One of the common battles within the bitcoin community right now is the war of words between the early-adopting libertarians and the new venture capitalists who want to take bitcoin to the mainstream. The debate between these two sides covers many different areas, but one of the key points that pops up more than any of the others is regulation (Read more: “Legal Environment Around Bitcoin“). Does bitcoin need to be regulated for it to be taken seriously by the mass public? What about the BitLicense? Is this a move in the right direction? Let’s take a closer look at the facts related to the regulation of bitcoin.

Bitcoin Needs Regulatory Clarity

The first thing that needs to be pointed out when it comes to the regulation of bitcoin is that it isn’t completely necessary. Having said that, regulatory clarity would be extremely valuable. At this point in time, the one thing that is holding back much of the growth that could take place in the bitcoin industry is the lack of regulatory clarity. Entrepreneurs and investors do not know if bitcoin is going to be banned in their local jurisdiction tomorrow, which means they are hesitate to place a big bet on a bitcoin-related company. Adding harsh regulations to the bitcoin industry would definitely be an issue, but this current lack of clarity could be doing more harm in the long run. The countries that are dragging their feet when it comes to regulatory clarity are losing out to other, more competitive nations. For example, Coinapult and Monetas are two companies that fled the United States partially due to the uncertainty around the BitLicense. Coinapult is now located in Panama, and Monetas has decided to build their base of operations in Switzerland.

The BitLicense Will Stifle Innovation

One of the reasons that some jurisdictions have not made a move towards the regulation of bitcoin is that they’re waiting to see what happens in New York. Although it certainly has its own problems, the reality is that New York is still the financial center of the world. This means that regulators in other US states and different countries around the world will see what happens in New York before deciding to come up with their own regulations. The New York Department of Financial Services has come up with the BitLicense, which is a special license that will have to be acquired by anyone operating a business related to the cryptocurrency and digital currency space. Charlie Shrem, who was eventually arrested for accusations of money laundering related to his company, BitInstant, actually worked closely with regulators to come up with some of the details related to this new regulation.

The main issue with the BitLicense is that it cuts out the small startups that are usually responsible for the largest amount of innovation in any industry. Acquiring a BitLicense will be an extremely costly endeavor, one that a few friends working out of their small apartment or dorm room will not be able to handle. This essentially centralizes innovation in the hands of the large firms who are able to afford the costs associated with the BitLicense. Many have stated that these sorts of high regulatory costs are the main reason that we haven’t seen much innovation in the finance industry as a whole over the past fifty years.

What Should Be Done?

Right now, the best thing regulators and lawmakers can do is leave bitcoin alone and let the technology evolve over the next few years. Many have said regulating bitcoin right now would be analogous to regulating the Internet in the early 90s. US Congressman Steve Stockman has penned a bill that would leave bitcoin alone for the next five years, and this is exactly the sort of solution that can allow the technology to flourish in these early days. Once the technology has had time to grow and better the lives of millions of people around the world, the regulators can then think of new ways to prevent criminals from taking advantage of the bitcoin protocol for money laundering and other activities.