07 June 2022 |

New York State Is Crippling Its Crypto Economy

By Ian Kar

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New York State passed another piece of anti-crypto regulation. With consumers and businesses getting affected across the board, New York State is becoming one of the most unfriendly crypto states in the US. 

New York City has been the epicenter of finance for a few centuries now, dating back to 1817 when the state established the New York Stock Exchange. 

And, nowadays, mainstream headline and Twitter rhetoric makes it seem like New York is becoming a major Web3 hub as well. I’m a fan of Eric Adams (I mean he’s a minority and the mayor of New York, that’s pretty dope to me) but there was a sooo much hooplah around him accepting his first 3 paychecks in the form of bitcoin and ethereum. Similarly, with NFT NYC coming up, tons of crypto partygoers plan on heading to the Big Apple to talk about the intersection of crypto and culture. 

Yet, the reality is that New York State is proving to be one of the most overzealous regulators of cryptocurrency in the US, severely jeopardizing New York City’s standing in the finance world. 

Time and time again, regulators in New York State have opted to constrict startups focused on building out crypto projects. Sure there are recent instances—the New York State Senate passed a bill a few days ago that effectively cripples new mining related projects for the next two years. On June 2nd, Attorney General Letitia James issued an Investor Alert warning against investing in cryptocurrencies, saying things like “Too often, cryptocurrency investments create more pain than gain for investors” and criticizing stablecoins. 

New York State has a history of overreaching cryptocurrency regulations. The New York Department of Financial Services, or the NYDFS, authored and implemented the Bitlicense in August 2015, arguably an abject disaster. It prohibited businesses engaging in “virtual currency” transactions from operating in the state without a license. After it was implemented, 10 companies immediately left NY. Since then, only around 20 crypto companies can offer their products and services in NY—everyone else can’t operate in the state. Companies like Circle, Coinbase, Paxos, Robinhood, SoFi, and others were all able to obtain one thanks to their strong legal and compliance, and the large war chests they raised from VC’s. But small startups are essentially hamstrung and can’t operate in NYC. 

It’s hard to emphasize how limiting this is for crypto consumers—they’re essentially being locked out from using a number of safe and compliant products that don’t live up to the NYDFS’s unreasonably high bar for crypto startup. 

The recent mining moratorium isn’t much different. Citing climate goals and environmental concerns, the State Senate is not permitting any new permits for mining projects that use carbon-based fuel (the largest crypto miner in NY is a hydroelectric. 

When I first saw this I thought this was a bit of an exaggeration—literally no other state in the US have done this, and countries that have banned crypto mining include China, Iran, Iraq, Bolivia, and Colombia. Not..great company to be in. 

In a fantastic CNBC article that you should all read, the bill sponsor Anna Kelles suggested everyone read the 3 page bill. So I did. And honestly it is a bit of an exaggeration—the bill is actually so narrow that it’s pretty useless and I’m left trying to figure out what the NY State Senate is trying to prove by passing this in the first place. Do they hate crypto? I don’t think that would get them that many points. My gut says there’s more politics here behind the scenes—CNBC says that the state has “aggressive” climate goals to reach net-neutral on gas emissions by 2050. By then, it’s safe to assume that crypto mining could be a massive part of the energy sector, crowding out other energy players in the state (and probably spend more on lobbying). 

It doesn’t matter why—it matters that it’s working. From CNBC:

“However, some data suggests miners began leaving New York for friendlier political jurisdictions like Wyoming and Texas last year, ahead of the anticipated crackdown. Data from digital currency company Foundry shows that New York’s share of the bitcoin mining network dropped from 20% to 10% between Oct. 2021 and the end of January.

“Our customers are being scared off from investing in New York state,” said Kevin Zhang of crypto mining pool Foundry.

“Even from Foundry’s deployments of $500 million in capital towards mining equipment, less than 5% has gone to New York because of the unfriendly political landscape,” continued Zhang.”

New York State limits consumer choice with the Bitlicense, and is now limiting mining through this new piece of regulation. How does this not discourage builders from launching crypto companies in New York? We never even got to the high cost of living and taxes. 

There’s some hope though—there’s a new conditional Bitlicense, the first of which was granted to Paypal in October 2020. This lets companies partner with existing Bitlicence holders—in this case, Paxos Trust Company—to rent their license, similar to the neobank and sponsor bank relationship. With Paxos as the underlying Bitlicense holder, PayPal most likely had a simpler process to go through. While it’s disappointing that this was designed for startups in mind but was first granted to a $100 billion dollar company, it’s still a sign in the positive direction. 

It’s a bit surprising and disappointing that a state with such a deep history in finance is shunning the next chapter of it. Even after the big crypto crash a few weeks ago, you’d be hard to find someone that says there’s absolutely no value in crypto or blockchain technologies (well I guess besides Warren Buffet.) Banks on Wall Street and institutions have been putting billions into the crypto ecosystem (big sums of money but we should expect banks to be fans of pro-crypto regulation.) Crypto technology will change financial services over the next few decades one way or another—one major question is where that innovation will take place. New York State is making a pretty rough pitch for founders.