On June 3, the New York State Department of Financial Services (NYSDFS) released its final BitLicense rules (Final Rules).1 The NYSDFS issued its original draft rules on July 17, 2014 and a revised version on February 4, 2015.2 Nearly all of the changes in the Final Rules are of a technical or clarifying nature.
However, the Final Rules do eliminate the obligation of a virtual currency business (VCB) to file currency transaction reports and suspicious activity reports with the NYSDFS, where such reports already must be filed with the federal government. Also, the Final Rules clarify that a VCB only needs to obtain prior approval from the NYSDFS for any new material product, service or activity, rather than for all new products, services or activities. In addition, the Final Rules clarify that for the purpose of obtaining NYSDFS prior approval for a change in control, no person is deemed to “control” a VCB merely by serving as an officer or director of the VCB. The Final Rules slightly broaden the scope of items that constitute “Virtual Currency” by narrowing the carve-outs to the definition. First, the previous drafts of the BitLicense rules carved out “digital units” that are redeemable for “goods, services, discounts or purchases.” However, the Final Rules clarify that these “digital units” must now be part of a “customer affinity or rewards program” or else they will be deemed to be Virtual Currency. Second, “Virtual Currency” also excludes “digital units used as part of Prepaid Cards.” However, the Final Rules changed the definition of “Prepaid Cards” (referred to as “Gift Cards” in the previous drafts) to include only those products that are issued or redeemable in legal tender; the previous drafts did not specify that Prepaid Cards had to be issued and redeemable in legal tender. NYSDFS Guidance and Speech
NYSDFS Superintendent Benjamin Lawsky gave a speech to the BITS Emerging Payments Forum on June 3 in connection with the release of the Final Rules.3 As part of the speech, he offered additional guidance, some of which is clear from the changes in the Final Rules, while other points may provide new context.
- Some VCBs had expressed concern that under the BitLicense and money transmitter rules VCBs will be subject to duplicative requirements, such as capitalization and recordkeeping obligations, for the same activity. In response, Lawsky stated that the NYSDFS will not require a duplicative set of application submissions for VCBs that want to obtain both a BitLicense and a money transmitter license, and that VCBs will be able to cross-satisfy many of the requirements that are common to both licenses. However, it is unclear whether Lawsky intended to limit this point to only those requirements common to the application process or if he intended that VCBs also may cross-satisfy common, on-going obligations.
- Lawsky emphasized that the NYSDFS has “no intention of being a regulator of software developers—only financial intermediaries.” Previously, some industry observers expressed concern that the proposed BitLicense regulations would inhibit innovation. However, Lawsky explained that one is not required to obtain a BitLicense for “simply developing software” if one is “not holding onto customer funds.”
- Some industry observers had expressed concern that the proposed BitLicense regulations would deter investment and venture capital funding. In response, Lawsky explained that the regulations are not targeted at “passive investors” and that “companies also would not need prior approval from NYSDFS for every new round of venture capital funding. Generally a company would only need prior approval if the investor wants to direct the management and policies of the firm (which is known as a ‘control person’ in regulatory jargon).” However, while a non-controlling investor will not need to obtain prior approval, Lawsky suggested that they should document and demonstrate that they are not going to have a controlling role.
- As noted above, Lawsky reiterated that VCBs will only need to obtain the NYSDFS’s prior approval for “material changes to their products of business models” but not for any “standard software of app updates[.]”
- As noted above, Lawsky stated that VCBs that are required to file suspicious activity reports with federal regulators will not have to file duplicates with the NYSDFS. However, he did not fully address the issue that VCBs may still be subject to other duplicative requirements, such as those applicable to New York money transmitters.
The Final Rules will become effective on the publication in the New York Register, which has not occurred as of the publication date of this alert.