Robinhood exchange gets its BitLicense to become one of the few qualified to trade in NY

What Frank Sinatra sings about New York is true - if you can make it there, you can make it anywhere. New York, the Empire State, is certainly the center of the financial world, with Wall Street and the Federal Reserve Bank. NY is also therefore the toughest place to comply with financial regulations and get a licence to engage in financial services of any sort.

So it is no small feat that Robinhood cryptocurrency exchange has acquired a BitLicense there and officially launched its zero-fee crypto trading facility.

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The BitLicense was granted in January this year and allows customers in NY to trade in crypto on the platform. Now you can get your Bitcoin, Litecoin, Ether and more at zero fees, thanks to their system called “order routing”. This is possibly the only exchange where you don’t pay a fraction of a percentage in commission for each trade you execute, whether bid or ask, buying or selling.

Robinhood simply sends your orders to trading exchanges to find competitive prices and receives a volume rebate from them which covers their costs and your trading fees.

We often complain about regulations getting in the way of our wish to trade in cryptocurrency, but some protection is also needed for us retail investors, what to speak of the larger institutional investors who deal with millions of dollars in trade. The BitLicense requires strict disclosure and consumer protection requirements, like KYC and AML.

To get this license, Robinhood has shown that it is willing to do what it takes to meet the standards set for good financial dealings, like keep your trading history for scrutiny by the government.

Only a handful of companies have actually been able to get this license, since it became the standard in 2015. Robinhood now joins an elite club of 16 BitLicense holders in total. Apparently the NY state attorney general’s office is aware of and concerned about the well-reported potential price manipulation that can go on at exchanges. Pump and dump schemes by whales or even the exchanges themselves to benefit insiders is not helping the crypto industry and can chase away big investors and retailers alike, stifling the much wanted mass adoption of crypto in the long run.

Many states or countries might ease the red tape in trying to attract crypto investment and business into their region, but lack of regulation can lead to criminal behaviour and a lot of lost money to customers, so NY applies the other approach of being very professional and thus stricter with regulation, despite cries of government overreach coming from occasional influential figures in the crypto community.

Regulation is something that can be discussed at length in order to come to a middle ground, and we will always have arguments on both sides of the bar.

Robinhod has done well to comply because it gets them into the Big Apple, where there are numerous benefits. There are many powerful financial institutions there, and some of the wealthiest people in the world, including traders and investors. NY could be seen as the toughest market to be in when it comes to regulation, so it’s like making it to the “top of the heap”, as Frank Sinatra sings.

In the first year of the BitLicense release in 2015, it sent big names in the crypto industry packing as they failed or morally refused to meet the standards - companies like BitFinex and ShapeShift. Even Kraken had to cease services to NY residents, and called the BitLicense regulation “a creature so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth.”

The colorful phrasing is quite ironic when you remember that a “kraken” is actually a horrible gigantic sea monster from Scandinavian mythology that attacks ships and sailors. Both Eric Voorhees and Jesse Powell, the bosses of ShapeShift and Kraken, have remained staunch critics of the BitLicense regulation and call for its removal.

"There were some things about it that were just untenable … having to disclose all the information about your global client base to the state of New York – we just couldn't live with.” Jesse Powell, founder and CEO of Kraken

This again shows how far Robinhod has come to meet the requirements to set up their exchange for NY customers. Admittedly the licence can take long to get approved. Not everyone wants to wait three years for approval. Also such tough regulation can hinder innovation and be very restrictive on smaller companies. In NY, as of last year, only five companies had received the license since its establishment in 2015.

"I went from loving the city and seeing it as a symbol of progress … to seeing it as an enemy of innovation. The regulators here want to treat every financial entity like a bank … we aren't banks, we don't want to be banks … everything we build is to do something in opposition to what banks have done,"

Eric Voorhees CEO and Founder of ShapeShift

The truth is that Robinhood wants to become a bank. They even applied recently to offer banking services, so they are moving toward mainstream, whereas many in the crypto industry are moving away from it. Another valid point with the strict BitLicense regulations is that it serves to entrench those already dominating the market, while stifling competition, something contrary to the ethos of Bitcoin and crypto in general, which is meant to empower the individual and decentralize the power and control over our personal financial activity. NY may be the capital of the financial world but cryptocurrency is altogether transnational.

Nevertheless, if Robinhood succeeds in its proposition, it will become a leader in the industry by helping to bridge the entrance gap for those regular traditional stock traders and investors, bringing them into the crypto markets as well. Not all traders will like Robinhood, since it lacks some of the features found on other exchanges, but the absence of trading fees is definitely something to investigate further.

What do you think about the need for regulation in the cryptocurrency industry?

Should we have stricter laws and standards, or should we have a more open and decentralized approach that empowers the sovereign individual beyond the control of questionable banks and other financial institutions like the IMF and BIS?