Time for digital currencies to grow up
As the creator of a digital currency, I have watched the industry mature from a terrible toddler with a penchant for the illicit to a rebellious teenager with a bright future. For digital currencies to fulfill the promise of adulthood they need some rules to live by, a protocol if you will.
The blockchain is the central ledger at the heart of all digital currencies and for the first time in human history, it allows individuals to send secure information over an unsecured network without a trusted third party. The most obvious use for this technology is for financial transactions and conveniently the centralized financial-services industry is ripe for disintermediation. Since the founding of the Bank of England in 1694, our financial system has consisted of middlemen orbiting the central banks. This web was necessary to ensure the safe transfer of value between two parties who have no way of trusting each other. The trusted third party, or middleman, performed an essential function by verifying the legitimacy of financial transaction and transferring the value.
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When Satoshi Nakamoto invented bitcoin in 2009, it removed a wide swath of middlemen, allowing for the direct transfer between individuals.
However, digital currencies and the blockchain are more than just a medium of exchange, they represent a secure database open to anyone who has an Internet connection. The Internet opened an unprecedented amount of information to society, but it lacked a mechanism to verify the information. The blockchain technology is the mechanism by which any piece of information can be traced back to its source by everyone. This technology is too important to lurk in the shadows.
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The New York State Department of Financial Services took the first step toward developing these rules this week, with the announcement of a BitLicense. Superintendent Benjamin Lawsky has taken the lead in regulating digital currency businesses with the goal of protecting consumers while fostering innovation. This was the right move at the right time.
Recent cyber-attacks on major digital-currency exchanges have threatened to derail the growth of the blockchain technology. These cyber-attacks have prompted me to establish a protocol for my digital currency, Nautiluscoin, not just for cyber threats but also for the growth of the Nautiluscoin economy. Moreover, many venture capitalists have been waiting for regulatory clarity to fund digital currency start-ups. The decision by the New York DFS will likely be mimicked across all 50 states and opens the door for venture capital to fund innovations that will provide long lasting societal benefits. The Internet began as a way to send files between computers and has flourished into a technology that allows doctors to remotely perform lifesaving surgeries. With the regulatory picture in focus, the journey into adulthood for digital currencies can begin.
There are two major challenges for any regulation of digital currencies: enforcement and fostering innovation. The strength of digital currencies is that they exist on millions of computers distributed across local and international borders. This distribution presents a challenge for regulators since enforcement across local and international borders is virtually impossible. Ideally, regulations will be light-handed enough to encourage those in the digital currency space to voluntarily submit to regulation. The BitLicense needs to be a stamp of legitimacy that is sought after by those operators with the most integrity. Moreover, the critics of regulation will surely point toward the potential for increased costs. This criticism is not without merit and is why it is critical for the New York DFS to honor its commitment to not stifle innovation. Light-handed regulation to protect consumers and allow more people to experience the benefits of digital currencies is a welcome addition to the ecosystem.
Regulation of digital currencies may appear to be anathema to those who subscribe to the purest form of Nakamoto's open-source creation. The open-source nature of digital currencies provides a built-in self-regulatory mechanism, but that mechanism does not protect against human greed. For digital currencies to grow up, they need a set of rules that allows for entrepreneurship while encouraging and protecting new users. Regulation done correctly can not only expand the user base, but also implicitly gives digital currencies legitimacy. Over the next 45 days, the digital-currency community will have an opportunity to opine on the proposed rules.
To be sure, this will not be without growing pains, but the BitLicense has the potential to be digital currencies' gateway to adulthood.
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Brian Kelly is founder and managing member of Brian Kelly Capital LLC, a global macro investment firm catering to high net worth individuals, family offices and institutions. He is also the creator of the BKCM Indexes, benchmarks for multi-asset money managers. Kelly, a CNBC contributor, often appears on "Fast Money." Follow him on Twitter @BrianKellyBK.