New York’s Department of Financial Services passed regulations which apply to virtual currencies, and require licensing of certain entities engaging in certain activities in connection with the state. It is referred to by the State as the “BitLicense”.
The State says that any individual or entity which is involved in the following is required to obtain a BitLicense:
- Virtual currency transmission
- Storing, holding, or maintaining custody or control of virtual currency on behalf of others
- Buying and selling virtual currency as a customer business
- Performing exchange services as a customer business
- Controlling, administering, or issuing a virtual currency.
Some pertinent definitions:
“Exchange Service” means the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form 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:
- 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 Virtual Currency, and (iv) may or may not be redeemable for real-world goods, services, discounts, or purchases.
- 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
- digital units used as part of Prepaid Cards.
“Virtual Currency Business Activity” means the conduct of any one of the following types of activities
involving New York or a New York Resident:
- receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the
transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of Virtual Currency;
- storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
- buying and selling Virtual Currency as a customer business;
- performing Exchange Services as a customer business; or
- controlling, administering, or issuing a Virtual Currency.
The development and dissemination of software in and of itself does not constitute Virtual Currency Business Activity.
Applying for a BitLicense
The BitLicense regulations require that any party that seeks to engage in Virtual Currency Business Activities first apply for and obtain a license (if the entity was operating in New York prior to the regulations it can continue to while it awaits its BitLicense). Entities which are already licensed under the New York Banking Law are exempt, as well as merchants who use Virtual Currency only for the purchase or sale of goods or services, or for investment purposes.
The BitLicense application is available here. The application fee is high at $5,000 (and non-refundable), and it requires in-depth disclosures, about the applicant, its affiliates, individuals involved in the foregoing, operations, legal proceedings, financial statements, and personal information, including background checks and fingerprints, about the principals.
New York was trying to be the trailblazer in virtual currency, by being the first state to have such a license. The entire BitLicense program was put together by Bejamin Lawsky, who left the New York Department of Financial Services soon after the BitLicense regulations went into effect, and he took most of the savvy folks who were working on it with him. The applications stalled and few have been issued, with many more applications pending. Notably, Circle was the first to receive a BitLicense, second was Ripple, and third was Coinbase (my preferred platform) received a BitLicense. Because of the slow process and the strict requirements (including the difficulty and high costs it takes companies to apply for and get the license), companies have stayed away from New York – its intended goal in passing the regulations has had the opposite effect. Blockchain startups see the New York regulations as overly burdensome and not worth the effort.