United States: New York's Proposed "BitLicense" Regulations Mark New Territory For Virtual Currencies

In a move widely seen as inevitable, the New York Department of Financial Services (NYDFS) has released draft regulations for the establishment of a "BitLicense" to govern virtual currency financial services.

The proposed BitLicense regulations apply to "Virtual Currency Business Activity," which broadly includes money transmission services, securing, storing or holding virtual currency for others, currency exchanges, and buying and selling virtual currency as a customer business. Virtual Currency Business Activity also encompasses "controlling, administering or issuing a Virtual Currency," which is the source of some controversy and is discussed in detail below.

Under the proposed BitLicense rules, entities who conduct Virtual Currency Business Activity involving New York or New York residents are also subject to rules for capital requirements, customer asset protection and custody, business ownership, recordkeeping and auditing, reporting, anti-money laundering, cybersecurity and consumer protection. While many of these are similar to current NYDFS requirements for traditional regulated financial institutions, several proposed regulations could pose significant challenges for virtual currency innovators.

The Path to Bitcoin Regulation

The NYDFS BitLicense proposal comes as an expected evolution of the Bitcoin economy. Dramatic short-term growth in market value in 2011 then again in 2013 were matched by increased interest in Bitcoin, and virtual currencies in general by entrepreneurs and investors. Coinbase and other platforms made purchasing Bitcoins easier through simple, customer-friendly websites and merchants such as Overstock.com began accepting Bitcoins for online purchases, making Bitcoin ownership more useful.

However, the emergence of Bitcoin has not been an entirely positive experience. Theft, pyramid schemes and a persistent association with Silk Road and other contraband markets have marred Bitcoin's image, culminating with the recent and spectacular failure of Mt. Gox, the oldest and largest major Bitcoin exchange. A string of security incidents, trading failures and US law enforcement actions that interrupted US withdrawals culminated in Mt. Gox declaring bankruptcy shortly after revealing that it had lost nearly $500 million in Bitcoins. While we don't have a clear picture inside Mt. Gox, the indicators suggest weak security and operational controls compared to traditional financial services companies.

Mt. Gox was a rude awakening for the Bitcoin community. The staggering losses with little hope of recovery was a watershed moment for the industry. Bitcoin had grown much faster than operational protections and if Bitcoin was going to become a viable mainstream payments platform it was going to have to mature.

The NYDFS BitLicense is a critical step in the development of the Bitcoin economy. The BitLicense is the first official financial services regulatory framework for virtual currency companies. It will be difficult, if not impossible, for virtual currency companies to evade New York, a major center of global finance and Bitcoin investment. The broad scope of the proposed BitLicense regulations creates a network effect that extends its impact beyond directly regulated entities to anyone who transacts with regulated entities.

The NYDFS BitLicense Proposal - Key Highlights

Reaction to the NYDFS BitLicense proposed rules has been mixed. To many, the regulations are a welcome step in bringing Bitcoin mainstream and see the BitLicense as a critical step in overcoming Bitcoin's rocky history. Others view the regulations as a threat to the core Bitcoin values of financial privacy and decentralized payments. However, most agree that regulation was inevitable and expect the regulations to be enacted in some form. As the initial impact of the proposed regulations has worn off, the focus has turned to areas that may impede virtual currency development and how to improve those before the final regulations are issued.

Below are several key issues that are likely to be areas of focus in public comments to the NYDFS.

  • Perhaps the most emotional aspect to the proposed NYDFS BitLicense regulations are requirements around collecting and maintaining identifying information about employees and customers. A key Bitcoin feature for many early adopters was its relative anonymity and decentralized nature that removed it from traditional centralized financial institutions and government control. Anonymity is incompatible with a modern anti-money laundering-focused banking system, however, making idealistic dreams of true financial privacy doomed in any system interacting with fiat currencies.

    While strong identification in the final rules are a near certainty, two aspects of the proposed rules will likely see extensive discussion:

    • In contrast to background check requirements for traditionally regulated institutions, the BitLicense rules require fingerprinting of every employee of the license applicant. Many commentators are pushing back that this goes too far and is unnecessary for roles with limited access that pose little risk to customer assets.
    • For customers, the proposed rules require licensed entities to collect and maintain identifying information, including physical address, for every participant to a transaction. This is a daunting proposition for a Bitcoin platform built to execute irreversible transfers using no more than a single cryptographic identifier.
  • The proposed BitLicense rules set stringent requirements for holding or storing virtual currency on behalf of customers. Licensed entities must maintain "the same type and amount" of virtual currency as that which is owed or obligated to other persons. This requirement contrasts sharply with traditional banks, which make constant use of customer deposits in the form of loans and investments. In addition, BitLicensed entities must maintain capital "sufficient to ensure the financial integrity of the Licensee and its ongoing operations." This requirement effectively prohibits business models reliant on leveraging customer assets, such as fractional reserve banking, which is nearly universal in traditional banks.

    • This requirement is especially onerous considering the BitLicense proposal specifically exempts entities chartered under New York Banking Law. Therefore, a traditional bank could expand to offer a fractional reserve-driven virtual currency depository while an entity holding a BitLicense could not.
  • One of the core concerns of many virtual currency advocates is the breadth of the BitLicense regulations. Much of the current innovation in virtual currencies is focused on using certain features of decentralized virtual currencies for non-currency purposes. Companies are currently experimenting with creating platforms based on Bitcoin or other virtual currency concepts that are not currencies. For example, decentralized platforms with a shared ledger could allow efficient management of company stock or other assets, replace escrow services or even improved voting. If these companies are subject to onerous BitLicense requirements these exciting "second generation" ideas could be stifled before they have a chance to emerge.

    • A key complaint regarding the scope of the proposed BitLicense is that the definition of "Virtual Currency Business Activities includes "controlling, administering, or issuing Virtual Currency." This ostensibly extends the regulations to anyone who develops a Bitcoin alternative, often called "altcoins," and would preclude the anonymous development of virtual currency platforms because of the BitLicense's registration requirements. This restriction is especially controversial for the Bitcoin community as Bitcoin was originally developed by an anonymous person or group known as "Satoshi Nakamoto." Satoshi Nakamoto's anonymity, and Bitcoin itself, would violate NYDFS regulations if Bitcoin was created under the proposed BitLicense rules.
    • The BitLicense proposal also lacks any threshold for applicability or "tiering" for smaller entities that do not process large amounts of virtual currencies. This may curtail innovation as any virtual currency, no matter how small or experimental, is required to comply with the full spectrum of BitLicense requirements.

The official publication date of the proposed NYDFS BitLicense rules is July 23, 2014, after which commenters have 45 days to submit public comments on the proposal. The final BitLicense regulations will have a major impact on all aspects of the virtual currency economy and for the next several months all eyes in the industry will be on the NYDFS rulemaking process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
22 Jan 2019, Seminar, San Francisco, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

23 Jan 2019, Seminar, Los Angeles, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

24 Jan 2019, Other, New York, United States

Join Dentons’ Health Care Partner Lori Mihalich-Levin and White Collar & Government Investigations Counsel Christine Genaitis as they lead conference sessions at AHLA Academic Medical Centers and Teaching Hospitals Institute.

Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions