The 'Great Bitcoin Exodus' has totally changed New York’s bitcoin ecosystem

New York’s bitcoin startups have been clearing out since the August 8 deadline to submit applications for special licenses came and went. The burden, it turns out, concerning both capital required and time invested, wasn't worth the potential benefits.

For others, who decided to tough out this new era of BitLicenses and agree to share not only information about themselves — but their customers — could find themselves at the head of a very thinned out herd.

“It sends a message that we wanted to send to our customers,” said Jaron Lukasiewicz, founder and CEO of Coinsetter, a Wall Street bitcoin exchange that focuses on professional and active traders. “We’ve never really been that appealing to anonymous interests anyway.” Not only do the BitLicenses require companies share in-depth information about their own operation, but there are ongoing Know Your Customer (KYC) requirements designed to prevent money laundering.

Coinsetter didn’t announce its application until Tuesday, though the deadline passed last week when a 45-day grace period elapsed after the BitLicense construct was formally unveiled. Now that the application is submitted to the New York Department of Financial Services, Coinsetter is authorized to legally service New York customers during its review.

The 30-page application included a $5,000 fee to Financial Services, and an additional 20 pages of rules to follow, according to Lukasiewicz. Over the past two years, he estimates his company spent $50,000 in legal fees and other labor costs to prepare for and complete the paperwork.

While Coinsetter and others opted to make the investment, many found the cost outweighed the potential benefits. Citing what they consider to be a lack of “onramp” to lower the threshold for startups, they're picking up stakes and leaving New York.

“While we’re sure that the protection from New York law enforcement is valuable, it comes at a price that exceeds the market opportunity of servicing New York residents,” wrote the founders of Kraken, a San Francisco-based bitcoin exchange with $6.5 million venture capital. “Therefore, we have no option but to withdraw our service from the state.”

The best-known company to publicly acknowledge leaving New York is ShapeShift.IO, founded by Erik Voorhees, whose SatoshiDice became the first multi-million dollar exit for a bitcoin company. Just days after launching his iOS app that let people “shift” between currencies without creating an account, Voorhees voluntarily suspended its operation citing concerns over the BitLicense. Also leaving the Big Apple is Hong Kong-based Bitfinex, Montana-based Poloniex, Finland-based LocalBitcoins.com, and others.

In addition to the application costs for the BitLicense are costs associated with ongoing Know Your Customer requirements designed to minimize the likelihood of money laundering through bitcoin businesses. Earlier this week, a Florida entrepreneur had his first day in a Manhattan federal court for charges related to his own alleged money-laundering.

From the beginning of the process that led to the creation of the BitLicense, the regulation has been controversial. Benjamin Lawsky, the former New York Financial Services superintendent, hosted hearings to learn about bitcoin. He opened up the process to a comment period from the public, but bitcoin's early adopters saw it as a watering down of the anonymity they like about bitcoin in the first place. Now that Lawsky is preparing to open a legal startup aimed at helping people navigate parts of the law he helped create, conflict-of-interest concerns have arisen.

And it’s not just companies who are leaving as a result of the BitLicense. This past weekend, Lukasiewicz said he had two customers close accounts as a direct result of the regulation. “A lot of people who use bitcoin do it because of distrust of the banks," he said. "And they view this as the thing they hate seeping into what they thought was their savior.”