HWG Regulatory Advisory: New York Department of Financial Services Releases Revised BitLicense Proposal

February 04, 2015

Jared Marx

The New York Department of Financial Services (“NYDFS”) issued its revised BitLicense proposal today, comprising detailed regulations for virtual currency businesses.  The revision is a tweak and not a rewrite: the NYDFS retained the structure of the original proposed regulations and most of the attendant requirements, but softened some of the most onerous aspects of the original proposal.  The primary changes in this regard are:

  • Conditional licenses now available: As promised, the NYDFS added provisions whereby, in the NYDFS’s discretion, businesses may receive conditional licenses during a period in which they are not yet following all of the regulations, but are working toward compliance.
  • Names and addresses of third parties to transactions need be obtained only “to the extent practicable”:The regulations previously required licensees to collect and maintain names and addresses of all parties to every virtual currency transaction.  That data collection is still required for the licensees’ own customers, but licensees must collect that data from third parties to transactions only “to the extent practicable.”
  • No more required third-party cyber-security audits: The regulations still have detailed requirements regarding cybersecurity and related audits, but the NYDFS has eliminated the previous requirement that licensees hire a third party cybersecurity auditor.
  • Capital requirements can be held in cryptocurrency: Capital requirements (beyond just holding customers’ cryptocurrency) remain in place, but those requirements may now be fulfilled by holding cryptocurrency.
  • Licenses cost $5,000: The previously undisclosed cost of a BitLicense is $5,000.
  • Gift card exception: The NYDFS has included a new, explicit carve-out from the regulations for gift cards.
  • New exceptions for nominal transfers and whitelabeling: There is also a new exception to licensure for transmission of virtual currency that is “for non-financial purposes,” and where the transfer amount is only nominal.  There is likewise an explicit carve-out for “whitelabel” products, so that sellers of software used by others in virtual currency businesses are not themselves subject to licensure.

The following notable provisions, however, remain in place from the previous version of the proposed regulations:

  • Information on employees: Applicants for a license must provide, among other things, biographies, financial statements, and third party background checks for all officers and directors of the applying entity; in a minor change, applicants must also provide photographs and fingerprints for other company employees only to the extent that they an employee has access to fiat currency or cryptocurrency.
  • Permission required to make changes to products: Licensees must receive NYDFS’s prior written approval before making any material change to its Bitcoin-related products.
  • Protection of consumer assets: A virtual wallet provider must hold as much virtual currency as are listed in its customers’ accounts—that is, no fractional reserve banking is permitted.  Each business must also post a bond for the benefit of customers in an unspecified amount set by NYDFS.
  • Books and records requirements: Licensed business must retain books and records, including the list of all parties to all transactions, for seven years—down from ten years in the previous version.  These books and records must be available for inspection by the NYDFS upon request.
  • Bank examinations: NYDFS will examine the books, records, financial conditions, and practices of licensees at least once every two years.
  • Submission of financial statements: Licensees must submit quarterly and audited annual financial statements to NYDFS.
  • Anti-money laundering provisions: NYDFS’s requirements largely mirror the federal requirements in this area, but also require, among other things, licensees to conduct independent audits of their anti-money laundering compliance programs.  The proposed regulations also require additional diligence on foreign account holders and on transactions of more than $3,000.
  • Consumer disclosure requirements: Licensees are required to make detailed disclosures to consumers when an account is created, and make less detailed disclosures (including a warning that the transaction may not be undone) before every transaction.
  • Fraud policy: Licensees must have a detailed policy for preventing fraud.
  • Complaints:  Licensees must publish a telephone number and address for customer complaints, and have a policy for resolving complaints.

In addition, the regulations remain written in language such that any company that does business with any New York resident—regardless of where the company is situated—would most likely be subject to licensure.

Parties may comment on the revised proposed regulations.  Those comments are due on Friday, March 6, 2015.

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For more information regarding the BitLicense proposal or Harris, Wiltshire & Grannis LLP’s cryptocurrency practice, please contact Jared Marx at (202) 730-1328 or jmarx@hwglaw.com.

This client advisory is not intended to convey legal advice. It is circulated to HWG clients and friends as a convenience and is not intended to reflect or create an attorney-client relationship as to its subject matter.

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