bitFlyer’s Hailey Lennon on Entering the US Market as a Bitcoin Exchange
Last week, Coin Central’s Steven Buchko had the pleasure of talking with Hailey Lennon, Director of Compliance at bitFlyer USA. They discussed Hailey’s jump into crypto, the current regulatory landscape, and how she sees regulation evolving over the next few years.
bitFlyer is the world’s largest Bitcoin exchange. Originating in Japan, the exchange now also operates in the EU and, as of November 2017, the US as well. This makes bitFlyer the first exchange to be regulated in all three of those regions. Recently, bitFlyer received approval to operate in Illinois bringing their total US count to 43 states and territories.
Check out our bitFlyer exchange review to learn more and see if it’s the right platform for you.
SB: How did you get introduced to cryptocurrency?
HL: I first heard about Bitcoin and the idea of virtual currency in 2011. I began to read about it and found it very interesting, but I didn’t see my career going in that direction at that time. I was intent on going into litigation and taking the law firm route after law school.
A few years later I became in-house counsel for a wholesale currency exchange company in San Diego. I joined as a general counsel to help with business litigation, employment law, and obtaining money transmitter licenses, but I was quickly exposed to the anti-money laundering aspect of a fiat currency exchange.
That’s what segued me into Silvergate [bank] where my career entered the virtual currency space. I’ve known about crypto for a long time, found it very interesting, and thought that it had a lot of potential, but then fate just put me in the center of it.
From Traditional Finance to Virtual Currency
SB: How was the transition from more traditional finance to virtual currency? Were there are a lot of differences?
HL: The transition has been challenging and exciting. The main difference is just being part of a startup. The bitFlyer team is working to build something in the US, and it’s a lot of long nights and hard work. Virtual currency exchanges are in a unique position in that they are operating with this new technology and sometimes you don’t know something is going to be an issue or challenge until you are looking right at it and have to figure out a solution on the spot.
The main similarity is the goal of having a very strong compliance program. The concerns around money laundering, transaction monitoring, and KYC [Know Your Customer] are all there like they are for a bank. And, you have to balance compliance with all the other aspects of the business.
SB: You were at Silvergate for how long before coming over to bitFlyer?
HL: I was there a little over two years and helped the team build the FinTech department and compliance program to screen prospective FinTech customers. It was an amazing experience. It’s a great team over at Silvergate.
SB: How did you get started at bitFlyer?
HL: The same way that a lot of my transitions have happened – it was an opportunity that kind of fell in my lap.
I was familiar with bitFlyer’s reputation in Japan and was excited to hear of their plans to launch in the US and the EU. It was a hard decision to leave my role at Silvergate, but I felt ready for a new challenge.
I moved from San Diego to San Francisco for this role. I just felt like it was a really cool opportunity to join a team of people trying to make an impact on this industry. I took the opportunity and ran with it.
SB: What did you learn at Silvergate that you were able to carry over to bitFlyer?
HL: That role gave me the opportunity to have a good pulse on the industry in general: the key players, the reputable companies in the industry, and industry standards. It allowed me to have an idea of what third-party vendors and law firms are well-used and trusted in the space. To bring that back into a more in-house role allowed me to help bitFlyer launch day one with as strong of a compliance program as possible.
The US Regulatory Process
SB: What have been the regulatory hurdles that you’ve had to overcome for bitFlyer to launch in the United States? Has there been anything major?
HL: No, nothing major. I think one misconception about the space is that it’s not very regulated. That’s just not the case. There are multiple levels of regulation to operate in this space. At the federal level, you have FinCEN, and then each state has its own money transmitter licenses. It also took a lot of coordination and interaction with the NYDFS [New York Department of Financial Services] to gain the BitLicense. Their team is incredibly thorough and their examination process is arguably the toughest in the US.
Obtaining those licenses takes time. While I wouldn’t call it a “hurdle,” it’s something that needs to be done. It’s a challenge to be able to be operational in multiple states and serve customers in each one.
That was the day one question: How do we serve all the customers we want to serve, bring them great customer service, and provide a safe experience in the virtual currency space all while making compliance a priority?
SB: That makes sense. That’s why you guys have been doing a state-by-state rollout?
HL: Exactly! I’ve touched on it already, but on the federal level with FinCEN, exchanges that allow customers to buy and sell virtual currency with fiat need to register as an MSB (money services business). Through that, they are required to comply with the Bank Secrecy Act and all the anti-money laundering regulations, as well as have a strong compliance program in place. That includes training and conducting independent audits.
Then, every state has a money transmitter statute of some kind that results in an application process. Every statute defines currency differently and defines what money transmission is different too.
It’s not even as simple as just going and applying for every state. You need to do an initial analysis of the state’s views on virtual currency as a currency and if virtual currency exchange is within their definition of money transmission.
There are states that we consider “no-action” because the state has come back and confirmed our belief that their statute doesn’t cover what we’re doing. But the majority of states feel that even if they hadn’t thought of the idea of virtual currency when they wrote their money transmitter statute, it’s still a broad enough definition that it covers virtual currency. Those states require us to go through the licensing process.
It’s a long process for a company like ours to actually be able to launch and become operational.
Thoughts on Future Regulations
SB: How do you think that regulatory processes will change over the next, say, five to ten years as more states start defining what is actually considered virtual currency and a virtual currency exchange?
HL: That’s a great question and one that people have differing opinions on what could happen and also what should happen. I think there are two paths that may occur.
One direction would be that we continue on the state by state licensing and regulation path. In that sense, I think that some states may follow the lead of New York. They may enact something similar to the BitLicense, which is a license and application separate from their money transmitter process that really dives into the risks specific to virtual currency: things like compliance, cybersecurity, and information security, as well as how a company manages their hot and cold wallet storage.
I think other states could potentially follow in those footsteps.
The other thought of where this could go is towards a nationwide FinTech bank charter. This is something the OCC [Office of the Comptroller of the Currency] has talked about. In that sense, it would allow for nationwide regulation of virtual currency exchanges.
There are pros and cons to that strategy. The states would lose their right to figure out how they want to handle consumer protection and how they want to allow companies to operate in their state. But on the other side, it creates a lot more uniformity, and a company like ours wouldn’t have to figure out how to apply in all these different state jurisdictions.
SB: Is that currently how commodities trading and securities are? Are there any state regulations with those?
HL: That’s where the CFTC and SEC come in. The SEC oversees the sale and trading of securities and the CFTC regulate futures trading. Although futures and securities are mainly regulated by federal oversight, I think some states do have their own way of looking at consumer protection in this area.
In regards to a virtual currency exchange, the confusing part is that there is FinCEN on the federal level regulating money services businesses, but it’s not like the official government oversight of virtual currency, and it’s not really a licensing regime. They’re more of an auditor on a federal level.
SB: I know that the SEC is pretty adamant in saying that they’re going to begin classifying ICOs as securities offerings. Will that have any impact on exchanges?
HL: Yes, it’s something as an exchange we’re definitely aware of because there’s still this gray area of ICOs needing to understand the securities implications of the space. At this point, bitFlyer would not list an ICO token because we don’t feel there is enough clear guidance on what it takes to ensure that they’re in compliance with the SEC and our other regulators, both domestic and abroad.
The regulatory body in Japan, the FSA, has cautioned ICOs from soliciting in Japan without a virtual currency license. I think there are ways in which the different regulations around ICOs impact us. That’s not to say that an ICO and a token can’t be a legitimate business, but it’s just an area that everyone needs to be cautious in.
The same goes for a virtual currency exchange. A company just needs to really take the time to understand the implications around their business and the services provided. They need to understand how that can open them up to other regulatory requirements to comply with. I think in the future, exchanges will need to continue to be cautious in what they choose to list on their platform because, in a way, an exchange is facilitating customers partaking in those coins or tokens.
SB: No ICO token listings, but do you have any plans to expand and add other types of digital currency that didn’t have an ICO? Or are you going to stick with bitcoin for now?
HL: Yes, definitely! We launched day one with just bitcoin but have plans to introduce other coins to our platform in the near future. The US will follow the direction bitFlyer Japan has taken in this regard. In the US, we have a little bit more of a process to go through, and some state regulators want to be a part of that decision process. They want to make sure that an exchange really understands the new risk profile that a coin adds to the exchange. bitFlyer USA definitely has plans to offer coins beyond bitcoin in the future.
SB: There’s a lot of other exchanges out there. What sets bitFlyer apart?
HL: I think it’s twofold. bitFlyer has gained such a good reputation and notoriety in Japan. But, beyond that, we aim to become a virtual currency exchange player on a global level.
We are licensed in Japan and the US, and then most recently, we were granted a license to operate in the EU. That allows us to have three key jurisdictions today, and we hope to have more in the future.
The overall goal is cross-border trading – allowing customers within all bitFlyer entities to be on our platform and trading with one another. This will allow bitFlyer USA and EU customers to benefit from the Japanese virtual currency exchange market as well as increased volume and liquidity. That’s one aspect.
The other thing that sets us apart is that, while bitFlyer is really known for the exchange and the success we’ve had, we also have been developing an enterprise blockchain technology called “miyabi”. “miyabi” is a proprietary blockchain technology that bitFlyer has developed for different companies to integrate into their systems.
I’ve always been impressed that, although we excel in the bitcoin exchange industry, bitFlyer’s overall mission is to make the world simpler through blockchains. I think that sometimes the potential of blockchain goes unnoticed and the focus, a lot of the times, is on how high or low the price of bitcoin is today in the news.
Overall, there’s the long-term potential for the blockchain to do a lot of good. bitFlyer sees blockchain technology as the second layer of what the company is trying to bring to the industry. Some players in the industry are trying to propel the goals of virtual currency and blockchain. It’s nice to be a part of a company that’s contributing to that.
SB: Is there anything else that you’d like our readers to know?
HL: There are a lot of general misconceptions about virtual currency, and I think there are three misconceptions that frustrate me and maybe other people who are trying to bring legitimacy to the space.
The misconceptions are that Bitcoin is not regulated, anonymous, and more likely to be used for money laundering or crime than, say, cash or another form of payment. All of those turn out not to be true.
There was a report that came out from Elliptic about a few weeks ago that was trying to analyze the use cases for Bitcoin and how much of it is actually tied to illicit sources. They found that only 0.61% of money entering exchanges in the last four years were verifiably from illicit sources. There’s room for interpretation in that statistic, but I think it’s still telling. News is attention-grabbing when there’s this idea of Bitcoin only being used for illicit things, but that just isn’t the case.
Bitcoin can bring a lot of good to the world. It makes financial services available to people that don’t have access to the banking system including people in developing countries, and it opens up cross-border payments on a global scale. The potential for blockchain is limitless. There’s a lot of good that could come with crypto and blockchain technology. The misconceptions shouldn’t be the focus of what this industry is doing or is capable of.
Thank you, Hailey, for taking time out of your busy day to speak with us about the regulatory processes in the United States. It’s a complex topic that’s still being developed, but it’s clear you and your team are ready for any changes that may occur.
We couldn’t agree more with your final statements and are happy to see bitFlyer is working towards further legitimizing Bitcoin and blockchain technology as a whole.
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ABOUT THE AUTHOR
ABOUT THE AUTHOR
Based in Austin, TX, Steven is the Executive Editor at CoinCentral. He’s interviewed industry heavyweights such as Wanchain President Dustin Byington, TechCrunch Editor-in-Chief Josh Constine, IOST CEO Jimmy Zhong, Celsius Network CEO Alex Mashinsky, and ICON co-founder Min Kim among others. Outside of his role at CoinCentral, Steven is a co-founder and CEO of Coin Clear, a mobile app that automates cryptocurrency investments. You can follow him on Twitter @TheRealBucci to read his “clever insights on the crypto industry.” His words, not ours.