Five years after throwing up a wall around its market few crypto startups could scale – a wall known as the BitLicense – New York is handing down a ladder.
The agency also finalized the guidance on coin listings for licensed entities it had proposed last year, and published documentation to aid companies seeking a BitLicense. Further, NYDFS said it had signed a Memorandum of Understanding with the State University of New York (SUNY) allowing fledgling prospective licensees to experiment with use cases under the school’s supervision.
All this is meant to make it easier for companies to engage with the department and secure licenses. Wednesday marks exactly half a decade after New York implemented its landmark regulatory framework for the cryptocurrency space, the most rigorous in the U.S.
The moves come in response to feedback from the crypto industry and other parties, said NYDFS Superintendent Linda Lacewell, who was formally confirmed to her office a year ago.
“I said at the end of last year, we're going to take a fresh look at that license and see how it's working and not working and how we can improve,” she said. “One of the things that we heard loud and clear is that we should find opportunities to open up the fields, that our license is good and solid, but we need to make it more available.”
Jeremy Allaire, CEO of the first BitLicense recipient Circle, told CoinDesk that while the initial 2013 draft seemed too stringent, the final license set a reasonable position, even if securing one still required companies to meet a high bar.
“But I think a really critical thing that it did was establish that firms, that these digital currency firms were different than just money transmission companies,” Allaire said. “It was one of the very first and [is] still one of the only state regulatory regimes that really specifically looked at what is different about digital assets and crypto assets.”
Many of Allaire’s competitors that fled or avoided the state have been far less diplomatic in their assessments, however.
The first phase of NYDFS’ effort to make it easier for companies to connect with the regulator’s staff and get advice about launching services in New York comes through its partnership with SUNY.
Dubbed SUNY BLOCK, the partnership means that an individual can visit any one of the university’s 64 campuses, scattered throughout the state, and work with the institution to build out some innovative idea, Lacewell said. Companies that partner with SUNY may even become eligible for a conditional license, pending a review by NYDFS.
“Much of the activity tends to be centered in New York City when it comes to New York and cryptocurrency businesses and initiatives,” Lacewell said. “Why not open that up to the whole state?”
More than 90% of all New York residents and businesses are located within 30 miles of at least one of the campuses, she said.
Alternatively, entities may be able to partner with an already-licensed exchange or startup and try to secure a conditional license that way.
“When we looked at our virtual currency license, there is a provision right in there, which we have never used … that allows me as the Superintendent to grant an application for a conditional license,” Lacewell said. “And that license lasts by its terms for two years unless we convert it to a permanent license or unless for some reason it's not working out.”
The partner entity – the one that already holds a virtual currency license – would have responsibility for ensuring anti-money-laundering provisions are followed or that transaction monitoring is in place, as two examples, she said.
This proposal is targeted at small startups in particular, ones with ideas on how to solve some major issue but which might not have the resources to secure a full license just yet.
NYDFS is putting this proposal out for public comment, with responses due by August 10.
Another sign that NYDFS is looking to lighten the regulatory burden: It has finalized proposed guidance released in December that will let licensed entities self-certify cryptocurrencies they don’t already offer – so long as three companies have already self-certified the cryptocurrency in accordance with the regulator's rules. Once that does happen, the crypto will be placed on a "green list," which would enable any other exchange or platform to offer services with that crypto.
“We want to regulate … as much as we have to and not a drop more because businesses need to do business and they need to operate,” Lacewell told CoinDesk.
Businesses will be responsible for detailing the risks and the business model for listing a particular coin as part of this self-certification process.
The idea is to improve “speed to market,” she said.
“We have an approved analysis that you employ and you work probably with your lawyers, and you come up with an analysis as to how you can self-certify that this coin is responsible to use in your business,” she said. “You send us your self-certification and you’re good to go.”
Lacewell added that NYDFS won’t try to prevent new coins from being listed, but it also won’t proactively find new tokens to approve.
“Does the industry think there should be more coins? Let the industry develop that, come to us, we’ll look at it three times [and then] the rest of the industry can also use it,” she said.
This way, NYDFS can dedicate more resources to novel projects or other tasks, rather than re-approving a coin.
Not that NYDFS hasn’t already been streamlining its approval process for the BitLicense.
The agency approved a mere handful, just over half a dozen, licenses in its first two years of operation.
But the pace of approvals began picking up in 2018 and 2019, and fully 25 entities from the industry have either trust charters or licenses as of press time.
Lacewell said there was an immense backlog when she arrived at the agency last year, but she cleared at least a third of recent approvals in her first year.
The acceleration is due in part to staffers at NYDFS being more comfortable with the process of approving an application, as well as the increased resources put into the cryptocurrency side.
Lacewell pointed to the Research and Innovation Division launched last summer as one example.
“We also pulled some of our best examiners who work on the application to work through [the division], and we have a committee that reviews the application with a number of top people from the agency,” she said. “Our banking head is very involved in looking at the business models, so it is definitely resource-intensive but I believe that it’s worth it.”
Lacewell said multiple times that she was hoping to spur more innovation in New York from crypto companies, but emphasized she wasn’t looking simply for token projects hoping to raise funds.
“When you think about the need for a contactless payment system, cross-border payments, the possibilities are really endless and I would only say that I hope the innovators focus in on what the needs of the people are rather than some ... fanciful idea,” she said. “Come up with something that is workable, that can be used by small business, that can help households, it can help immigrants, that can further the need to preserve public health.”
The regulator pointed to the simultaneous crises affecting New York and the rest of the country – the ongoing COVID-19 pandemic, the economic downturn caused by the lockdowns and the civil unrest and street protests.
“So many in this nation feel that they are not a part of daily society, and they're sick of it,” she said. “So, pick your crisis and do something about it, and we're going to help you to get there.”
The regulator wants to help “innovators and entrepreneurs,” she said, and to that end remains “open for discussion” with companies looking to launch services in the state.
Hunter Merghart, the head of U.S. operations for crypto exchange Bitstamp, told CoinDesk via email that compared to other states, New York has more dialogue with the exchange.
The application process for a license was “thorough,” he said, but this makes sense given New York’s history in regulation around more traditional financial services.
“We think regulation can be a way to help give customers more comfort and transparency into how they are being serviced, and by who,” he said.
And, perhaps counter to some regulatory agencies that don’t consider cryptocurrencies to be significant or something to be concerned with, Lacewell said she believes cryptocurrencies are “here to stay.”
“They can operate responsibly,” she said. “The industry has become much more sophisticated. When you see the Fidelitys of the world and others coming in, you see central bankers talking about digital currencies, I don’t know where it’s going to go … [but] I think it is more than time to sit up and take notice and see where this industry is going.”
UPDATE (June 24, 2020, 18:50 UTC): This article has been updated to clarify the coin listing policy.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.