The New York Department of Financial Services (NYDFS) is overhauling its regulation of virtual currency. Under its newly proposed framework, it would be easier for virtual currency companies to enter the New York market.
Existing BitLicense Requirements
New York is one of the first states in the country to enact a regulatory framework for virtual currency like Bitcoin. Under NYDFS regulations enacted in 2015, businesses must obtain a license, commonly referred to as a “BitLicense,” prior to engaging in any virtual currency business activity. To date, New York has granted 25 virtual currency licenses and charters.
New York’s virtual currency regulation broadly defines “virtual currency” to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. Entities engaging in any of the following activities are required to obtain a BitLicense:
- 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; and
- Controlling, administering, or issuing a virtual currency.
An entity chartered under the New York Banking Law must receive the prior approval of the NYDFS to engage in virtual currency business activity. In addition, out-of-state businesses are required to obtain a virtual currency license to engage in virtual currency business activity involving New York State or persons that reside, are located, have a place of business, or are conducting business in New York.
New BitLicense Application Procedures
In June, NYDFS announced several changes regarding how it regulates virtual currency. Many of the changes are based on feedback from the industry.
For businesses seeking to enter the New York market, the agency published a notice regarding its evaluation of virtual currency license applications. With the “goals of increasing transparency and speed in the BitLicense application review process,” NYDFS has adopted two new practices. First, NYDFS will consider a BitLicense application to be ready for substantive review only when it includes all the documents required as part of the Nationwide Multistate Licensing System & Registry (NMLS) application process—as reflected in the checklist of requirements for a BitLicense application—and each such document appears to be adequate on its face in terms of organization and level of detail. Applications that are not yet in this state will be deemed unready for substantive review until the missing items have been provided, and will generally not be reviewed, except for an initial intake process to determine whether substantive review is appropriate.
In general, once substantive review of an application begins, NYDFS staff will convey to the applicant in detailed deficiency letters information about any deficiencies in the application. Under the second newly adopted practice, if all deficiencies involving a particular application requirement or set of requirements have not been fully and effectively addressed by the end of the response period for the third deficiency letter addressing the requirement(s), NYDFS may, without further notice, deny the application.
To further aid applicants, NYDFS has also published a new virtual currency-related Frequently Asked Questions (FAQs) that addresses questions identified through discussions with current and prospective market participants. The FAQs will be updated on an ongoing basis.
Guidance Regarding Adoption or Listing of Virtual Currencies
NYDFS also announced final guidance regarding licensees’ ability to self-certify the use of new coins. Under the new guidance, once a virtual currency business’s coin-listing policy is tailored to its specific business model and risk profile and approved by NYDFS, the business will be able to self-certify to NYDFS that its proposed use of a new coin complies with the requirements of its approved coin-listing policy. Prior to using the coin, the virtual currency business must provide written notice to NYDFS of its intent to use the coin, including details of its specific use and purpose. In such a case, no prior approval from NYDFS will be required.
The guidance also outlines a new approach under which NYDFS will provide a list of approved coins that all licensees can easily adopt. Under the new framework for “greenlisting” coins, NYDFS will maintain a record of all coins approved for virtual currency businesses, whether approved directly by NYDFS or through the self-certification process, including their approved use. If a coin has received such approval for a specific use by three different and unrelated virtual coin businesses (the “Greenlist Threshold”), NYDFS will prepare to add that coin for that specific use to the Greenlist. Six months later, the coin may be adopted by other virtual currency businesses for that specific use. For all of their coins, virtual currency businesses “must provide their customers appropriate written disclosures regarding the coins they offer for use and must indicate to their customers whether a coin is drawn from the Greenlist, added through self-certification, or added through specific DFS approval.”
Proposed Conditional BitLicense Framework
NYDFS has also proposed a new conditional licensing framework intended to make it easier for virtual currency start-ups to enter the New York market. Under the proposed conditional licensing framework, a new entrant would be allowed to work in collaboration with an authorized BitLicensee or a holder of a New York limited purpose trust charter during the term of the conditional BitLicense. The framework can be utilized by a variety of entities, such as startups, growth-stage companies, established New York companies not yet conducting any virtual currency business activity, and established virtual currency companies now operating outside New York. Under the proposed framework, a firm seeking to engage in virtual currency business activity in New York under a Conditional License would collaborate and engage with an authorized virtual currency business for various services and support, such as those relating to structure, capital, systems, personnel, or any other support needed. Applicants for a conditional license would be expected to provide their service level agreement with the established virtual currency business and to enter into a supervisory agreement with NYDFS, among other requirements. NYDFS is accepting public comments until August 10. Comments should be sent to email@example.com.
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please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.