After almost a year of discourse and revision, New York’s Department of Financial Services’ final “BitLicense” regulation has been published in the New York State Register and an application has been made available. This client alert provides a brief summary of who must apply, the application process and ongoing compliance requirements.

A.  Who must apply:

The final regulations require licensure for those engaging in “Virtual Currency Business Activity”, which is a broadly-defined term encompassing any business or individual engaged in the following activities:

  • Conversion of government currency into virtual currency;
  • Conversion of virtual currency into government currency;
  • Conversion of virtual currency to another virtual currency;
  • Buying and selling virtual currency as a customer business;
  • Administering or issuing a virtual currency; or
  • Storing, holding, or maintaining custody or control of virtual currency on behalf of others.

The final regulations do not require licensure for:

  • Merchants merely accepting virtual currency in exchange for goods and services;
  • Conversion of virtual currency into government currency;
  • Customers paying for goods or services with virtual currency;
  • Banks that have been approved by the New York Department of Financial Services to conduct exchange services;
  • Certain prepaid and stored value programs;
  • Certain non-currency uses of blockchain technology; or
  • Pure software services not acting as intermediaries, custodians, “controllers,” etc.

The carve-out for so-called “pure” software developers is nuanced: the mere development and dissemination of software does not “in and of itself” constitute activity that requires a license. Presumably, businesses that both develop software and also engage in “Virtual Currency Business Activity” (as described in the revised regulations) will still be subject to licensure.

B.  "Virtual Currency" Defined:

"Virtual Currency" includes any digital unit used as a medium of exchange that, construed broadly:

  • Has a centralized repository or administrator; orli>
  • Is decentralized and has no centralized repository or administrator; or
  • May be created or obtained by computing or manufacturing effort.

Virtual Currency does not include most in-game currencies that have no equivalent value in government currency.

C. Application Process:

The application process is the most in-depth of any state money services license. Similar to money transmission applications, the BitLicense application requires the production of biographical information, background reports and fingerprints for the key officers, stockholders and certain employees of the applicant. In addition, the applicant would need to provide details of current and proposed business, financial statements, its written policies, details regarding pending litigation, verification of compliance with NY tax regulations. Lastly, applicants must pay a non-refundable application fee of $5,000.

If an applicant does not satisfy all the requirements, the authorities may grant a conditional license, which will entail periodic review. The requirements for obtaining a conditional license, and the privileges granted by one, are a matter of facts and circumstances. Significant discretion is left to the Superintendent to fashion those elements.

D.  Key Licensure Provisions:

  • Compliance Policies: Licensees must maintain policies and procedures that combat fraud, money laundering, cyber threats, privacy and information breaches. These polices must be approved by licensee’s board of directors or equivalent governing body, and compliance to these policies must be monitored on an on-going basis.
  • State AML Reporting: Licensees must report certain virtual currency transactions above certain value thresholds not to the federal government, but to the Department of Financial Services directly.
  • Customer Identification: Licensees must identify all parties to their transactions, to the extent it is “practicable” to identify them.
  • Capital Requirements: Each license would be required to maintain certain minimum capital as determined by the superintendent. The capital may be held in the form of cash, virtual currency, or liquid investments as determined by the superintended.
  • Bonding: Each licensee shall maintain a surety bond or trust account for the benefit of its customers and hold same type and amount of virtual currency as held by it on behalf of its customers. Licensee cannot encumber, sell, pledge or otherwise dispose of these assets except at the direction of its customers.;
  • Follow-on approvals for material changes to business: If licensee offers a materially new product, service or activity, or materially changes its existing product, service or activity involving New York or New York Residents, then it must obtain superintendent’s prior written approval. Licensees may not engage in the new business without this approval.
  • Change of Control: Prior written approval of the superintended is required for a change of control or a merger or acquisition of a licensee. Control is defined to mean 10% or more of the voting stock of the licensee. In the early days of a start-up, this could occur frequently.
  • Books and Records; Examinations; Financial Disclosures: A licensee must maintain specific books and records for at least seven years from their creation. In addition, a licensee must permit examinations of its financial condition at least once every two years. A licensee must satisfy quarterly reporting obligations including the submission of audited financial statements.