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The Daily

Two Large Bitcoin Exchanges Leave NY Over New Regulations

Chris Gaetano
Published Date:
Aug 18, 2015
bitcoin_hpKraken and Bitfinex, two of the largest Bitcoin exchanges, recently announced that they are leaving New York because of the state’s newly approved BitLicense regulations, which they say will be too costly to comply with, according to Under the new rules, companies that act as financial intermediaries for virtual currencies such as Bitcoin must have what is known as a "BitLicense" in order to operate in the state of New York. To acquire one, companies must, among other things, provide a wealth of detailed information—both personal and financial—to the government, as well as follow a number of different rules and regulations generally intended for consumer protection and anti-money laundering purposes. They include a requirement to hold virtual currency of the same type and amount as any virtual currency owed or obligated to a third party and a requirement for entities to maintain the identity and physical address of all parties involved in virtual currency transactions, the amount or value of the transactions, when it happened, and a description of the transactions. noted that the exchanges that have opted to stay in New York and acquire a license, such as CoinDesk, generally have more funding than the ones that have decided to leave. 

BitCoin and other virtual currencies have very quickly evolved from a fringe interest indulged in mainly by hobbyists, to a topic taken seriously, if cautiously, by mainstream financial players. With increased attention has come increased efforts at regulating their use, not only from New York state but also federal agencies such as the IRS and FinCEN. Within the Bitcoin community, this has sparked off intense debate over whether these developments are positive. Some people, mainly early adopters, have viewed virtual currencies more ideologically, seeing them as a way to develop an entirely new economic system away from the confines of any authoritative governing body, and so regulations such as the BitLicense are anathema. To them, virtual currencies should not be subsumed into the existing nation-state framework because its whole point was to exist outside of it. Others, however, see the regulations as providing the trust, stability and, most importantly, the legitimacy needed to take virtual currencies out of the shadows and into the mainstream. They see virtual currencies such as Bitcoin as an exciting new financial tool that can address problems in the existing economic framework without having to leave it entirely. To them, regulations can increase use of virtual currencies, thereby adding to their overall utility. 

This split has become apparent through the recent development of a competing Bitcoin product, BitcoinXT, which was meant to address what its developers saw as scaling problems in the current model. The move has proven controversial within the community, with both proponents and opponents claiming that they, and not the other side, are the ones truly interested in preserving the legacy of Bitcoin inventor Satoshi Nakamoto (likely a pseudonym for an as-of-yet-unknown software engineer). At issue, according to the Business Insider, is the size of the files containing the block-chain, the mechanism through which Bitcoin verifies the authenticity of each unit of currency. The BitcoinXT developers want to increase it from 1 megabyte to 8, saying that Bitcoin's mainstream appeal will be hamstrung if the file size is not allowed to grow. But opponents say that increasing this file size will also centralize the currency to an unacceptable degree, as it makes it more difficult for ordinary people to host the nodes that verify transactions. 

The eventual victor of this schism will depend on the miners, the people who produce new instances of Bitcoin or, now, BitcoinXT. According to the Guardian, while the two are largely compatible for most everyday users today, if 75 percent or more of miners switch to BitcoinXT the two versions will become incompatible, effectively shutting out the original product.