...There is no way a $8B + USD economy is going to go unregulated.
The conversation is not NO regulation. The conversation has to be about prudent regulation. And Lawsky has shown in his public statements and these hearings that he wants input from the community to keep illicit activity out of the us financial system and to protect consumers from fraud and incompetence while creating a framework that will allow this new technology to thrive in the New York.
Agreed. They are going to regulate, and that shouldn't really come as a surprise. Now is the time to try and shape that regulatory effort. I liked Fred Wilson's suggestions about "safe harbor" and an on-ramp, so that startups with little volume/impact wouldn't be subject to any onerous regs. I think that's a reasonable approach. Allow the innovation to happen, see what works, and as companies scale, apply the reg burden as they level up. New bitcoin startups shouldn't need two lawyers for every one engineer, plus millions in capital requirements or surety bond coverage... But if a startup succeeds and starts to do huge volume, then their compliance burden goes up.
Bruce - I agree with your point that once regulation happens, it'll just grow and grow. That's kinda the nature of government looking across large timescales. Unfortunately it's unrealistic to assume there's a path to zero regulation. Thus, as stated above, the goal should be to help shape it in the most productive way possible. Obviously I think you're aware of this, and that's your overall goal here.