On June 3, 2015, the New York Department of Financial Services (“NYDFS”) released its final BitLicense regulations, which Superintendent Benjamin Lawsky described as “the first comprehensive framework for regulating digital currency firms.” As previously reported, the NYDFS originally released proposed BitLicense regulations on July 17, 2014. After receiving thousands of public comments, primarily voicing concern over the possible scope of regulation, the NYDFS made major revisions and released re-proposed BitLicense regulations on February 4, 2015.
The final BitLicense regulations contain relatively few changes to the February 2015 re-proposed version, which we previously summarized. Such changes include, for example: (i) with respect to the requirement that a licensee obtain the NYDFS’s written approval before offering any materially new product, service, or activity involving New York or New York residents, the final BitLicense regulations added language clarifying the meaning of “materially new product, service, or activity”; (ii) with respect to the requirement that a person seeking to acquire control of a licensee must obtain approval from the NYDFS Superintendent, the final BitLicense regulations added that a person will not be deemed a “control person” solely by reason of being an officer or director; and (iii) with respect to the requirement that a licensee must report to the NYDFS virtual currency transactions exceeding $10,000 in an single day, the final BitLicense regulations clarified that such reporting is required only for virtual currency to virtual currency transactions that are not subject to reporting requirements under federal law.
Generally, the BitLicense regime applies various requirements to persons engaged in specified “Virtual Currency Business Activities.” These requirements include, but are not limited to: paying a $5,000 application fee and obtaining a license; maintaining capital in an amount and form as the Superintendent determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to a licensee; protecting customer assets, including maintaining a surety bond or trust account in U.S. dollars for the benefit of licensee customers in such form and amount as is acceptable to the Superintendent; submitting certain periodic reports to the Superintendent; being subject to examination by the Superintendent at least once every two years of the licensee’s financial condition, safety and soundness of its business conduct, management policies, and other matters; and establishing and maintaining written, board-approved compliance policies addressing anti-fraud, anti-money laundering, cyber security, privacy and information security.
Superintendent Lawsky made the following points in announcing the release of the final BitLicense regulations “in order to allay various concerns [the NYDFS] heard during the public comment period”.
- Companies will not need prior approval for standard software or app updates, but only for material changes to their products or business models. An example of a material change would be if a firm that was licensed as a wallet service decided to begin offering exchange services.
- The NYDFS intends to regulate only financial intermediaries, not software developers. For example, software developers that do hold customer funds will not be required to apply for a BitLicense.
- Firms will be able to “cross-satisfy” many of the licensing requirements under BitLicense and the federal money transmitter regulations.
- Companies that file suspicious activity reports with federal regulators such as the United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN) will not be required to file duplicate reports with the NYDFS.
- Companies will not need prior approval from the NYDFS for every new round of venture capital funding. Generally, a company will need prior approval only if an investor would become a “control person,” i.e., would direct the management and policies of the company.
The final BitLicense regulations will not take effect until published in the New York State Register. Upon such publication, a person conducting Virtual Currency Business Activity will have a 45-day transitional period to apply for a license, at which point it will be deemed to be in compliance with the BitLicense requirements until notified by the Superintendent that its application has been denied. If a person is so notified by the Superintendent, then it must immediately cease operating in New York and doing business with any New York State Resident.
Various other U.S. states have followed New York’s lead in pursuing virtual currency regulation. Significant state proposals are highlighted below.
In June 2015, the California State Assembly approved a bill that would impose on virtual currency businesses operating in California licensing requirements similar to those under the BitLicense regime. The bill is currently under review by the California Senate. Features of the bill include, among others, a $5,000 licensing fee and capital standards for virtual currency businesses. Similar to BitLicense, the California proposal would not subject firms that use virtual currencies only to buy or sell goods or services to its various requirements.
In May 2015, the Connecticut House of Representatives passed a bill that would allow the Connecticut Banking Department to deny a money transmission license to an otherwise-qualified applicant that has a virtual currency business model, based on potential consumer risks. This bill also includes surety bond requirements for money transmitters in virtual currency that differ from those that ordinarily apply to money transmitters. The bill is now before the Connecticut Senate.
In June 2015, the “Digital Currency Jobs Creation Act” was introduced in the New Jersey Legislature. In addition to imposing requirements relating to cybersecurity, risk disclosure, and recordkeeping, the bill would provide certain tax breaks to digital currency companies in New Jersey. For example, the bill would exempt from New Jersey’s sale and use tax the sale of energy to virtual currency miners. The bill also would allow New Jersey to accept tax payments in bitcoin.
In March 2015, the North Carolina House of Representatives approved a bill that would clarify that virtual currency transmission–except for certain “business-to-business” transmission activity–would require licensing and regulation under the existing North Carolina Money Transmitters Act. The bill is now under review by the North Carolina Senate.
In March 2015, a bill was introduced in the General Assembly of Pennsylvania that would, among other changes, add virtual currencies to the definition of “money” in Pennsylvania’s statute providing for the licensing and regulation of money transmission businesses.
 NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms (June 3, 2015) (available at: http://www.dfs.ny.gov/about/speeches/sp1506031.htm); New York State Department of Financial Services, New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (June 3, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf).
 New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (July 17, 2014) (available at: https://www.dfs.ny.gov/about/press/pr1407171.htm); previous postings of Derivatives in Review (available here) also reported on Bitcoin developments.
 https://www.dfs.ny.gov/about/press/pr1407171.htm; New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf).
 This summary may be found here: http://blogs.orrick.com/derivatives/2015/03/09/nydfs-releases-revised-bitlicense-proposal/
 “Virtual Currency Business Activity” is defined as an activity that falls under the BitLicense requirements if it involves New York or a New York Resident. “New York Resident” means, generally, an individual or entity, however organized, that resides, is located, has a place of business, or is conducting business in New York.
 NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms (June 3, 2015) (available at: http://www.dfs.ny.gov/about/speeches/sp1506031.htm).