The New York State Department of Financial Services ("NYDFS") proposed a regulatory framework for licensed virtual currency firms listing new coins for trading.

According to the NYDFS, under the proposed guidance, there would be two processes by which the NYDFS would either recognize, or allow a regulated entity to recognize, a virtual currency (or "coin") as being acceptable for trading by reason of, among other things, not being an unregistered security.

Under the proposed guidance, the NYDFS would publish a list of those coins that the regulator recognizes as acceptable for licensed virtual currency firms to trade. Coins that are "currently contemplated" to be generally approved for trading "include" Bitcoin, Bitcoin Cash, Ether, Ether Classic, Litecoin, Ripple, Paxos Standard and Gemini Dollar.

Second, a licensed virtual currency firm could self-certify that a particular coin was acceptable for trading, provided that (i) the firm had a policy by which it would so certify, (ii) the policy provided for a "full risk assessment" that was "entirely free of conflicts of interest," (iii) the virtual currency firm informed the NYDFS of any new coin that it approved, and (iv) the firm continued to monitor the coin's performance after its approval for trading.

In the proposal, the NYDFS provides a list of the risks that a virtual currency firm would be required to consider before approving a coin for trading. These include (i) risk as to the manner in which the coin is governed, (ii) operational, technologies and cyber risks, (iii) market risk, (iv) AML risk and (v) securities law and other regulatory risks. Finally, a virtual currency firm will have to have "an independent audit review" to determine that all risks of the new coin have been "assessed and addressed."

Comments on the proposed guidance must be submitted to the NYDFS by January 27, 2020.

Commentary

Steven Lofchie

The NYDFS proposal is a bold and positive step. As a starting matter, the New York regulators are proposing to recognize that there are a number of virtual currencies (not just Bitcoin and Ether) that are in fact currencies, and not securities. While the fact that the NYDFS treats these coins as not being securities is not binding on the SEC, nor on other regulators. As a practical matter, though, the NYDFS determination would have considerable weight.

The proposal to allow private firms to self-certify that a particular coin is acceptable to trade is likewise a bold step. Will firms be aggressive or overly aggressive in self-certifying? (Will there be a chicken and an egg problem: if firms are too aggressive in certifying, they are creating material legal issue; if they are too conservative, it will be very difficult to create new types of coins). What happens if the NYDFS or the SEC subsequently disagree with a given certification?

A coin creator that seeks certification to become a virtual currency business should consider how it will establish itself so as to provide the necessary assurances that will enable certification. The certification process outlined by NYDFS looks pretty demanding. But it is a step toward clarifying how to do that.

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