New York’s Big Cryptocurrency Mistake

A long-simmering feud between crypto companies and regulators boiled over in the Empire State last week. The conflict came to a head when the New York Attorney General’s office issued a report accusing digital currency exchanges of shady trading practices and behaving like scofflaws.

Ordinarily, firms on the receiving end of this sort of thing offer a meek statement to say they’re “reviewing the findings of the report” or “looking forward to working with regulators.” Not this time. Coinbase fired back to say the AG’s insinuation that it engages in proprietary trading at the expense of its customers is flat-out wrong. Meanwhile, Kraken lashed out with a series of colorful (and probably ill-advised) taunts on Twitter, pointing out the San Francisco-based exchange pulled out of New York long ago.

In these type of dust-ups, it’s normally best to take an industry’s complaints about regulators with a grain of salt. After all, the oil industry regularly complains about the EPA and Big Pharma kvetches about the FDA—but few doubt these agencies are performing a useful function. Sure, the regulators may be heavy-handed in some cases, but overall they do a good job.

It’s not so clear this is the case with the state of New York, which has engaged in a series of actions that appear less about protecting consumers than about turf-guarding and political preening. This started with the infamous “BitLicense” in 2014, whose cost and complexity drove a number of fin-tech companies out of the state. Shortly after, the creator of the BitLicense left government to open (you guessed it) a fin-tech consultancy shop, leading to accusations he had built himself a revolving door. Meanwhile, the BitLicense process remains an opaque and sluggish process with the financial-crats who run it offering little insight into how it works.

The state of New York struck once more this week, filing a lawsuit to block the federal government from granting national banking charters to fin-tech companies like Lending Club and Coinbase. A national charter would spare such companies, which are beginning to resemble traditional banks, from the onerous process of obtaining 50 separate permits from different state regulators. No way, says New York, it’s better to let the state protect the country’s consumers.

This assertiveness is not totally unfounded. After all, New York is home to Wall Street and remains the financial capital of the world. The hometown regulators should have a say, and state laws give them enormous power to have one (see Messari’s excellent rundown of the AG report to learn more). But in the case of the emerging cryptocurrency industry, there are already regulators aplenty—from the SEC to the Justice Department—policing the beat. In this context, New York’s power-play looks power-mad and self-interested. The regulators should stand down.

A version of this article originally appeared in the The Ledger, Fortune’s weekly newsletter on the intersection of finance and tech. Subscribe here.

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