Obtaining a Virtual Currency License in New York

November 16, 2017
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NYDFS Regulations Require New York Businesses To Obtain a Virtual Currency License Before Engaging In Virtual Currency Business Activity

New York is one of the first states in the country to enact a regulatory framework for virtual currencies such as Bitcoin. Under regulations enacted by New York State Department of Financial Services (NYDFS) in 2015, businesses must obtain a virtual currency license, commonly referred to as a “BitLicense,” prior to engaging in any virtual currency business activity.

Obtaining a New York Virtual Currency License

Photo courtesy of Ben O’bro (Unsplash.com)

Who Must Obtain a BitLicense?

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.

The requirements do not apply to consumers who wish to purchase goods or services with virtual currency or merchants who want to accept virtual currency as payment for goods or services. In addition, where a transaction is undertaken for non-financial purposes and does not involve more than a nominal amount of virtual currency, a BitLicense is not required. The development and dissemination of software in and of itself does not constitute virtual currency business activity requiring licensing.

BitLicense Regulatory Requirements

The application for a BitLicense is comprehensive and requires businesses to provide detailed information about their operations as well as their management. Applicants must provide the following information, among other requirements:

  • The exact name of the applicant, including any doing business as name, the form of organization, the date of organization, and the jurisdiction where organized or incorporated;
  • A list of all of the applicant’s affiliates and an organization chart illustrating the relationship among the applicant and such affiliates;
  • A list of, and detailed biographical information for, each individual applicant and each director, Principal Officer, Principal Stockholder, and Principal Beneficiary of the applicant, as applicable, including such individual’s name, physical and mailing addresses, and information and documentation regarding such individual’s personal history, experience, and qualification, which must be accompanied by a form of authority, executed by such individual, to release information to the NYDFS;
  • A background report prepared by an independent investigatory agency for each individual applicant, and each Principal Officer, Principal Stockholder, and Principal Beneficiary of the applicant, as applicable;
  • A set of fingerprints and portrait-style photographs for each individual applicant; for each Principal Officer, Principal Stockholder, and Principal Beneficiary of the applicant, as applicable; and for all individuals to be employed by the applicant who has access to any customer funds, whether denominated in Fiat Currency or Virtual Currency;
  • An organization chart of the applicant and its management structure, including its Principal Officers or senior management, indicating lines of authority and the allocation of duties among its Principal Officers or senior management;
  • A current financial statement for the applicant and each Principal Officer, Principal Stockholder, and Principal Beneficiary of the applicant, as applicable, and a projected balance sheet and income statement for the following year of the applicant’s operation;
  • A description of the proposed, current, and historical business of the applicant, including detail on the products and services provided and to be provided, all associated website addresses, the jurisdictions in which the applicant is engaged in business, the principal place of business, the primary market of operation, the projected customer base, any specific marketing targets, and the physical address of any operation in New York;
  • Details of all banking arrangements;
  • All written policies and procedures required under the regulation, such as cybersecurity;
  • An affidavit describing any pending or threatened administrative, civil, or criminal action, litigation, or proceeding before any governmental agency, court, or arbitration tribunal against the applicant or any of its directors, Principal Officers, Principal Stockholders, and Principal Beneficiaries, as applicable, including the names of the parties, the nature of the proceeding, and the current status of the proceeding;
  • Verification from the New York State Department of Taxation and Finance that the applicant is compliant with all New York State tax obligations in a form acceptable to the superintendent;
  • If applicable, a copy of any insurance policies maintained for the benefit of the applicant, its directors or officers, or its customers; and
  • An explanation of the methodology used to calculate the value of Virtual Currency in Fiat Currency.

The Application Forms for License to Engage in Virtual Currency Business Activity are available online, but must be submitted in hard copy to the NYDFS. The filing fee is $5,000. To ensure compliance with New York’s virtual currency regulations and licensing requirements, it is advisable to work with an experienced attorney.

Do you have any feedback, thoughts, reactions or comments concerning this topic? Feel free to leave a comment below for Fernando M. Pinguelo. If you have any questions about this post, please contact me or the Scarinci Hollenbeck attorney with whom you work. To learn more about data privacy and security, visit eWhiteHouse Watch – Where Technology, Politics, and Privacy Collide (http://ewhwblog.com).