The New York State Department of Financial Services (“NYSDFS”) requires a License to Engage in Virtual Currency Business Activity, colloquially known as the “BitLicense”, to operate certain Virtual Currency-related businesses. The definition of “Virtual Currency” is broad and would include most, if not all, cryptocurrencies and tokens. Companies that want to engage in such business must submit an application for a BitLicense and include a $5,000 non-refundable fee. Once an application has been submitted and deemed complete by the NYSDFS, it has 90 days to approve or deny the application. However, the NYDFS has discretion to ask for additional information, which may cause the application process to extend for longer periods of time. In addition to the application fee, applying for a BitLicense has been reported to require thousands to millions in legal fees necessary to prepare the application and response to supplemental NYSDFS requests.

The NYSDFS has broad discretion to approve or deny any application and may also grant a 2-year conditional license with more tailored requirements and examinations to startups and new businesses that do not satisfy all the regulatory requirements upon licensing.

The NYSDFS also has broad discretion to revoke or suspend any BitLicense that it grants. Furthermore, any material change of activities or change in control after obtaining a BitLicense will require additional approval from the NYSDFS.

Although the BitLicense creates barriers to entry and will impose significant application costs, compliance costs and capital requirements once the BitLicense is obtained, BitLicense-regulated companies are likely to find it easier to establish banking relationships and receive other benefits from being legitimized by the state of New York.

The regulations define Virtual Currency Business Activity as any one of the following types of activities:

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 BitLicense explicitly excludes the development and dissemination of software in and of itself from the definition of Virtual Currency Business Activity.

The BitLicense also exempts the following persons from requiring a BitLicense: persons that are chartered under the New York Banking Law and are approved by the superintendent to engage in Virtual Currency Business Activity; andmerchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services or for investment purposes.

The regulations are limited to activities involving New York or a New York Resident. New York Residents include individuals that reside, are located, have a place of business, or are conducting business in the State of New York count as New York Residents under these regulations.

In October 2015, an Article 78 proceeding was filed in the Supreme Court of the State of New York challenging the authority of the NYSDFS to define Virtual Currency and arguing that Virtual Currencies, like bitcoin, should instead be defined as commodities as defined by the U.S. Commodities Futures Trading Commission. Justice St. George heard the case on October 10, 2017 and will render her decision on January 11, 2018.

As of November 28, 2017, the NYSDFS has approved six firms for Virtual Currency licenses or charters, denied those applications that did not meet its standards and has many more applications in its backlog. The NYSDFS has granted BitLicenses to bitFlyer USA, Coinbase Inc., XRP II and Circle Internet Financial, and limited purpose trust charters under the New York Banking Law to Gemini Trust Company and itBit Trust Company. The primary difference between those with licenses and those with charters is the latter are prohibited from receiving deposits and making loans and are subject to different capitalization and FDIC insurance requirements.

Under the BitLicense, each Licensee engaged in Virtual Currency Business Activity shall not, among other things, advertise its products, services, or activities in New York or to New York Residents without including the name of the licensee and the legend that such Licensee is “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.” Licensees are subject to many other strict regulations further outlined by the NYSDFS.

More information about the BitLicense Regulatory Framework can be found on the New York State Department of Financial Services website. Application instructions for a License to Engage in Virtual Currency Activity can be found here.

Sources

• Department of Financial Services Press Release Nov 28, 2017
• DFS Regulations of the Superintendent of Financial Services, Virtual Currencies
• New York State Department of Financial Services
• DFS Virtual Currency Licensing
• Application and Procedure for the Organization of a Trust Company for the Limited Purpose of Exercising Fiduciary Powers