REPORT: NEW YORK CRYPTO REGULATIONS: NY BitLicense Is An Abomination; May Only Get Worse - Abacus Journal

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.¹ 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.²

The strict licensing requirements favor large virtual currency firms and financial institutions. The BitLicense application and licensing process are 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.³

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.⁴

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, cybersecurity, privacy, and information security procedures
Prior written approval from the superintendent of the NYSDFS before the company introduces a “material change” to their business models, 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 BitLicense⁵

The application fee for a Bitlicense is $5000 and the applicant must complete a 31-page application form.⁶

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.⁷

Since the enactment of the rules, the NYSDFS has approved only eleven charters or licenses for virtual currency companies.⁸

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.⁹

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.¹⁰

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.¹¹

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.¹²

The report concludes that “virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading.”¹³

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.¹⁴
strong>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.¹⁵

Recommendation: We would advise new crypto firms to consider establishing operations in Montana, New Hampshire, Texas, Tennessee or Wyoming.

The information provided in this report is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, financial advisor, or other professional to determine what may be best for your individual needs.

This report was prepared by Trifin Roule.

For nearly two decades, Mr. Roule provided for the U.S. government legal analysis of anti-money laundering, counterproliferation financing and counterterrorist financing laws and regulations dozens of jurisdictions, and international standards, as detailed through intergovernmental bodies (e.g. Financial Action Task Force (FATF)), and financial institutions (e.g. banks’ financial intelligence units and compliance offices).

In addition, Mr. Roule has provided in-depth analysis of digital asset accounting, auditing, customer due diligence, exchange, licensing, mining, initial coin offering (ICO), private key storage, and record-keeping practices and regulations.

Mr. Roule is a former Assistant Editor at the Journal of Money Laundering Control, a peer-reviewed journal that provides detailed analysis and insight on the latest issues in the law, regulation and control of money laundering and related matters. Mr. Roule has published dozens of articles on anti-money laundering, and counterterrorist financing laws and regulations.

Trifin Roule is the Publisher of our new division, Abacus Legal, and his and his team’s reports will be free to read for the next 45 days. After that time they will be dubbed premium content and require a subscription.

“New York State Department of Financial Services, New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200. Virtual Currencies”.
In accordance with the New York State Administrative Procedure Act (SAPA), the final DFS rules for virtual currency business activity have been published in the New York State Register’s June 24, 2015 edition.
New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.2(q).
New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.2(q).
New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §§200.4, 200.7.-200.19.
New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.5; and “Application Forms For: License to Engage in Virtual Currency Business Activity,” New York Department of Financial Services at URL: .
New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.3.
“DFS Authorizes Coinbase Global, Inc. to Form Coinbase Custody Trust Company LLC,” New York Department of Financial Services Press Release at URL: https://www.dfs.ny.gov/about/press/pr1810231.htm.
“The Ledger: Is New York’s BitLicense an ‘Absolute Failure?” Fortune, 25 May 2018.
“Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 1.
“Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, pp. 5-6.
“Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 2.
“Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 5.
Bill No. S09013: Creates the 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, New York State Assembly website at URL: https://nyassembly.gov/leg/?bn=S09013&term=2017.
Bill No. A09899: Relates to financial technology products and services; establishes a regulatory sandbox program, New York State Assembly website at URL: https://nyassembly.gov/leg/?default_fld=%250D%250A&leg_video=&bn=A9899&term=2017&Summary=Y&Actions=Y&Committee%2526nbspVotes=Y&Floor%2526nbspVotes=Y&Text=Y.