New York’s BitLicense – License to Engage in Virtual Currency Business Activity

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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:

  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 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.

“Virtual Currency Business Activity” means the conduct of any one of the following types of activities
involving New York or a New York Resident:

  1. 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;
  2. storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
  3. buying and selling Virtual Currency as a customer business;
  4. performing Exchange Services as a customer business; or
  5. 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.

Ricardian Contracts

RC-bow-tieRicardian Contracts are really a stepping stone to Smart Contracts.  They are a way to link a contract to another system, typically an accounting system.  Ian Grigg came up with the Ricardian Contracts some time ago.  He first published about it in Financial Cryptography in 7 Layers in 1998.  Ricardian Contracts were initially used for Ricardo (hence their name), a bond platform.

They are a melding of a traditional contract with a contract that can be read and executed by machines. A Ricardian Contract can be defined as a single document that:

  1. is a contract offered by an issuer of some item of value (think of a bond, coin, token, currency, etc.) to a holder of such item;
  2. for a valuable right held by the holder, to be managed by the issuer;
  3. can be read in plain language by humans (so like a normal contract);
  4. can be read by programs (and is parsable like a database);
  5. digitally signed;
  6. carries the keys and server information; and
  7. is allied with a unique and secure identifier.

Generally a Ricardian Contract is one that is used to define a value for issuance and holding of something over the Internet.  It sets forth the applicable terms and sets it in cryptographic stone, so everyone knows who signed it, and when and exactly what it said at that time. It automates the offer and acceptance of the agreement and ensures they are enforceable.

It removes a good deal of the typical contract dispute issues, but not all of them.  Items such as what was the offer and whether it was accepted, who the parties are, what the terms of the contract are are greatly resolved. When you use natural language however, there are always items that may be ambiguous, or changes in the nature of the parties, the industry or the economy which can greatly change what parties expected in a contract (that’s assuming they both had the same expectations for all provisions in the contract – another thing that is usually not the case).

The Ricardian Contracts are a bit unique, and likely cannot be used for anything, as drafting these agreements which must include markup language to enable them to be read by computers is a bit different.  They are also pretty versatile and can be strung together (usually transactions are more complicated than one agreement can cover).

Digital Signatures – Basics of Hashes and Encryption

Asymmetric_encryption_(colored)When dealing with online contracting, blockchain, clickwrap agreements, smart contracts, or just generally these days (and certainly in the future), you will come across the terms “hash” and “encryption.” Especially when discussing digital signatures. We’ll try to distill these a bit for you.  These are all regularly used in the transmittal of electronic information and verification of the information, the sender and/or receiver. Read more

A Look at Smart Contracts

smart contract logoNick Szabo is credited as being the visionary, if not the godfather, of smart contracts.  He sees smart contracts as agreements that “involve objectively verifiable performances, or performances that can be automated such as cash flows.”  His blog “unenumerated” is fantastic (deep posts on a variety of topics – each one is an ocean of thought in and of itself) and his appearance on Tim Ferriss’ podcast is probably the best crash course on all things blockchain and crypto-currency related.

Nick’s proposed definition of a “smart contract” is (1) a set of promises (2) specified in digital format (3) which includes various protocols (4) within which the parties perform. Read more

Federal Securities Laws applied to ICO’s – Initial Coin Offerings

BITCOINNew “coins” or tokens and their platforms are all the rage.  Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Zcash, Dash, Ripple, Monero, the list goes on and on and new ones keep popping up.  The new coins are either entirely their own platform or they are derivations, i.e. spin-offs of one of the existing virtual currency platforms. Read more

Introduction to Blockchain and Smart Contracts

BLOCKCHAINTechnology is permeating all aspects of society.  Legal constructs are the latest to be infiltrated. We will discuss some of them in upcoming posts, including blockchain, smart contracts and related concepts.  First we need the building blocks to understand how the blockchain works.

Bblockchain is a form of a decentralized ledger technology.   It is decentralized, or distributed, because it operates on a peer to peer basis.  There is no centralized database of the chain or any blocks. Instead, for each blockchain there are various computers or servers which operate as “nodes” for the applicable chain.  Each node contains the entire chain, and nodes review any proposed block and it must be verified prior to it being added to the chain. Nodes can be anonymous. Read more