In the aftermath of the BitLicense application deadline this week, a number of prominent bitcoin companies have ceased operations in New York.
Although the reasons behind startups’ reluctance to apply for a license are varied, cost has played a significant part.
Of those who did apply – and fronted the $5,000 non-refundable application fee, most have alluded to an arduous process and high costs.
But just how much did their expenditure amount to?
CoinDesk has spoken to various companies in the space to breakdown the cost of the BitLicense application process both in monetary and non-monetary terms.
‘Expensive and difficult’
“Applying for the BitLicense is an expensive and difficult process, as many have noted. Some other firms have chosen to abandon the New York market entirely, rather than comply. We do not fault them for doing so,” said George Frost, executive VP and chief legal officer at Bitstamp.
Frost estimated the application cost Bitstamp roughly $100,000, including time allocation, legal and compliance fees.
“Our UK parent company has contributed a lot of time, expertise and money in the BitLicense effort, but much of this investment will benefit the entire Bitstamp group,” said Frost.
Bitstamp, the world’s third largest exchange in terms of BTC/USD trading volume, proceeded with the application for various reasons. Firstly, because, if approved, it would allow the company to offer a fully compliant trading platform for New York residents. Secondly, Frost said he expects to be able to offer a broader range of financial tools to customers – including Automatic Clearing House (ACH) deposits, domestic wire transfers and debit card transactions.
The application efforts, he added, included establishing a new operating subsidiary in the US, developing a business plan, establishing appropriate financial controls, hiring a US compliance officer – Lisa Dawson, former senior VP and compliance officer at Citi Group – and spending months “analysing and agonising over” the BitLicence’s requirements and providing industry comments to the New York State Department of Financial Services (NYDFS).
“We drafted a detailed risk assessment of Bitstamp USA and the Bitstamp group overall, and more than 30 policies, training manuals and internal procedures guides that we believe are compliant with the New York regulatory regime … These included hundreds and hundreds of pages of plans covering every aspect of our intended operations. All of this internal scrutiny and drafting has made us a lot smarter company, albeit one with corporate tunnel syndrome.”
Although a costly and cumbersome process, Frost said he believed greater regulation for the ecosystem is inevitable.
“Like others, we regret the loss of economic freedom occasioned by the onset of regulation. [But] by participating, we are better positioned to help create an industry – and regulatory environment – that achieves widespread adoption and preserves as much individual autonomy as possible.”
Manning the effort
Also unlike, Bitstamp, the New York-based company is a relative newcomer to the bitcoin scene, but by no means less eager to comply with the New York State’s regulatory framework.
“Given that we are a new startup company we have been extremely diligent with our expenditures. In terms of hard costs we’ve spent approximately $50,000 … by far the biggest costs have been the man-hours to date,” said Patrick Manasse, chief compliance officer.
Manasse estimates that the team spent approximately 1,200 hours compiling the documentation for the BitLicense application, but noted that an additional 2,000 man hours had already been invested in developing MonetaGo’s global compliance program.
Efforts were spent on providing compliance training to all of the officers and directors, working with lawyers and consultants in various regions and communicating with banks and other relevant authorities.
“Add to this programmers and developers putting in place systems and service providers, and you start to get a sense of the size and scope of the undertaking,” he said, noting: “If all the hours were added up, the total would easily be upwards of a quarter million US dollars.”
So, while putting the actual application together took MonetaGo’s team members the better part of the past 45 days – the grace period following the publication of the BitLicense in New York’s Register – the process, Manasse said, really began at the company’s inception.
Manasse said the ongoing costs, should MonetaGo’s submission be approved, are hard to estimate accurately. He believes they will depend on the approach taken by the NYDFS:
“The Department could easily make it completely unfeasible for startups to continue operating in the space, but that is not the sense that we have gotten from our interactions with them thus far. It is our hope that a measured approach will be taken.”
However, Manasse suggested that being a relatively new company could potentially work to MonetaGo’s an advantage in terms of cost.
“A compliant company such as ours which is newly launched and has a limited operating history probably doesn’t require the same amount of scrutiny as other players which have been around since the early days of bitcoin.”
A spokesperson for Coinbase confirmed that the San Francisco-based company had submitted its BitLicense application.
Although they declined to divulge specific details, the spokesperson noted the process was a “significant undertaking”, but one the company had no problem carrying out because it had sufficient internal resources.
Meanwhile, Jaron Lukasiewicz, CEO and founder of Coinsetter, noted his company had spent approximately $50,000 on BitLicense-related expenses over the past two years. “I think its bigger cost, though, has been in the uncertainty it created for investors looking to invest in our space – hopefully that will begin to reverse itself now.”
Bittrex, a cryptocurrency exchange, also applied for the license. Bittrex founder Bill Shihara told CoinDesk he estimated the process to have cost his company between $18,000 and $20,000, whilst employees spent approximately 80 hours compiling and reviewing the paperwork.
“I am sure larger companies incurred much higher costs than we did … we were lucky that we had a lot of the paperwork already available.”
Although he noted the BitLicense was a significant undertaking for companies, he said customers should welcome it:
“Ultimately, I think customers should be happy about the BitLicense. While it is burdensome for us, the core of the paperwork involved consumer protection. The BitLicense requires background checks on the principals who handle your funds; detailed information of how the funds are stored and credited to our users; proof that the company is profitable; as well as security and incident response plans.”
“If the BitLicense reviewers do their jobs right, passing the application process means the company holding your funds is a legitimate business that you should want to work with,” he concluded.
Marco Santori, counsel at Pillsbury Winthrop Shaw Pittman LLP, described the application process as “consultative and iterative”.
“The NYDFS will not simply take your $5,000 and deny you without ceremony. They will certainly accept the application fee, but if the staff takes issues with some of the applicant’s responses, or find deficiencies, they will address them with the applicant. Their objective is to bring businesses into the BitLicense regime, not to block them out of it,” he added.
The NYDFS, Santori said, has 90 days to grant or deny a BitLicense application, but the Superintendent may extend that period for a reasonable amount of time sufficient to enable compliance with the BitLicense regime. “It is not clear whether that means compliance by NYDFS or the applicant. I expect that – certainly during the early stages – applications will take longer than 90 days to be approved.”
If an application does not satisfy all the criteria, the authorities may decide to grant a conditional license, which will entail periodic review. “This is an amorphous thing. The are no criteria set forth in the regulation for what kind of company might qualify for a conditional license or what conditions might be attached for that license.”
“Unilateral discretion in that regard,” Santori added, “is left to the Superintendent. Those seeking a conditional license should submit their application along with a cover letter explaining why they believe one should be granted, and what conditions they believe should attach. It will likely take a bit of advocacy.”
Further Reading: Buy Our Bitlicense Research Report
New York image via Shutterstock.
Disclosure Read More
The leader in blockchain news, 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.