Why it matters

In another virtual currency first, New York’s Department of Financial Services (DFS) granted the first limited-purpose trust charter to a virtual currency company to itBit Trust Co. LLC, a Bitcoin exchange. The company underwent a review by the state regulator of its anti-money laundering, capitalization, consumer protection and cybersecurity standards. The charter to operate as a limited-purpose trust company under New York State banking law permits itBit to begin operations immediately, subject to continued supervision by the DFS, which in many ways is more rigorous than regulation under the proposed BitLicense proposal expected to be finalized later this month. “We have sought to move quickly but carefully to put in place rules of the road to protect consumers and provide greater regulatory certainty for virtual currency entrepreneurs,” DFS Superintendent Benjamin M. Lawsky said in a statement. “The technology behind Bitcoin and other virtual currencies could ultimately hold real promise and it is critical that we set up appropriate rules of the road to help safeguard customer funds. Indeed, we believe that regulation will ultimately be important to the long-term health and development of the virtual currency industry.” The DFS noted that it is continuing to review and accept applications and proposals from other virtual currency companies, with the finalized BitLicense regime to be released soon.

Detailed discussion

In August 2013, the New York Department of Financial Services (DFS) began the process of drafting regulatory guidelines for virtual currencies. After fact findings and public hearings in January 2014, the DFS released its BitLicense regulatory framework for public comment.

The framework includes “consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms.” The initial proposal was tweaked based on public comment (with the addition of a two-year transitional BitLicense geared toward startups) and DFS said it expects to issue final regs by the end of this month.

During this process, the DFS has suggested that a trust charter might be an alternative to a BitLicense. Just ahead of the release, the DFS granted a charter to itBit Trust Co. LLC to operate as a limited-purpose trust company under state banking law. To receive the charter, the New York City-based Bitcoin exchange underwent “a rigorous review of [its] application, including, but not limited to, the company’s anti-money laundering, capitalization, consumer protection, and cyber security standards,” by the regulator.

DFS approved the charter on May 7.

Charter in hand, itBit can begin operations immediately in New York, subject to ongoing supervision by the state regulator. While the company is subject to the heightened regulatory compliance necessary to operate under a trust charter (abiding by the anti-money laundering, capital and other requirements that apply to a more traditional bank’s operations), the DFS noted that the company will also be required to meet the obligations under the final BitLicense regulations.

To read the DFS’ press release about the charter, click here.

To view itBit’s charter, click here.