New York’s department of financial services proposed a BitLicense on July 17th. As proposed the license is expected to stifle or kill digital currency innovation in New York.

The license was drafted to protect consumers and prevent financial crimes like money laundering. Both excellent goals. However the license as drafted will probably do neither and stifle the New York bitcoin ecosystem. If you think that isn’t a big deal think again. Bitcoin is growing faster than the internet and has the potential to change every financial transaction on the planet.

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The license is onerous to comply with. Bonding for all holders is mandatory and licensees must collect personally identifying information for all transactions including the physical address and name of the parties, regardless of the transaction size.

Proof of Existence is a website that lets someone essentially notarize a document for a few cents. How does requiring that site to be bonded and have users names and addresses prevent crime or protect consumers. All the site does is prove a document existed at a point in time.

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Would Proof of Existence have been created in New York after the BitLicense was enacted? The bonding and security requirements would turn that weekend project that cost only hours of time to create into a tens of thousands or maybe even more licensed endeavor taking months to launch. Who knows if this project will turn into or spark the idea for a multibillion dollar company. The proposed BitLicense will prevent New York entrepreneurs from quickly and cheaply testing their idea in the market.

The license contains provisions that require any business using bitcoin and residing in New York or servicing any New York customer to be licensed. That doesn’t sound bad on it’s face, but it is antithetical to the way bitcoin works. Imagine if when you received a letter through the US Postal Office you had to know if the person who sent that letter lived in New York. Impossible to certainly comply with and difficult to try right? Bitcoin works the same way.

Strict AML / KYC (antimoney laundering / know your customer) regulation makes sense for companies holding hundreds of thousands or millions of dollars worth of customers money. However that is a minority of companies affected by these proposed regulations.

One of the great things about bitcoin is being able to make convenient micropayments. For example a young computer science student from Michigan could create a service that lets users who like a post on Facebook send the poster a penny’s worth of bitcoin. With bitcoin that payment could come from anyone anywhere in the world.

For that Michigan student to comply with New York’s licensing requirements the student would have to collect every customers name and address. Why? To comply with New York law the student needs to be licensed to service New York residents. This means the student needs to know where everyone using the service is located, even if the student doesn’t intend to be licensed.

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Imagine having a hot dog stand here in Michigan and needing to know where every customer lives in case some New York customers buy hot dogs and there is a law in New York stating hot dogs must be 6 inches long. Regulations like that don’t exist because New York has no standing to regulate commercial activity in other states.

These are just two examples of the onerous and overly broad clauses in the proposed regulations. Other clauses prevent bitcoin companies from holding bitcoins. Imagine a gold company not being able to own gold or Apple not being able to own shares of stock.

The impact of the drafted regulations will be to push bitcoin innovation elsewhere and prevent New York consumers from participating in the biggest financial innovation since the invention of currency. How would New Yorkers like to have been prevented from using email?

Imagine if Steve Jobs and Steve Wozniak had to apply for a license and be bonded before playing with computer parts in their garage because they were located in California. They would have become criminals ignoring the law, Apple wouldn’t have existed, or they would have created Apple somewhere else. Are any of those good outcomes?

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Banning great technologies, like the printing press, the telephone, the internet, and digital currencies doesn’t destroy those technologies. It doesn’t prevent those technologies from benefitting all of humanity. It simply prevents those technologies from benefitting law-abiding citizens in the regulated jurisdictions.

Does it make sense to subject a business taking $1 per year to rules designed to prevent money launderers and terrorists from using banking services for nefarious purposes because simply because that is $1 worth of bitcoin? Banks protect millions to trillions in assets and consumers need to feel their money is safe. Every sensible person recognizes at a bare minimum there should be thresholds for regulations and that at some level of economic activity there should be no regulation. As the above examples illustrate, when dealing with small amounts of money there is no need to protect consumers from fraud, theft, terrorist financing, or money laundering.

Regulation at micro levels prevents entrepreneurs from ever trying. No one knows which business models will employ thousands of people, benefit investors, and delight customers. What we do know is that stifling regulations without a benefit to society, like those proposed in New York, will harm law abiding entrepreneurs, consumers, and investors who live in those jurisdictions.

Disclosure: At the time of this writing, David Smith has a long bitcoin position and owns So What’s Bitcoin?