Contortions for Compliance: Life Under New York’s BitLicense

In June 2015, in a race to be a first mover in the space, the New York Department of Financial Services (DFS) enacted the BitLicense regulatory framework, a licensing regime that covers substantially all “virtual currency business activity” to the extent it touches New York or its residents.

Namely, any business engaging in virtual currency business activity involving New York State or persons that reside, are located, have a place of business, or are conducting business in New York must apply for the BitLicense, with no grace periods or de minimis exceptions.

To the extent a business makes it through the licensing process and receives a BitLicense, as a whopping four businesses have to date (in addition to two companies who undertook the application process and received trust charters), the BitLicense imposes significant operational burdens, requiring robust compliance policies and processes with respect to anti-fraud, anti-money-laundering, cybersecurity, privacy and information security, among other requirements.

As such, the BitLicense has prompted flight from New York by larger players such as Bitfinex and Shapeshift and has had a chilling effect on others acting in an abundance of caution.

For those of us who remain in New York because we happen to live here, there is a widespread sense of confusion as to the scope of activities which fall under the purview of the regulations given: their vague wording, requirements that seem positioned toward financial institutions and the lack of formal guidance in the wake of the enactment of the regulations.

In all, uncertainty as to the reach of the licensing requirement has left many companies with three options: avoid doing business in New York entirely, attempt to structure a business around the law, or engage in potential or outright non-compliance with the law.

Based on the fact that DFS has received so few applicants to date, and has only five rejected applications on file, one could infer that many are electing non-compliance.

Case studies

Drone Energy and Travel by Token are two Empire State-based clients of mine running very different businesses, but with the common concern of operating in line with best practices.

These businesses, in addition to complying with applicable foreign, federal and state regulatory regimes (existing and as they develop), are expending a significant amount of time and energy to structure around the BitLicense.

For example, Drone Energy has a patented solution and an innovative business model designed around mining cryptocurrency. While it would be helpful for this exemption to have been explicit in the text of the BitLicense regulations, DFS has indicated in public comments that mining activities are categorically outside the scope of the law.

However, the business will at some point look to exit to U.S. dollars without tripping into the definition of “virtual currency business activities.” This has been limiting as we have discussed various potential business models but something our client is able and willing to work around.

The other client, Travel by Token (TBT), is an early-stage start-up that uses an AirBnB/timeshare hybrid model for vacation stays, providing token holders access to vacation properties purchased and held by the company for the exclusive use of token holders at below-market prices.

As the token is in the development stage, we are in the clear to develop the underlying software in New York State under the BitLicense regulations. But the company will need to leave the state before commencing a token offering and hazarding being deemed to be “controlling, administering, [and/]or issuing a Virtual Currency” under Section 200.2(q)(5)of the BitLicense regulations…

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