17 Sep 2015
On 3 June 2015 the New York financial services regulator, the New York State Department of Financial Services (‘NYDFS’), announced the release of the final form of its “BitLicense” which was described as “the first comprehensive framework for regulating digital currency firms”.
The press-release accompanying the announcement noted that the BitLicense “contains key consumer protection, anti-money laundering compliance, and cyber security rules tailored for digital currency companies”. It was apparently the product of a nearly two-year-long inquiry by the NYDFS.
Benjamin Lawsky, the Superintendent of Financial Services at the NYDFS, delivered a speech on the day of the announcement at the “BITS Emerging Payments Forum” in Washington, DC. During his remarks, Mr Lawsky stated:
“We want to promote and support companies that use new, emerging technologies to build better financial companies. We just need to make sure that we put appropriate regulatory guardrails in place.”
In introducing the BitLicense, Mr Lawksy made the following points:
- “First, companies will not need prior approval for standard software or app updates – only for material changes to their products or business models. (A good example of a material change would be if a firm that was licensed as a wallet service decided to begin offering exchange services. We have no interest in micro-managing minor app updates. We’re not Apple.)”
- “Second, we have no intention of being a regulator of software developers – only financial intermediaries. For example, students or other innovators who are simply developing software and are not holding onto customer funds are not required to apply for a BitLicense. There is an important reason for making this distinction when a company becomes a financial intermediary: There is a basic bargain that when a financial company is entrusted with safeguarding customer funds and receives a license from the state to do so – it accepts the need for heightened regulatory scrutiny to help ensure that a consumer’s money does not just disappear into a black hole.”
- “Third, we are not going to require a duplicative set of application submissions for firms that want both a BitLicense and a money transmitter license. Firms will be able to cross-satisfy many of those license requirements. Companies will be able to work with us to have a “one-stop” application submission that covers all the bases they need.”
- “Fourth, companies that already file suspicious activity reports (also called “SARs”) with federal regulators such as FinCEN do not have to file a duplicate set of those same SARs with our agency. Our goal is to avoid duplication where possible. And we generally already have access to that information when we need it through information sharing arrangements with federal regulators.”
- “Fifth, companies also would not need prior approval from NYDFS for every new round of venture capital funding. Generally, a company would only need prior approval if the investor wants to direct the management and policies of the firm (which is known as a “control person” in regulatory jargon). In other words, that provision is not targeted at truly “passive investors.” The notion of approving a “control person” is pretty standard in the regulation of financial companies and is generally intended to help stop known fraudsters from having direct access to customer funds. Large new investors (i.e. those with a 10 percent or more stake) would simply need to document and demonstrate that they are not going to have such a role. Additionally, under the regulation, simply because someone sits on a company’s board does not necessarily mean they are considered a control person.”
The full text of Mr Lawsky’s speech can be found here.
A copy of the final version of the BitLicense can be found here.
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