Re: Bitwage, Inc.’s Response to Proposed Rulemaking Regarding Regulation of the Conduct of Virtual Currency Businesses
Bitwage is a Delaware corporation, formed in May 2014, with its principal office in Palo Alto, California. Bitwage offers payroll services that allow an employer and employee to agree contractually on a portion of the employee’s pay to be received in virtual currency. The Bitwage solution plays an important role in the Bitcoin ecosystem by enabling a scalable and reliable way to provide Bitcoins to the people who need it most (e.g. the unbanked) and by creating an easy, secure, and compliant on-boarding process for mainstream adoption.
Bitwage believes in responsible regulation of Virtual Currency Businesses as we believe it should benefit and protect consumers while also not stifling innovation in an maturing start-up ecosystem by onerous regulations and overbearing fee and bonding structures that would lock out the small business entrepreneur.
Bitwage has a unique perspective on the Proposed Rule as it relates to our specific area for innovation. In most jurisdictions there is a money transmitter exemption for Payroll Providers due to the fact the Provider is facilitating the payment of wages between employers and employees. Many Payroll Providers also provide access to various medical plans, retirement plans, savings plans as well as investment options allowing portions of their payroll to be put in these vehicles.
Currently, the Department does not regulate payroll providers and only a couple of the large payroll companies are registered as money transmitters in New York specifically for the money transmission side of their business, not for the payroll services. In fact, § 641. of the license requirement states. “No person shall engage in the business of selling or issuing checks, or engage in the business of receiving money for transmission or transmitting the same, without a license therefor obtained from the superintendent as provided in this article …”
Payroll providers do not fit this definition specifically because the provider is NOT receiving money for transmission. Payroll providers are receiving the money to provide payroll services for an employer to facilitate payments to employees. These highly regulated services include deductions for taxes that are forwarded to state and federal governments as well as employee benefit plans including, but not limited to, health, retirement and disability.
Bitwage urges the department to consider how these regulations, developed specifically for consumer protections with businesses conducting money transmitter like services with virtual currency, may adversely affect startups involved in Virtual Currency Business that do not conduct business similar to that of money transmitters. Regarding payroll in particular, payroll transactions are already highly regulated. Dates, amounts, and parties involved in payroll transactions are already reported to both state and federal governments for tax purposes. Requiring a payroll company to record and report the same information to a different government agency is both duplicative and a waste of resources.
In our full response, we will discuss the definitions of Virtual Currency Business Activity and how payroll companies, which are not typically considered money transmitters, are included. Should the department decide that such ambiguity in the definitions of Virtual Currency Business Activity might include many Virtual Currency Businesses that do not act in a similar fashion to money transmitters, we urge the department to provide further clarity so as to not stifle innovation for these types of businesses.
What is the impact of NY statute on Payroll Services?
The proposed “BitLicense” casts too wide of a net. In its proposed form, the BitLicense would effectively stop significant innovation in the payroll sector as it would force a large number of small innovators to spend too much time and effort collecting excessive information on their customers, and hold unnecessarily high reserves. Furthermore, a significant feature of the Blockchain Technology is its open network and protocol. The layers of regulations as it relates to Virtual Currency and the Blockchain Technology removes many advantages of these features and runs contrary to encouraging entrepreneurial investment in New York.
Many Bitcoin Companies, such as Payroll Companies, are not Money Transmitters and Should Not be Regulated like Them.
In reality, the BitLicense will also stifle innovation by grouping payroll services with money transmitters. As stated above, payroll services and money transmitting are fundamentally different businesses that require different levels of consumer protection. There are many uses, both known and not yet contemplated, for Virtual Currency and the Blockchain Technology. There are many uses of this new technology that have very little to do with the transmission of money. Regulations that are really only appropriate for money transmitters would cripple a growing technology with the potential to change the way that people are paid. Payroll companies, from enterprises to startups and even small businesses, would be required to adopt money transmitting type regulations just to offer Virtual Currencies as an alternative way to pay wages. Barring the likes of Paychex, ZenPayroll, and Gocheto Financials from offering Virtual Currency wages directly inhibits the growth of the Bitcoin economy and hurts the various jobs that have and will be created to support the infrastructure. While certain guidelines are understandable, the interests of the consumers of New York and the United States are not well served by a BitLicense that is too restrictive.
By Imposing Money Transmitter-like Regulations, NYDFS is Stifling Innovation Against Consumer Interests.
The payroll sector has been virtually unchanged for half a century due to large players, legacy systems and banking protocols that limit the way employees get paid. This has led to an explosion in an industry that preys on the middle and lower income communities … . . the payday advance/loan and check cashing industry. Because employees have to wait until their payday or are unbanked due to financial stress, they are forced to pay bills and cash paychecks through these companies. Fees and interest rates for these companies can exceed the amount of an employee’s paycheck if the loan is not paid on time. This has built the payday advance/loan and check cashing industry into a $9B industry while creating financial stress on employees as well as employers, as employees don’t perform well while under financial burdens. The Virtual Currency and Blockchain Technology would allow next generation services to bring this sector into the future while allowing employees the ability to take advantage of getting paid on demand. Whereas the current payment gateways, such as ACH and Wire, are costly and slow, Blockchain Technology allows for cheap, instant transactions. Take the idea of paying an employee every minute. Running this through the ACH system costs on average $0.30 per minute and 2-4 days to hit the employee’s account. This is $25,000 a year per employee and the payments are not usable for several days. Employers want to take advantage of the economies of scale to pay once every couple weeks, employees living paycheck by paycheck will not be able to wait for the cash to clear for their bills. With Blockchain Technology, paying an employee per minute costs close to nothing and is instant. This allows for innovative technologies like Real-Time Payroll. This means employees no longer have to succumb to the ever-lasting cycle of debt owed to the payday advance/loan and check cashing industries. By overregulation, many of the possibilities like Real-Time Payroll will never come to fruition.
Should Companies be Deemed Similar to Money Transmitters, a Tiered Regulatory System Should be Adopted so as to Encourage Innovation.
We believe adopting a tiered licensing structure would allow small companies the flexibility to be innovative without excessive capital requirements or onerous recordkeeping regulations. As growth occurs, the companies would likely be able to adopt more rigorous regulation and comply without slowing innovation.
In closing, Bitwage understands the difficulty faced by the Department in developing the regulation of Virtual Currencies in a manner which takes into account the various participants, complexities and concerns involved. However, we would like the Department to consider the points discussed above in relationship to Payroll Providers as well as other servicing companies who have the ability to use the Virtual Currency and Blockchain Technology. Bitwage is committed to complying with all requirements developed by the Department as well as other state and federal authorities in their efforts to regulate the Virtual Currency. We would greatly appreciate the Department taking into account the advantage of allowing innovation within this sector and the benefit to the consumer with the evolution of next generation payroll services.
Mike Gordon, Esq.
Compliance Officer, Legal Council
Note: This is an abridged version. Full Response Here.