But, obviously, there is one sort of business that doesn't run on this model. Financial companies basically take your money and put it in places where it makes money for them while you're not looking. Banks, in particular, take deposits and lend or invest them back out. If I put $100 in the bank, the bank does not just put a crisp $100 bill in an envelope labeled "For Matt, whenever." The bank takes my $100 and buys credit derivatives or whatever with it, and relies on the well-understood magic of banking -- maturity transformation, diversification, deposit insurance, etc. -- to answer the question, "what happens if I want my $100 back?" That's why, instead of charging me a fee to hold on to my money, my bank can pay me a very teeny amount of interest.
Other financial intermediaries don't do exactly this, but there is a general theme of making money by using the customers' stuff when the customers aren't using it. This will not fly with Ben Lawsky, though, when it comes to Bitcoin businesses. Bitcoin businesses, in New York, will have to be far more conservative than regular financial businesses.
In one sense this is ironic: Part of the Bitcoin ethos is its libertarianism, and some of that raffish libertarian charm will be lost if Bitcoin transactions are regulated much more strictly than dollar transactions.
But in another sense it's a perfect fit, because another part of the Bitcoin ethos -- and one closely linked to its libertarianism -- is a fondness for hard money. Part of the attraction of Bitcoin is that it's not a fiat currency: It can't be inflated or "manipulated" by central banks; it's like gold in its limited, exogenous supply and its deflationary effects.
If you like hard money, you probably don't like fractional reserve banking. That basic business activity that banks get up to, where they take in deposits and then lend most of them out, so that both the depositor and the borrower think they have "money" (mine in a bank account, yours in the currency that you borrowed from the bank), is viewed with great suspicion by those who want to keep a close eye on the money supply. And Ben Lawsky, for all that he's a government official meddling in Bitcoin, is also doing his part to prevent private Bitcoin actors from inventing fractional reserve banking. No one will be lending out Bitcoin deposits on his watch.
Or, almost no one: "The license is not required for merchants or consumers that utilize Virtual Currency solely for the purchase or sale of goods or services; or those firms chartered under the New York Banking Law to conduct exchange services and are approved by DFS to engage in Virtual Currency business activity." If you want to be a Bitcoin bank in New York, your best bet is to be a regular bank first.
Does Lawsky mean something else? There's a colloquial usage of "capital" to mean just, like, "money you've got in the bank" -- liquidity, sort of -- so maybe he means that? But the factors also include "the liquidity position of the Licensee." I don't know.
And here I am cheating, because the actual proposal is less drastic. The press release says, "any Virtual Currency owed or obligated to a third party," but the proposal says only:
"To the extent a Licensee secures, stores, holds, or maintains custody or control of Virtual Currency on behalf of another Person, such Licensee shall hold Virtual Currency of the same type and amount as that which is owed or obligated to such other Person. Each Licensee is prohibited from selling, transferring, assigning, lending, hypothecating, pledging, or otherwise using or encumbering assets, including Virtual Currency, held, stored, or maintained by, or under thecustody or control of, such Licensee on behalf of another Person."
So there's a conflict between the "owed or obligated" language in the press release, which would prohibit basically any Bitcoin leverage, and the "custody or control of Virtual Currency on behalf of another Person," which would allow leverage -- but still not fractional-reserve deposit banking, etc. Like if I wrote you a Bitcoin swap ("you pay me $6,500 in a year, I pay you 10 Bitcoins in a year"), I (probably?) don't need to sit on 10 Bitcoins under the language of the regulation, but I (probably?) do under the language of the press release.
The bond seems to have to be invested in a segregated bank account. If your capital exceeds that, then you can do what you want with it. Oh wait no you can't. From the proposed regulations:
"Each Licensee shall be permitted to invest its retained earnings and profits in only the following high-quality, investment-grade permissible investments with maturities of up to one year and denominated in United States dollars: (1) certificates of deposit issued by financial institutions that are regulated by a United States federal or state regulatory agency; (2) money market funds; (3) state or municipal bonds; (4) United States government securities; or (5) United States government agency securities."
Man! You have to invest your profits in short-term government guaranteed debt! Imagine if JPMorgan was subject to that requirement.