United States: NYDFS Releases Revised BitLicense Proposal

Last Updated: March 18 2015
Article by Nikiforos Mathews and Jonas Robison

On February 4, 2015, the New York State Department of Financial Services ("NYDFS") released a revised version of its proposed virtual currency regulations (commonly referred to as "BitLicense"), originally released in July 2014. Nearly 4,000 formal comment letters were submitted by advocacy groups, financial service providers, law firms, individuals and others on the original proposal.  A 30-day public comment period began upon publication of the revised proposal in the New York State Register on February 25, 2015.  Section I below summarizes significant changes that the revised version of the BitLicense proposal made to the original, and Section II provides an outline of the overall proposed BitLicense regime, as amended.

1. Revisions to the Original BitLicense Proposal

The revised BitLicense proposal includes several significant changes to the original.  As expected, several of these revisions are designed to accommodate startups or other small companies operating, or wishing to operate, in the virtual currency space.  Specifically, the NYDFS superintendent (the "Superintendent") may grant a conditional license to an applicant that is not in full compliance with the BitLicense requirements.  In issuing a conditional license, the Superintendent may impose upon an applicant any reasonable conditions that the Superintendent determines.  A conditional license will expire two years after issuance, unless the Superintendent either removes its conditional status or renews it.  In determining whether to issue, renew or remove the conditional status of, or impose or remove any specific conditions on, a conditional license, the Superintendent may consider any relevant factors, including without limitation:  the nature, scope and anticipated volume of the applicant's or licensee's business, and the nature and scope of the risks that the applicant's or licensee's business presents to consumers, virtual currency markets, financial markets and the general public; registration of the applicant or licensee with the United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN); licensing, registration, or other authorization of the applicant or licensee by any governmental or self-regulatory authority to engage in financial services or other business activities; the applicant's or licensee's financial services or other business experience; and the licensee's history as a holder of a conditional license.

NYDFS clarified or provided additional guidance on several additional points in the revised BitLicense proposal, including the following:

  • Software development and dissemination, in and of itself, does not constitute "Virtual Currency Business Activity," i.e., an activity that falls under the BitLicense requirements if it involves New York or a New York Resident;1
  • Transmission of virtual currency for non-financial purposes that involves only nominal amounts also does not constitute Virtual Currency Business Activity;
  • Merchants and consumers utilizing virtual currency solely for investment purposes were included in the exemption from the BitLicense requirements originally available only to merchants and consumers utilizing virtual currency solely for the purchase or sale of goods or services;
  • A licensee may seek clarification from NYDFS regarding the materiality of any proposed change to an existing product, service, or activity involving New York or New York residents prior to making that change;
  • $5,000 is specified as the BitLicense application fee;
  • The books and records of licensees must be preserved in their original form or native file format for seven years, rather than ten years;
  • The capital requirements have been somewhat relaxed such that a licensee may hold required capital "in the form of cash, virtual currency, or high-quality, highly liquid, investment-grade assets, in such proportions as are acceptable to the [NYDFS] superintendent;"2 and
  • Background reports are required only for employees of an applicant who have access to customer funds, rather than for all employees.

II. Outline of the BitLicense Regime

The BitLicense regime, as currently proposed, would apply various requirements to persons engaged in any of the following Virtual Currency Business Activities: (i) receiving virtual currency for transmission or transmitting virtual currency (except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of virtual currency), (ii) storing, holding or maintaining custody or control of virtual currency on behalf of others; (iii) buying and selling virtual currency as a customer business; (iv) converting or exchanging virtual currency as a service; or (v) controlling, administering or issuing a virtual currency. Merchants and consumers utilizing virtual currency solely for the purchase or sale of goods or services or for investment purposes are specifically excluded. Requirements applicable to persons conducting Virtual Currency Business Activities include the following:

  • obtaining a license from NYDFS;
  • payment of a $5,000 BitLicense application fee;
  • submission to NYDFS of voluminous information related to the applicant, such as biographical information and background reports for the applicant's principal officers, principal stockholders, principal beneficiaries, and employees with access to customer funds; organizational charts and financial statements; details of banking arrangements; and other items;
  • designating a qualified individual (or individuals) as a compliance officer;
  • maintaining written, board-approved compliance policies addressing anti-fraud, anti-money laundering, cyber security, privacy and information security, and other requirements;
  • capital requirements 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;
  • obtaining prior written approval from the Superintendent before introducing or offering a new, or making a material change in an existing, product, service, or activity involving New York or New York residents;
  • obtaining prior written approval from the Superintendent before taking any action that may result in a merger or acquisition of all or substantially all or a substantial part of the assets of a licensee;
  • maintaining certain books and records, including but not limited to a general ledger meeting certain specifications and records of the names and addresses of the parties to each transaction that are customers or accountholders of the licensee and, "to the extent practicable,"3 those that are not customers or accountholders;
  • 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;
  • periodic submission to the Superintendent of certain reports and financial disclosures, including quarterly and audited annual financial statements;
  • establishing and maintaining the following programs, in each case satisfying various specifications: (i) anti-money laundering based on the legal, compliance, financial, and reputational risks associated with the licensee's activities, services, customers and counterparties, and geographic location; (ii) cyber-security to ensure the availability and functionality of the licensee's electronic systems and to protect those systems and any sensitive data stored on those systems from unauthorized access, use, or tampering; and (iii) business continuity and disaster recovery to ensure the availability and functionality of the licensee's services in the event of an emergency or other disruption to its normal business activities;
  • certain restrictions relating to advertising and marketing, including that advertisements must include a legend that the licensee is "Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services";
  • disclosure to customers of various virtual currency-related material risks and terms and conditions; and
  • establishing and maintaining written policies and procedures to fairly and timely resolve complaints.

A person conducting Virtual Currency Business Activities at the time the BitLicense requirements take effect would 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 New York State Residents.4

Footnotes

1. "New York Resident" is defined to mean, generally, an individual or entity (however organized) that resides, is located, has a place of business, or is conducting business in New York.

2.In the original BitLicense proposal, each licensee was "permitted to invest its retained earnings and profits in only the following high-quality, highly liquid, investment-grade permissible investments with maturities of up to one year and denominated in United States dollars: certificates of deposit issued by financial institutions that are regulated by a United States federal or state regulatory agency, money market funds, state or municipal bonds, United States government securities, or United States government agency securities."  New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.8(b) (July 17, 2014) (available at: http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf ).

3.New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.12(a) (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf ).

4.New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.21 (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf ).

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.

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Nikiforos Mathews
Jonas Robison
 
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