The New York Department of Financial Services virtual currency license is back in the spotlight after NYDFS announced that it had rejected the application of Bittrex Inc., a virtual currency exchange, to conduct virtual currency business in the Empire State. The NYDFS virtual currency license, or BitLicense, is notoriously difficult to obtain, having been granted to only 19 companies since it was implemented in July 2014. Although all BitLicense application denials are technically publicly available (but not published), the announcement of Bittrex’s application denial in such a public way is a first for the regulator. The rejection letter states that “Bittrex has failed to demonstrate responsibility, financial and business experience, or the character and fitness to warrant the belief that its business will be conducted honestly, fairly, equitably and carefully. . . .” The denial, coupled with the requirement that Bittrex immediately close up shop in New York, marks a very public rebuke of the exchange, which Bittrex met with a prompt and strongly worded response of its own.
Bittrex submitted its BitLicense application on August 10, 2015. On April 10, 2019, NYDFS publicly announced the rejection of Bittrex’s application. New York allowed Bittrex to operate in the state during the three and a half year application process under the terms of a safe harbor. According to NYDFS’s public rejection letter, the prolonged application process culminated in a four-week on-site review of Bittrex’s operations by NYDFS in February 2019. As a result of the on-site review, NYDFS rejected Bittrex’s BitLicense application based primarily on “deficiencies in Bittrex’s Bank Secrecy Act (BSA), Anti-Money Laundering (AML) and Office of Foreign Assets Control (OFAC) compliance program; a deficiency in meeting the Department’s capital requirement; and deficient due diligence and control over Bittrex’s token and product launches.” This long list of deficiencies, after such a long and laborious application process, appears at odds with the Department’s statement that “throughout Bittrex’s application process, the Department worked steadily with Bittrex” to address deficiencies in some of the very same areas found to be deficient during the February 2019 review.
According to the rejection letter, Bittrex has approximately 35,000 New York-based users who must now find a new exchange on which to trade. This is not going to be an easy task because Bittrex is a market leader listing 212 digital assets on its exchange. By way of comparison, Coinbase, which received its BitLicense in January 2017, lists six digital assets on its exchange (not including the digital assets listed on Coinbase Pro).
Within hours Bittrex responded to the public rejection with its own statement asserting that the rejection “harms rather than protects New York customers,” and stating that “Bittrex fully disputes the findings of the NYDFS” in its rejection letter. According to Bittrex, the NYDFS rejection letter contains “several factual inaccuracies” which Bittrex addresses in its response letter.
Given the public nature of this confrontation and the status of New York as a major financial hub, it is unlikely that we have heard the last of this from the parties involved. In the interim, industry participants should review the NYDFS rejection letter and Bittrex’s response, both of which provide helpful insight into the BitLicense application process and the requirements that digital asset companies have to meet if they seek to offer services in New York.