In mid July 2014, the New York State Department of Financial Services laid out a proposed regulatory framework for the issuance of bitcoin licenses. If the regulations are enacted, New York would become the first state to regulate the bitcoin marketplace in the United States. But some in the bitcoin community argued that the alternative currency and its emerging marketplace are still in the early days of development and could be curtailed by over-burdensome regulation.
The NYDFS said regulating bitcoin is important to ensure consumer protection and guard against illegal activities, such as data theft and exploiting bitcoin as a money laundering tool. NYDFS Superintendent Benjamin M. Lawsky said, "We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. Setting up common-sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets."
The NYDFS' licensing proposal targets primarily bitcoin exchanges. To obtain and maintain BitLicenses, exchanges would have to comply with a long list of requirements. These include:
Other requirements include operating cyber security programs, designating chief information security officers, keeping certain financial records and making quarterly financial reports to the NYDFS.
Jeremy Allare, Chief Executive Officer at Boston-based bitcoin startup Circle Inc., said in an Aug. 13 blog post that the NYDFS' BitLicense proposal is the "first material attempt at government rulemaking around digital currency, and given the significant role that New York plays in defining rules for the financial industry, this is a historic and crucial milestone for the development of the Bitcoin industry globally. Regulators and lawmakers from around the United States and across the globe will scrutinize and possibly emulate the approach established in New York."
However, Allare noted that New York's proposal is premature, heavy handed and would result in "radically limiting those who can participate in this industry, pushing firms offshore and into sometimes shadier jurisdictions." Allare added that, as currently written, it would be “technically impossible” for Circle to comply with the proposed regulations. "Without some material changes, Circle will have no choice but to block New York customers from accessing our services,” he said.
Allare does welcome bitcoin licensing, but he believes regulation needs to be designed with caution. "The high-level goal of establishing a license framework for a new class of digital currency-based money transmitters and money services businesses is reasonable," he said. "Having such a framework in place can materially open up commercial opportunities for companies by reducing the perceived risk and the regulatory uncertainty that currently hang over bitcoin companies – enabling firms to find banking partners, insurance partners, auditors, and other business partners."
Allare believes the bitcoin marketplace is at a pivotal crossroads. For bitcoin licensing to work, the NYDFS must, among other things, exempt software creators and bitcoin mining operations from the requirements, simplify the business approval and reporting processes, and normalize the AML requirements with federal rules already in place. Allare believes these steps would regulate bitcoin operations without curtailing innovation.
Tom Waters, Director of Sales at Bank Associates Merchant Services, is not surprised by the reaction of the bitcoin community to the BitLicense proposal. "Regulation was inevitable so the timing is perfect," he said. "It is the first step in developing a consistent framework and guideline for those who are cautious to enter the market for fear of accidentally breaking a law."
But Waters echoed Allare's concerns. The proposal "extends too far in limiting commercial participation beyond money transmittal," he said. "The current proposal seeks to enforce the activities of software developers, payment processors, mining pools and other entities that do not act as money transmittal services.
"At the very least, it forces startups and entrepreneurs to move out of the state to continue their work. That would simply just be bad for New York. At worst, it will be blindly mirrored and implemented by other governmental bodies, effectively hobbling the growth of a very high potential innovation."
However, Waters noted that the NYDFS seems to be listening to the bitcoin community, as Lawsky extended the original 45-day comment period (which began on July 23) another 45 days after bitcoin supporters weighed in on the proposal.
In an Aug. 5 letter, the Bitcoin Foundation stressed that the bitcoin community should have an active voice in shaping the regulations. The letter said NYDFS' rulemaking process should be upgraded to take advantage of 21st century technology to more adequately include public opinion in the process. 
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