Ben Lawsky’s Revolving Door

BitLicense is extremely controversial in the Bitcoin community. Not only is it the first comprehensive body of Bitcoin regulation in the United States, but it is also the most restrictive. BitLicense was created by the New York Department of Financial Services (NYDFS), with Benjamin Lawsky — the Department’s superintendent — leading the charge.

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The Bitcoin community has vilified Lawsky because of his leadership role in BitLicense. Since the beginning, Lawsky and his associates at the NYDFS have touted their ability to engage with the community and produce safe legislation that preserves innovation in New York’s digital currency space. However, the community sees the Department’s actions in a different light. Bitcoiners admonish Lawsky for being stubborn and inflexible, failing to seriously take their opinions into consideration. These sentiments are not without reason, either; although BitLicense has been revised twice, most of the major stipulations that irk the community are still firmly in place in the final draft.


What’s more is that Lawsky has recently announced his plans to leave the NYDFS and start a private consulting firm in the near future. What will he be consulting on? Naturally, Lawsky’s firm will focus on helping digital currency companies navigate New York’s virtual currency regulatory environment — the one Lawsky created.

 

This move has made Lawsky out to be even more of a Bitcoin villain. Not only did he oversee what many people consider to be the death of Bitcoin in New York, but now he is trying to profit from it in the private sector. Given that a large bulk of the digital currency community come from libertarian backgrounds, there is a lot of outrage surrounding the construction of Lawsky’s revolving door.

 

BitLicense alone is bad enough. It’s requirements are so restrictive and its reach is so extensive that it could affect the entire US Bitcoin economy — and possibly digital currency businesses across the world. The bloated regulation has already claimed its first victims; ShapeShift and Eobot have cut off their services to New York, and BTCGuild is shutting down completely — citing BitLicense as a partial reason.


These initial service suspensions and closures is grim foreshadowing of what faces the New York digital currency economy. BitLicense is so restrictive that only the biggest, wealthiest, and most well-connected Bitcoin companies will be able to operate in New York — whose large, finance-driven economy otherwise offers a promising Bitcoin market. Even if smaller companies do manage to meet BitLicense’s requirements, the cost of doing so will put them at a marked disadvantage against larger competitors with more resources and influence.

 

Now, Lawsky is adding insult to injury by injecting a layer of cronyism into an already depressing regulatory landscape in New York. Of course, the idea of giving compliance guidance to budding businesses is not bad; if there must be regulation, people might as well help each other navigate it. However, Lawsky is offering advice on how to deal with the burden that he created.


The moral implications of such an action are undoubtedly questionable. As mentioned above, it is one thing to help fellow entrepreneurs navigate an unfortunately brutal regulatory environment. But to profit from the very burden that you orchestrated is under-handed, greedy, and morally and politically corrupt. Intentionally or not, Lawsky is making Bitcoin businesses worse off for his own personal gain. If Lawsky truly wanted to help firms in New York, he would have fought for their freedom to innovate instead of profiting from their struggle and misery.


With this new consulting firm, the possibility of a cronyist and elitist Bitcoin economy in New York is much more likely to come to fruition. Essentially, Lawsky is providing the top firms with a direct link to the NYDFS. With his political connections and intimate knowledge of BitLicense, Lawsky is equipped to open the floodgates for companies that wish to use the law against competitors. In public choice theory, this phenomenon is known as regulatory capture, where private firms use their resources to influence the government in their favor.

 

Unfortunately, Lawsky’s questionable transition from the public to private sector is nothing new, It happens all the time in the mainstream economy. Regulators spend several years crafting new legislation or beefing up existing laws only to take jobs helping companies get around those same rules. Then, after a few more years, they reenter the bureaucracy and get to work making the web of regulation even more ensnaring. Banking, health care, agriculture, energy, or anywhere else, the revolving door exists wherever there are rules telling firms what they can and cannot do.

 

Of course, there must be some balance between ensuring that customers know what they’re buying and avoiding suffocating companies with rules. However, attempting to strike that balance means that there will always be predators around to derive personal benefits from the laws. It is discouraging that politicians and bureaucrats seem to desire that personal gain more often than wanting to preserve that balance between anarchy and intervention.


How can we achieve the right mix of regulation and laissez-faire without creating the revolving door? Public choice economists have tried to find an answer to that question for decades, and so far it seems like they have been unsuccessful. Maybe it’s impossible to get the perfect mix, perhaps we just have to accept the fact that there will be corruption and cronyism as long as the government tries to tell people what to do.


But maybe it’s possible that laissez-faire is better than a system of corrupted consumer protection. Although it isn’t politically feasible, experimenting with a hands-off approach might reveal that the spontaneous order produces market-based consumer protection. If such experiments confirm that hypothesis, then the antics of Lawsky and countless other bureaucrats will be rendered unnecessary. Whether or not we will ever get to conduct free market experiments, though, remains to be seen.

What do you think about Lawsky’s plans to create a private BitLicense consulting firm? Let us know in the comments below!

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