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New York's Bitlicense Regulations: What do they mean?

Preamble: NY’s new virtual currency regulations are quite complex, this post is meant to serve as a general overview of the licensing requirements and some of the novel questions they pose – NOT meant to serve as a substitute for competent legal advice about your particular situation.

If you’re anywhere near the BitCoin world, you’ve probably heard of or read something about NY State’s new Virtual Currency regulations, more commonly referred to as the BitLicense regs. The regulations, which were released earlier today, are Benjamin Lawsky’s parting contribution to the New York State Department of Financial Services (NYSDFS).

The NYSDFS was created in 2011 under NY’s 2011 Financial Services Law with a stated policy of fostering growth in the NY financial industry while also protecting users of financial products and services, no doubt a tough task. Now the NYSDFS has ventured into the world of virtual currencies in an early attempt to bring order to the seemingly lawless. Depending on how you envision the future of virtual currencies, we may be seeing the very beginning of a whole new world of financial regulation.

The regulations require that any Person (which by definition includes partnerships, corporations, etc.,) engaged in any Virtual Currency Business Activity must obtain a license from the NYSDFS. The application for a license costs $5,000 and will be reviewed by the Superintendent, who at least until the end of June, is Ben Lawsky. It’s unclear who his successor will be at this point, but hopefully they have a solid background in virtual currencies if they’re going to be in charge of dispensing licenses.

You may be asking yourself, “what’s a Virtual Currency Business Activity??” Luckily, the definitional section of the regulations provide some guidance on this point. On its face, the definition covers storing virtual currency on behalf of others (like a bank); currency exchanges; currency transmission services; and a variety of other activities. (For the specific definitions, check Section 200.2 of the regs.)

The next question is whether your specific activity or business requires a license under these regulations. This is a highly specific inquiry that can really only be answered after an in-depth consideration of the activity, as the BitLicense regs are somewhat complex. Adding to the complexity is the fact that this is uncharted territory, there’s no precedent as to what activity amounts to a Virtual Currency Business Activity.

Most interesting are the anti-money laundering provision of the BitLicense regs. It’s no secret that Bitcoin and other virtual currencies have been the chosen method of conducting business on some of the notorious “dark net” markets, including Atlantis, Evolution, and others because of their perceived veil of anonymity. The anti-money laundering provisions attempt to lift that veil by requiring that transactions valued at over $10,000 USD be reported to the NYSDFS Superintendent. The regulations even go so far as to place an affirmative duty on license holders to monitor for suspicious activity that, “might signify money laundering, tax evasion, or other illegal or criminal activity.” It’ll be an interesting day and some interesting litigation when the NYSDFS Superintendent yanks someone’s license for failing to comply with these provisions.

Businesses that are already conducting Virtual Currency Business Activity have 45 days from the effective date of the regulation (so 45 days from June 3, 2015) to submit an application for a license. Interestingly, one remaining question is what are the penalties for noncompliance? This will likely be a hot topic in the not-too-distant future.

This post is just meant to serve as a general overview of a few aspects of the bitlicense requirements and there are a number of provisions beyond the scope of this article. It will be fascinating to see how this area of law develops over the coming months as the boundaries of these regulations start to take shape.

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