The Specific Issues with Offering Services to Americans
I recently asked Erik Voorhees about the specific laws and regulations that force foreign companies to avoid American customers. As an early Bitcoin adopter and one who has been fined roughly $50,000 by the US Securities and Exchange Commission for victimless transgressions, Erik hold a unique perspective on the regulatory environment for the Bitcoin industry in the United States. Erik stepped down from his position as CEO at Coinapult in January, although he is still a co-owner. Voorhees was quick to point out why the “antagonistic” rules associated with becoming a money service business (MSB) and money transmitter business (MTB) cause the most problematic aspects of offering financial services to Americans. He noted, “Compliance with MSB statutes isn’t terribly onerous; however, it does require a business to generally invade privacy, spy on its users, and act as a law enforcement agent of the US government.”
In Erik’s view, “the MTB category is the higher threshold.” He noted that the costs of obtaining MTB licenses in over 45 individual states can “cost hundreds of thousands, [or even millions], of dollars.” Voorhees even went as far as to refer to the license fees, bonds, and legal bills attached to MTB licensure as “extortion money” due to the fact that the government’s monopoly on violence is what backs this collection of money. In addition to the economics, he also pointed out that “those with a moral opposition to this kind of unconstitutional [wholesale spying on users have] little choice but to block US users entirely.”
Preventing Innovation in the United States
When speaking about the unseen side effects of these licenses and regulations, Voorhees pointed to an issue that Charlie Shrem also talked about in a recent discussion with Marc Hochstein. Voorhees noted, “[Entrepreneurs] often won’t have hundreds of thousands of dollars to spend on legal advice, so what [are they] to do? America certainly used to be the land of innovation, but it cannot be said to hold that title anymore.” To expand on Erik’s point, innovation, in any market, usually comes from smaller competitors. As Shrem pointed out in his talk with Hochstein, “[The innovation in the Bitcoin space is coming] from the smaller guys that are running their businesses out of their basements.”
When it comes to issues related to regulation in general, Voorhees also pointed out a problem I recently explored in a piece for Inside Bitcoins. Although he didn’t utter the phrase “regime uncertainty,” Voorhees noted that, “Because Bitcoin is so new, lawyers and politicians really don’t know how to treat it. Some say one thing, some say another. It is all [a] very grey area. This is very scary for a business, which must choose between acting in a grey area and risking prosecution for things which weren’t clearly unlawful, or being overly cautious and limiting innovation or growth in some way to make sure that no action could possibly be considered problematic.” In other words, it’s essential for business owners to have regulatory clarity in order to assess the viability of their businesses.
The uncertainty around offering Bitcoin services to Americans is so problematic that both Xapo and Coinapult did not wish to make public statements on the matter. It seems that regulators have created an environment where companies outside of the US do not even want to make negative comments towards the laws found in that particular country. Coinapult COO Justin Blincoe could only share the following statement when he received the same questions as Erik Voorhees:
Coinapult doesn't offer services to the US market because even our legal experts have no idea how they will be treated and what licensing might be necessary. So we prefer to keep our heads down, focus on our product, and provide it to customers where we are confident in our ability to do so without being accused of a crime.
Could US Politicians Learn from Regulatory Mistakes?
I asked Erik about his thoughts related to other Bitcoin companies blocking unfriendly jurisdictions in the future, such as Circle blocking New York. If New York saw businesses emmigrating, did he think their regulatory stance on Bitcoin would change? Voorhees was quick to reply, “No. I don’t.” He continued, “Politicians are stubborn and generally believe they are doing what is right, and they stick by it even when it’s unethical or disastrous. They’re better at shrouding themselves in rhetoric and making excuses, or vilifying the opposition, than [at] genuine self-reflection.”
On the other hand, the former Coinapult CEO seemed to see the possibility for politicians to learn from the success of jurisdictions with free and open policies. He hypothesized, “If and when certain jurisdictions enact draconian policies upon Bitcoin, and the new [jobs and capital start] moving elsewhere, which [they] inevitably will, [then] other jurisdictions will see this and learn the lesson that the original tyrants were too shortsighted to understand.”
This point goes well with the previous point about regulations and licenses blocking innovation. Certain jurisdictions, such as Switzerland, could decide to embrace Bitcoin due to the large amount of economic growth such an action could bring to the country. They would essentially offer innovative regulatory policies that are unavailable elsewhere, similar to the way basement entrepreneurs currently offer innovative services that bigger players do not. Other countries and jurisdictions will be able to provide that which United States refuses to. For example, Estonia and Singapore provide a precedence with their recent innovative forms of financial freedom. Having said that, Estonia’s EU membership could become problematic if it wishes to provide a hub of innovation for Bitcoin in the future.
Foreign Banks Don’t Want Americans Either
It should be noted that the Bitcoin industry isn’t the only area in the financial space that has started to block Americans. Various banks around the world have started to close American accounts due to regulations related to tracking and reporting information on customers with US citizenship. It is unknown if these banks are dealing with the same moral dilemma that Voorhees described when it comes to spying on their customers, but it’s likely that they just don’t want to deal with the financial cost of creating reports on the activities of every American customer. As we saw in the past with the US government leading the charge into Costa Rica to shutdown Liberty Reserve, US regulators believe it’s their role to prevent money laundering, also known as financial freedom, in every part of the world. It is obviously annoying to citizens of other countries when the American governement tries to force its financial laws and regulations on the local population, although probably not as annoying as when US foreign policy leads to the deaths of hundreds of thousands of innocent children and the secretary of state deems it to be “worth it.”
A Final Thought from Erik Voorhees
At the conclusion of my questions for one of Bitcoin’s earliest adopters, I asked Erik if he wanted to share any other thoughts on the general topic of overbearing regulation in the United States. He was able to provide a view on the general trend towards more government regulation of daily life that illustrates why many Americans, myself included, become interested in Bitcoin in the first place:
As an American, I'm embarrassed that the country I grew up loving as the land of the free, and home of capitalism and industry, has slid during my lifetime into a socialist, central-planning mess. Bitcoin is one of the most important technological innovations that has ever occurred, and those exploring, experimenting, and building this new industry are being told they need licenses to innovate, that they must spy on their users, and that they must make the new world of finance look like the legacy, which is in desperate need of replacement. Freedom and innovation should always feel most at home in America, not least.