Love them or hate them, real regulations are now upon us. Federal agencies like the IRS and FinCEN have provided guidance on how they believe the Bank Secrecy Act applies to bitcoin companies, and some states like Texas and Kansas even joined in the action, publishing their own guidance on how bitcoin businesses ought to be regulated under state law.
On 17th July, the New York Department of Financial Services (NYDFS) published its long-awaited proposal for a “BitLicense”. The 40-page document lays out a comprehensive framework for how bitcoin businesses ought to be regulated in New York. Keep in mind that until a final version is developed, this document is merely a proposal, and does not yet carry the force of law.
Before that can happen, the NYDFS will “officially” publish the article on 23rd July, at which point members of the public will have 45 days to send official commentary to the NYDFS to be considered in its final rule. Once that happens, the US will have its first-ever digital currency-specific law on the books. This is a Very Big Deal.
In this article, I will discuss the most important aspects of the proposed BitLicense as it applies to bitcoin businesses. Let’s start with the 'who'.
Who Requires a License?
In short: pretty much everyone. Businesses that:
- Convert digital currency to government currency or another digital currency
- Receive digital currency for transmission
- Transmit digital currency
- Secure digital currency
- Store, hold or take control of digital currency.
...all need a BitLicense.
This is true for any business that “involves” New York or any person:
- Residing in New York,
- Temporarily located in New York, or
- Working in New York.
...regardless of where the business is physically located, whether in New York, Texas, Guatemala or nowhere at all, in the case of distributed hacker collectives.
As you might have guessed, this probably means that direct purchasers and sellers of digital currency, basic hosted wallet providers, multi-signature wallet providers, merchant payment processors, custodial exchanges and even local wallet software developers probably need a license.
The proposed language is just that broad. In fact, the only exceptions are merchants accepting digital currency in exchange for goods and services, and banks who have sought “approval” from NYDFS.
What is “virtual currency”?
“Virtual currency” includes bitcoin and other convertible currencies, but specifically excludes customer affinity programs like airline miles. As many of us fretted, there is no carve-out for coins used to track digital assets; even if a business uses a mere Satoshi to tag and trade the asset.
How big of a bond is required?
Yes, the BitLicense makes bonding mandatory for all license holders. There is no upper or lower limit to the bond required. NYDFS has broad authority to fashion whatever requirements it deems reasonable.
What customer information must be collected?
A BitLicense holder must collect, for each transaction, the:
- Amount of any fees charged
- Any payment instructions
- Name of all parties to the transaction, and
- Physical address of all parties to the transaction
- Time of the transaction.
...and retain that information for 10 years. There is no minimum dollar threshold for these requirements, and no carve-out for tipping bots, blind exchanges or any other circumstance in which this information would be unavailable to the business.
It goes without saying that some would be problematic – particularly the last two.
What kind of reserve system is required?
Full reserve. A BitLicense holder may not lend or spend any crypto that it holds on its customers’ behalf. As such, the many bitcoin “banks” that accept “deposits” and offer “loans” will be illegal in New York under the BitLicense regime.
Thus, bitcoin banking is prohibited; only bitcoin “vaulting” is allowed.
In What Assets can Earnings be Invested?
A BitLicense holder can only invest its earnings in: government securities, money market funds and insured Certificates of Deposit. A business that transmits bitcoins may not invest in the very currency it transmits.
What financial reporting is required?
A BitLicense holder must report its financial statements to the NYDFS quarterly, and audited financial statements yearly.
What AML/KYC is required: The BitLicense’s most novel characteristic is that it creates the first state-level anti-money laundering reporting program. FinCEN – the federal regulator – already requires reporting cash and coin transactions over $10,000. Now, New York requires that BitLicense holders report to the NYDFS any crypto transaction over $10,000.
BitLicense holders must also file state suspicious activity reports (SARs) with the NYDFS, not just the ones required to file with FinCEN.
What you can do
You may be shocked by the breadth of these proposed rules, but this is actually fairly common. It is rare that a regulator proposes rules and then, in response, the industry to be regulated cries out for more rules. Regulators anticipate the industry’s demand for trimming and paring, so their initial effort tends to be over-inclusive.
If you disagree with any of these proposals, there will be a 45-day comment period beginning on 23rd July, and it is critical that you make your voices heard within this period. I will certainly be drafting comments on behalf of my clients. These comments can demand narrower tailoring, greater clarity, and very often, exemptions for your business.
Based on my experience, New York is genuinely interested in getting these regulations right. The NYDFS could have quietly published guidance without engaging in dialogue with the community.
Instead, it has welcomed discussion and dialogue with the public. I, for one, will be taking advantage of it.
If you’re looking for assistance or just want to talk crypto law, please don’t hesitate to reach out.
Marco Santori is a business attorney in New York City with Pillsbury Winthrop Shaw Pittman LLP. He is a lawyer, but he is not your lawyer, and this is not legal advice. You can reach Marco at email@example.com.
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