New York, one of the first states to adopt virtual currency rules, has taken a relatively strict approach in the regulation of virtual currency activities. The rules, enacted on 24 June 2015, established a regulatory framework for virtual currency businesses that requires operations related to transactions involving any form of virtual currency to obtain a “Bitlicense” from the state.
The strict licensing requirements favor large virtual currency firms and financial institutions. The BitLicense application and licensing process is likely overly burdensome for small companies with limited access to capital and legal resources.
Overview of Bitlicense
Subject to certain exceptions, anyone engaging in any of the following activities is required to obtain a BitLicense from the New York State Department of Financial Services (“NYSDFS”):
• Virtual currency transmission
• Storing, holding, or maintaining custody or control of virtual currency on behalf of others
• Buying and selling virtual currency as a customer business
• Performing exchange services as a customer business
• Controlling, administering, or issuing a virtual currency.
Out-of-state businesses that engage in virtual currency activity involving New York State, or with persons within the state, must obtain a BitLicense to conduct their business.
Some of the regulatory requirements include:
• Minimum capital reserves
• Records of transactions must be kept for at least seven years
• Quarterly financial statements must be submitted within 45 days of the close of a quarter
• Background checks on all employees must be performed by an independent investigatory agency
• Appointment of a dedicated compliance officer
• Enforcement of written anti-fraud, anti-money laundering, cyber security, privacy and information security procedures
• Prior written approval from the superintendent of the NYSDFS before the company introduces a “material change” to their business model, such as a new product or service
• Prior written approval from the superintendent of the NYSDFS before any merger with or acquisition of any company holding a BitLicense.
The application fee for a Bitlicense is $5000 and the applicant must complete a 31-page application form.
The one-size-fits-all” licensing process does not provide any exceptions for small virtual currency companies.
Application Approval Process Slow, but Improving
The 2015 rules do not impose a deadline on the NYSDFS for completing the licensing process.
Since the enactment of the rules, the NYSDFS has approved only eleven charters or licenses for virtual currency companies.
The license for Genesis Global Trading was not granted for nearly three years, and a license for BitFlyer USA, Inc. was not granted for over a year.
The number of licenses issued will likely increase over the next 12-24 months.
Focus Remains on Consumer Protection: The 2018 New York Attorney General Report
In September, the New York Attorney General (“NYAG”) issued a report that concluded crypto trading platforms vary significantly in their risk management strategies and in the ways they fulfill customer responsibilities.
The NYAG identified three broad areas of concern: potential conflicts of interest; lack of serious efforts to impede abusive trading activity; and limited protections for customer funds.
The NYAG also referred three virtual currency exchanges- Kraken, Binance and Gate.io-to the state’s financial regulator for possible legal action and raised concerns over price manipulation and conflicts of interest on trading platforms.
The report concludes that “virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading.”
Draft Virtual Currency Legislation Introduced into the State Assembly
Virtual currency bills have been introduced in the State Assembly this year. New York, however, will not likely amend existing rules or introduce major virtual currency legislation until 2020, after the State Assembly is able to review a task force report that must be completed by December 2019.
• Bill on the Creation of Virtual Currency Task Force: The bill proposes the creation of a digital currency task force to provide the governor and the legislature with information on the potential effects of the widespread implementation of digital currencies on financial markets in the state. If passed, the bill would establish a group consisting of nine members which would be called on to submit a report to the governor, temporary president of the senate, and the speaker of the assembly by December of 2019. Additionally, the task force would be required to provide the number of digital currencies and exchanges operating in the state, information about large investors in the field, and the energy consumption necessary for coin mining operations. The task force would also provide a review of laws and regulations on digital currency used by other states, the federal government, foreign countries, and foreign political and economic unions to regulate the marketplace.
• Bill on Virtual Currency: The bill proposes eliminating the BitLicense and licensing fees. In addition, the bill mandates that any virtual currency business or entity be subject to routine audits by a public or third-party depository service. Any entity in full compliance will receive a digital New York Seal of Approval to reassure consumers that the outlet is trustworthy and secure.