Revisions to New York’s Proposed BitLicense Regulations
Bitcoin & Cryptocurrency Update
Date: February 12, 2015
On February 4, 2015, the New York Department of Financial Services (Department) released the first revision to its proposed “BitLicense” regulatory scheme. The purpose of the BitLicense scheme is to provide an independent regulatory framework for the emerging digital currency economy, including purchasing, trading and exchange services that occur within New York’s jurisdictional boundaries. The Department released its first draft of the regulations on July 17, 2014, following nearly a year of inquiry into digital currencies, which included public hearings and an “Ask Me Anything,” or “AMA,” public forum on the popular website Reddit. The revised regulations are slated to become effective soon after an additional period of public comment.
The revised regulations address some of the concerns expressed by the digital currency industry during the public comment period. Thompson Hine’s Cryptocurrency group has identified two notable changes that will be of particular interest to a variety of businesses operating in the digital currency space:
- The industry expressed concerns that the regulations’ potential breadth might include non-financial business activities. The Department responded by including an exemption for businesses that focus on software development, including potential “Bitcoin 2.0” applications that leverage the technical innovation of blockchain technology without engaging in the sale or transfer of digital currency. These activities would include, but are not limited to, the use of blockchain technology to record the transfer of stocks, real property or automobiles. Under section 200.2, “Definitions,” the Department clarified the meaning of “virtual currency business activity” by exempting activities that transfer digital currencies for non-financial purposes, as well as the development and dissemination of related software. See2(q) – (q)(1). This is a significant development that has the potential to excuse myriad business activities from the BitLicense’s regulatory requirements.
- Comments also indicated concern that many of the BitLicense’s requirements would have a disproportionate impact on new startup ventures in the digital currency space, the majority of which have little to no budget or staff capacity for addressing sophisticated compliance requirements. In response, the Department included a provision for a “conditional license,” which allows it to grant a BitLicense even if the business does not satisfy all of the regulatory scheme’s requirements. See4(c), “Application.” The conditional license provision provides the Department with wide latitude in deciding whether to grant such a license as well as the level of regulatory scrutiny that will be applied to the business. The conditional license is valid for two years and may be renewed upon application.
The revised regulations, however, still include a number of extensive compliance obligations, including requirements for capital reserves, record keeping and reporting, anti-money-laundering protocols, cybersecurity safeguards and others. Several of these provisions are enhancements of the general requirements for money transmitter licenses in most states. New York’s proposed BitLicense regulations are therefore an important development in the evolving governmental response to digital currencies. Once finalized and effective, New York’s regulations may well become the model copied by other states.
FOR MORE INFORMATION
For more information, please contact:
James P. Jalil
Norman A. Bloch
Thomas F. Zych
or any member of our Blockchain & Cryptocurrencies group.
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