Keyword: virtual currency license

New York Looks Like it Might Loosen Up on Its Virtual Currency Regulation

On June 25, the New York State Department of Financial Services (NYDFS) published a “Conditional BitLicense” proposal for reforming its licensing framework that would make it easier for virtual currency businesses to obtain permission to operate in New York. The proposal was developed as part of a broader effort to respond to industry changes and concerns that NYDFS identified in its five-year review of its cryptocurrency licensing regime (which originally took effect in June 2015) under which more than two dozen cryptocurrency companies have been approved to do business in New York. Under the proposed regulations, a virtual currency firm will be authorized to operate in New York even if it does not have a full BitLicense from the state if it obtains a “conditional BitLicense” and partners with a firm that does have a full license. (To note, the conditional BitLicense has always existed, but this is the first time that the NYDFS has announced clear rules to help companies access the license.)

The NYDFS’s proposal is likely a welcome development. New York’s process for obtaining a full BitLicense is considered one of the toughest in the country and has long been unpopular with blockchain startups. Among the complaints: steep paperwork requirements and lengthy approval times. Under the proposed conditional licensing regulation, a cryptocurrency firm that wishes to operate in New York can bypass the difficulties of applying for a full license and instead apply for a conditional BitLicense, which would grant it operational privileges so long as it partners with another cryptocurrency firm that is fully licensed. Currently, the NYDFS envisions that under such a partnership, the licensed firm can assist in providing various services and support, including “those relating to structure, capital, systems, personnel, or any other support needed.”

The proposed application process is simple: In order to apply for such a license, the unlicensed cryptocurrency firm would need to inform the NYDFS of its intention to apply and provide a copy of the service agreement between the unlicensed cryptocurrency firm and the licensed cryptocurrency firm, as well as additional documentation. It is clear, however, that the NYDFS views this licensing framework as a temporary stepping stone; the NYDFS stated that it expects firms who obtain such conditional licenses to then apply for a full license within 2 years.

It is not entirely clear how the conditional license will operate in practice. It does not appear that any other state makes conditional licenses available. To that end, the NYDFS is inviting comments on its proposed regulation, including:

  1. What type of cryptocurrency firms would benefit the most from such a conditional license?
  2. What type of licensed firms would be best and most effectively able to partner with unlicensed firms under the terms of a conditional license?
  3. What types of services and support should a licensed firm provide for the firm with the conditional license?
  4. Should there be limits placed on the types of services that a licensed firm can provide?
  5. Should there be caps and limits on the total number of conditional arrangements that a licensed firm can enter? What other checks should be in place?
  6. Should the licensed firm be held accountable for initial due diligence of the firm wishing to obtain a conditional license and to what extent?
  7. Should ongoing due diligence be required?
  8. How should the licensed firm and firm with the conditional license divide responsibilities and obligations for ensuring compliance with legal and regulatory requirements?
  9. What is the best way to check for and resolve conflicts of interest between the two firms involved?
  10. What is the best way to structure such collaboration to limit any potential adverse effect on the markets?
  11. Are there other methods besides a conditional license that the NYDFS should consider?

NYDFS requests that all comments by submitted by August 10, 2020. Given that cryptocurrency regulation is generally uncharted territory, virtual currency firms should consider submitting comment to the NYDFS to assist it in developing this regulation further so that it is effective and workable.

NYDFS to Virtual Currency Exchange: Don’t Let the Door Hit You on Your Way Out

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.