses to control what jurisdiction they do business in, through ‘geo-fencing’  for example,” Harper wrote in a blog post on the Foundation’s website. “How you direct advertising, the location information you collect from users, and specific notices and agreements with users can all protect Bitcoin businesses from unfriendly states.”

The Bitcoin Foundation white paper provides the following insights:

  • A 1997 precedent stipulates providing a website isn’t sufficient to establish jurisdiction if the business doesn’t use the site to interact with customers. However, businesses may be subject to jurisdiction by enabling customers to contact them or place orders through the website.
  • Some jurisdictions require companies to actively target users to be subject to their regulations, while other jurisdictions stipulate any company engaging with its citizens is required to abide by its laws.
  • Businesses can avoid jurisdictional issues by avoiding to do business with its customers.

Harper believes the New York financial regulator will review its proposal and address the shortcomings. In the meantime, he encourages the bitcoin community to study the jurisdiction primer and consider possible options to avoid the encumbrance these regulations might pose.

Written by Kalen Smith
Photo credit: Mukumbura via photopin cc

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