The finalized New York Department of Financial Services BitLicense has just been published—and it’s about 50 pages of complete and utter gibberish, so I thought I’d try and break it down somewhat for my readers. If you’d like to give it a read through yourself, you can find it here. Let’s dive in. While reading, feel free to imagine bullet points—it will help you keep the cadence.
To begin with, the BitLicense has unfortunately decided to continue using the term Virtual Currency rather than the widely-preferred and more accurate digital currency or cryptocurrency.
“Exchange Service” means a business moving anything of value to or from crypto, including crypto-to-crypto transactions.
200.2.p defines the scope of the definition of Virtual Currency:
Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. Virtual Currency shall not be construed to include any of the following: (1) digital units that (i) are used solely within online gaming platforms, (ii) have no market or application outside of those gaming platforms, (iii) cannot be converted into, or redeemed for, Fiat Currency or 6 Virtual Currency, and (iv) may or may not be redeemable for real-world goods, services, discounts, or purchases. (2) digital units that can be redeemed for goods, services, discounts, or purchases as part of a customer affinity or rewards program with the issuer and/or other designated merchants or can be redeemed for digital units in another customer affinity or rewards program, but cannot be converted into, or redeemed for, Fiat Currency or Virtual Currency; or (3) digital units used as part of Prepaid Cards;
The definition includes Ripple and Stellar as well as all decentralized cryptocurrencies. The standard is clearly not intended to include Isk or World of Warcraft gold (as noted by them being digital units that are used solely within online gaming platforms), but they do not “have no market or application outside of those gaming platforms,” as there are real world values associated with both—they can be bought and sold for US dollars on a pseudo-black market. I imagine if this ever goes to court, that they will rule for intent; but that’s really not what we’re focused on, so let’s move on.
200.2.q.1 clearly exempts any company that uses the blockchain without working with the monetary utilities of bitcoin—e.g. Proof of Existence is not performing a “Virtual Currency Business Activity,” because the transaction is “…undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of virtual currency.” This same provision would similarly exempt a business whose only purpose was to create colored coins, or anyone else seeking simply to use the blockchain as a secure and globalized information repository.
Very importantly, 200.2.q exempts the creation and dissemination of software that creates decentralized cryptocurrencies from being a Virtual Currency Business Activity. However, the creation of a centralized cryptocurrency, like Ripple or Stellar, WOULD be a Virtual Currency Business Activity, per 200.2.q.5 (“controlling, administering, or issuing a Virtual Currency.”)
Other things that are clearly Virtual Currency Business Activities:
- Running an exchange.
- Running any sort of Virtual Currency investment vehicle.
- ANY service that allows for deposits in Virtual Currency from customers.
- Buying or selling Virtual Currency to or from customers.
- Virtual Currency escrow services.
Merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services or for investment purposes (not on behalf of others, but on a personal basis) are exempt from the licensing requirement. Also exempted are entities chartered under the New York Banking Law who are approved by the superintendent to engage in Virtual Currency Business Activity.
I’m going to skip over describing the mundane details of the application process. Suffice to say that it is about as stringent as one would expect; background checks, lots of paperwork, etc.
Flat $5,000 application fee. Makes things very easy for startups, of course. /s
The superintendent shall declare an amount of capital, upon studying the activities and scope thereof of the licensee, that shall be held in an amount and form that the superintendent determines is sufficient to ensure the financial integrity of the licensee. In other words: reserves need to be held, the superintendent decides them on a case-by-case basis. Licensee’s may hold this capital in cash, Virtual Currency, and various high-grade investments, in proportions deemed acceptable by the superintendent.
Section 200.9.b stipulates no Virtual Currency fractional reserves.
Any “new” products (i.e. those not yet in the marketplace in New York State) must be approved by the NYDFS / Superintendent.
Transaction records (including customer names and addresses—an AML/KYC provision) must be kept for a minimum of 7 years.
Full financial inspection by the NYDFS at least every 2 years. Quarterly financial statements made to the NYDFS. Annual audited financial statements.
Section 200.15 lays out the necessary anti-money-laundering provisions. Nothing particularly out of the ordinary here.
Section 200.16 makes clear the cybersecurity requirements of Licensee’s. In short—Licensee’s must create cybersecurity policies and do penetration testing on themselves. They have to perform security audits, etc. Good, sound policy—and probably one of the main advantages of the NYDFS BitLicense branding on a business: consumer guarantee of cybersecurity.
Sections 200.18 & 200.19 lay out necessary consumer disclosures, in advertising and prior to transacting. You’ll likely see something like the following on most NYDFS BitLicense’d company websites in the future:
[Disclaimer: Virtual Currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protections. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of Virtual Currency. Transactions in Virtual Currency may be irreversible, and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable. Some Virtual Currency transactions shall be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that the customer initiates the transaction. The value of Virtual Currency may be derived from the continued willingness of market participants to exchange Fiat Currency for Virtual Currency, which may result in the potential for permanent and total loss of value of a particular Virtual Currency should the market for that Virtual Currency disappear. There is no assurance that a Person who accepts a Virtual Currency as payment today will continue to do so in the future. The volatility and unpredictability of the price of Virtual Currency relative to Fiat Currency may result in significant loss over a short period of time. The nature of Virtual Currency may lead to an increased risk of fraud or cyber attack. The nature of Virtual Currency means that any technological difficulties experienced by the Licensee may prevent the access or use of a customer’s Virtual Currency. Any bond or trust account maintained by the Licensee for the benefit of its customers may not be sufficient to cover all losses incurred by customers.]
In some ways this disclaimer seems standard, in others it’s rather prejudicial. I’m glad the NYDFS is advertising our favorite part of cryptocurrencies, though: that it’s not backed by the government. Still, the language here is vague enough so as to be… relatively fair. I don’t think it’s necessary for them to make claims about the volatility or the fact that the market for it could disappear—but they’re simply doing what they believe they need to in order to protect their consumers.
Overall? Bullish news. The license is not overly stringent, does not require IMMENSE resources (although it is quite costly, and means that anyone with less than around $2MM in working capital is shut out), and seems to generally understand what it should and should not apply to.
What are your thoughts?