The New York Department of Financial Services rejected Seattle-based crypto exchange Bittrex’s application for a BitLicense Wednesday.
“Throughout Bittrex’s application process, the Department worked steadily with Bittrex to address continued deficiencies and to assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector,” wrote Daniel Sangeap, deputy superintendent and deputy counsel at NYDFS.
The regulator “issued several deficiency letters” since the exchange first submitted an application, addressing Bittrex’s anti-money laundering procedures, Office of Foreign Assets Control compliance and its coin listing process.
However, a number of concerns remained unaddressed, Sangeap wrote.
The letter goes into detail, saying that “Bittrex’s current policies and procedures are either non-existent or inadequate,” questioning the “level of authority and effectiveness of the Compliance Officer,” saying it may have an inadequate training program for employees and raising a number of other issues.
Bittrex’s chief compliance officer is John Roth, a former Department of Homeland Security Inspector General who’s also spent time at the Department of Justice (as a special counsel for international money laundering policy) and was a member of the National Commission on Terrorist Attacks Upon the U.S. (more commonly known as the 9-11 Commission).
Bittrex CEO Bill Shihara told CoinDesk that Roth developed the exchange’s compliance program.
In a statement, Bittrex disputed the regulator’s findings and said it has already begun addressing many of these concerns. (Read the full statement below).
Sangeap’s letter pointed to Bittrex’s OFAC screening process, saying it may not be able to identify misspelled names, that its monitoring process is manual rather than automated and that the exchange’s “active customer file” indicated that Bittrex processed “several transactions involving customers from OFAC sanctioned countries.”
Compliance chief Roth told CoinDesk that while some residents of Iran were able to trade on the exchange in 2017 due to “an unintentional gap” in its compliance procedures, these accounts were suspended in October of that year.
“We disabled the accounts … and immediately reported, then reported it in more detail in January 2018,” he said. “No one from an OFAC sanctioned country has traded since October 2017.”
Customer due diligence was another highlighted issue.
According to NYDFS, some of the accounts at Bittrex are identified by “clearly false names” such as “Elvis Presley,” “Donald Duck,” “Give me my money” and “abc-abc,” as well as “obscene terms and phrases” (no examples were provided).
In its statement, Bittrex said NYDFS’ sample came from 2017, but that the exchange has implemented more stringent customer identification processes since, going so far as to disable any accounts which do not meet its “enhanced verification standard.”
Roth elaborated, saying that “none of the accounts [with bogus names] were active accounts,” adding:
“They couldn’t trade, they couldn’t withdraw money, they couldn’t engage in any economic activity because they weren’t enhanced verified … That doesn’t get mentioned in the letter anywhere, that those folks never traded.”
One section of the letter, titled “lack of adequate due diligence in launching tokens or products,” states that examiners from NYDFS were “unable to assess compliance” with the exchange’s own token review policy when looking at a random sample of 15 cryptocurrencies.
“This was due to the fact that partial files were provided to the examiners, and moreover, actual compliance in certain files could not be established,” Sangeap said. Some tokens were listed despite some applicants refusing to complete the necessary paperwork – “and in one case … there was no application on file at all.”
The exchange offers more than 200 cryptocurrencies to its customers, including through an OTC trading desk launched earlier this year.
In its statement Wednesday, Bittrex said NYDFS presented a supervisory agreement to the exchange which would have allowed it to offer only 10 cryptocurrencies.
According to Roth, this list included bitcoin, bitcoin cash, bitcoin cash SV, litecoin, ether, ethereum classic, Stellar lumens, cardano, XRP and dogecoin.
“This would have prohibited Bittrex from listing coins that are offered to New York residents by other BitLicensees,” the statement said. “NYDFS reserved the right to order us to withdraw coins at any time. Additionally, DFS would be able to prohibit offering tokens to NY residents, even if other NY BitLicense holders were able to offer the tokens.”
Shihara elaborated, saying that NYDFS “also wanted the right to control what tokens we trade with any of our U.S. customers,” meaning the 49 non-NY states and the District of Columbia.
These terms were unacceptable to Bittrex, the company said, and it refused to sign the agreement.
Bittrex has 14 days to confirm to NYDFS that the exchange has ceased conducting business in New York and create a plan to wind down any existing business with state residents, according to Sangeap’s letter.
The exchange will have 60 days in total to transfer any assets it custodies for New York residents and transfer any positions or transactions.
An NYDFS spokesperson told CoinDesk that there is no appeals process for the rejection, though Bittrex can reapply for a BitLicense.
Shihara told CoinDesk that the exchange was not making any profits in New York due to its high compliance costs, but the exchange operated in the state anyway “because we really felt strongly that the taxes that we paid for operating our business in the U.S. are worth it.”
“[It’s] difficult to say if we’ll reapply for the BitLicense,” he added, but if NYDFS updates its regulatory framework to match how quickly the technology changes, he hopes to bring Bittrex back to the state.
In the meantime, Roth noted, Bittrex will develop internal controls to prevent any NY residents from using the exchange.
“We don’t know what those are yet but we’ll have to do something,” he said.
Read Bittrex’s full statement:
UPDATE (April 10, 21:25 UTC): This article has been updated with additional information, a statement from Bittrex and comments from two Bittrex execs.
Image of Kiran Raj, Chief Strategy Officer at Bittrex, via CoinDesk archives