Seven months after releasing its BitLicense proposal, the State of New York has published substantial revisions. Like the original version, the revised regulations apply more broadly than federal regulations and require many virtual currency businesses that “involve” the State of New York or customers located or operating within New York to obtain a license.

The New York Department of Financial Services has today released its revised “BitLicense” regulations. With a few notable differences, the revised regulations track the original proposal of July 2014. Businesses transacting in virtual currencies should understand how the regime might impact the conduct of their business.

Who Must Register?

The revised regulations, like the original proposed regulations, require licenses for 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
  • Securing of virtual currency
  • Storing, holding, or maintaining custody or control of virtual currency on behalf of others

Though the revised regulations build out a robust definition of virtual currency exchanges, they still cover the receipt of virtual currency for transmission and the transmission of virtual currency.

The registration requirements still do not apply to:

  • Merchants merely accepting virtual currency in exchange for goods and services
  • 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

The revised regulations contain yet another carve-out for so-called “pure” software developers: 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.

What is the Timeline for Licensure?

The revised regulations provide for a grace period of 45 days before submitting an application for a license.

Some businesses, however, may qualify for a newly introduced “conditional license” presumably geared toward growing businesses that cannot meet the requirements for full licensure. During the 2-year term of the conditional license, the licensee will be subject to heightened review of its operations. The scope of this review is not qualified in the proposal, and the Commissioner has retained discretion to extend the 2-year term indefinitely.

What Is the Geographic Reach?

Like the original proposed regulations, the revised regulations still apply to any business “involving New York or a New York Resident” without regard to where the business itself is physically located. “New York Resident” is defined as any person or business entity residing in, located in, or conducting business in New York. Interpreted broadly, the regulations might even apply to any virtual currency business engaged in the above-listed activities that serves customers temporarily working in or temporarily located in the State of New York.

What Qualifies as “Virtual Currency”?

The definition of “Virtual Currency” differs only slightly in the revised proposed regulations. It is still defined to include Bitcoin and other convertible currencies, and there remain exemptions in the definition of “Virtual Currency” for:

  • virtual units that can be redeemed for real-world goods, services, discounts or purchases but cannot be redeemed for currency, such as airlines miles and affinity points
  • currencies used solely within online gaming platforms, such as World of Warcraft gold
  • virtual units used as part of gift cards

There is a new carve-out in the revised regulations for transactions undertaken for non-financial purposes that do not involve the transfer of more than “a nominal amount” of virtual currency. The revised regulations are silent on what qualifies as “a nominal amount,” but this carve-out is likely a direct reference to industry calls for a “Bitcoin 2.0” exemption for businesses making non-currency uses of the Bitcoin protocol that merely deal in so-called “colored coins” or other tokens that stand for something other than money.

Capitalization Requirement

The original proposed regulations could have been read to prohibit licensees from investing in virtual currencies. The revised proposed regulations provide more flexibility and require licensees to hold sufficient capital in “cash,” virtual currency, or high-quality, highly liquid investment-grade assets. The amount of this capital requirement is subject to the discretion of the New York Department of Financial Services, with no stated upper or lower limit.

Collection of Customer Information

The revised proposed regulations still require the collection and retention of certain categories of information for each transaction, but the retention time has been reduced to seven years. For each transaction—no matter the size, the licensee must collect and retain the following information:

  • The amount of the transaction
  • The date and “precise time” of the transaction
  • Any payment instructions
  • The total amount of fees and charges received and paid
  • The account numbers of the parties to the transaction
  • The physical addresses of the parties to the transaction

Critically, the original proposal further required licensees to record the identities of both parties to any transaction. This requirement has been softened in the revised proposal, and only requires that licensees record identifying information for (i) the parties to the transaction that are clients or accountholders of the licensee, and (ii) “to the extent practicable” any other parties to the transaction.

What Kind of Reserve System Is Required?

A full reserve is still required under the revised regulations. The revised proposed regulations still require licensees who store, hold or maintain custody or control of virtual currency on behalf of another person to hold virtual currency of the same type and amount as that which is owed or obligated to such other person. Virtual currency “banking”—accepting deposits and making loans from those deposits—is arguably illegal under New York’s proposed regime. Only virtual currency “vaulting” is permitted.

The Revised Proposed Regulations Require Financial Reporting

The revised proposed regulations still require each licensee to submit quarterly financial statements within 45 days of the close of the licensee’s fiscal quarter.

These reports must include:

  • A balance sheet, income statement, statement of change in ownership equity, statement of comprehensive income, cash flow statement, and statement of net liquid assets
  • A statement demonstrating compliance with any financial requirements required by the regulations
  • Financial projections and strategic business plans
  • A chart of accounts, including a description of each account

The following are no longer required to be submitted under the revised proposed regulations: profit and loss statements, and statements of retained earnings.