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NYDFS Grants First Charter to New York-Based Virtual Currency Company
On May 7, NYDFS granted its first charter to a New York-based commercial Bitcoin exchange. In February, the company requested a charter under the NYDFS’s application process, which included a thorough review of the company’s anti-money laundering, capitalization, consumer protection, and cyber security standards. Under the New York Banking Law, the company can start its operations immediately, but is subject to continual supervision by the NYDFS. Indeed, Superintendent Lawsky noted, “regulation will ultimately be important to the long-term health and development of the virtual currency industry.”
California Set to Consider Virtual Currency Guidelines
On February 27, California Assembly Member Matt Dababneh introduced AB 1326, which would provide guidelines for individuals or businesses who conduct business using virtual currency. The legislation would prohibit a person from engaging in any virtual currency business activity unless licensed by the Commissioner of Business Oversight or unless otherwise exempt. The application process would require applicants to provide detailed information and pay a $5,000 application fee to the Commissioner of Business Oversight. Licensees would be subject to capital requirements, with a certain amount of capital held in high-quality, investment-grade investments, and would be required to maintain consumer protections.
New York DFS Revises BitLicense Framework for Virtual Currency Regulation
On February 4, New York DFS proposed revisions to its anticipated regulation of virtual currency companies. The DFS originally released a proposal on July 17, 2014, and on December 18, Superintendent Lawsky delivered remarks stating the DFS was revising its proposal to provide more flexibility to virtual currency startups. The revised proposal (i) gives DFS the option of renewing a conditional BitLicense if the virtual currency firm continues to meet operating criteria; and (ii) removes previous language stating that a firm operating a BitLicense is required to obtain addresses and transaction data for all parties to a virtual currency transaction. Regardless of the changes, virtual currency firms still must meet strict standards for consumer protection and anti-money laundering requirements.
CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
As previously reported in our January 8 Digital Commerce & Payments alert and in InfoBytes, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency on December 16, 2014. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
Special Alert: CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
On December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
The Policy
As a result of its work to date, the Policy recommends that “activities involving third party control of virtual currency, including for the purposes of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.” The Policy states that state regulators have determined certain activities involving virtual currency raise concerns in three areas: consumer protection, marketplace stability, and law enforcement.
The Task Force’s intentional technology-neutral approach targets “licensable activities” – activities performed by one party, in a position of trust, acting on behalf of another. It recommends that such licensable activities be regulated by amending current laws, or when necessary, enacting new legislation to cover the transmission, exchanging, and holding of value of currencies. The Policy recommends that those who service these transactions through mobile wallets, vaults, payment processors, and others should be appropriately licensed.
The Policy targets certain activities:
- Transmission
- Exchange (e.g., sovereign to virtual, virtual to sovereign, or virtual to virtual)
- Services that facilitate third-party exchange, storage, and/or transmission of virtual currency through any medium (e.g., wallets, vaults, kiosks, merchant-acquirers, and payment processors).
The Task Force notes that the Policy explicitly does not cover either merchants or consumers whose use of virtual currencies is solely to purchase goods or services; or for activities that utilize similar technologies, such as cryptography-based ledger systems, but are not financial in nature nor used for financial recordkeeping.
The Draft Model Regulatory Framework
The Draft Model Regulatory Framework proposes a system for state licensing and supervision of certain virtual currency activities. The Draft Model Regulatory Framework addresses the following areas of concern regarding businesses engaged in virtual currency activities: licensing requirements and systems, financial strength and stability, consumer protection issues, cybersecurity, compliance with Bank Secrecy Act and Anti-Money Laundering, recordkeeping, and regulatory supervision.
Request For Public Comment
The CSBS is looking for public comment on the Draft Model Regulatory Framework in two main areas:
- The Licensing Regime for the Virtual Currency Business. What should such a regime look like? How can states best streamline the process? How should laws that apply to regular money transmitters, such as escheatment or funds availability, be applied to the virtual currency business?
- Risk Management. What is an appropriate level of identification for customers? How should BSA/AML regulations change to address virtual currencies? What role should cyber risk insurance play? What sorts of consumer protections will be necessary?
The specific questions posed by the CSBS are found here. The creation of a new licensing regime, in addition to laws that will govern future litigation structure, will influence the direction states take in regulating virtual currencies.
Members of the industry have until February 16, 2015 to respond to the RFC.
State Bank Regulators Request Feedback On Model Framework for Virtual Currency Activities
On December 16, the Conference of State Bank Supervisors (CSBS) announced its draft regulatory framework and requested public comment on specific questions intended to aid state regulators on the regulation of virtual currencies. The regulation of virtual currency activities currently varies from state to state. The draft framework is intended to create uniform state regulation. Comments are due by February 16, 2015.
NY Superintendent of Financial Services Proposes Lighter BitLicense Regulations
On December 18, Superintendent Lawsky delivered remarks regarding New York’s revised proposal for regulating virtual currency companies. The new proposal stems from the original July 17 proposal and includes certain revisions previously alluded to on October 17. Lawsky noted that the revisions will provide flexibility to virtual currency startups, while simultaneously allowing the New York Department of Financial Services to remain committed to protecting consumers. Most notably, the revised regulation “will offer a two-year transitional BitLicense, which may be issued to those firms who are unable to satisfy all of the requirements of a full license, and will be tailored to startups and small businesses.” According to Lawsky, while the companies will still have to abide by anti-money laundering and consumer protection requirements, the revisions are intended to “strike an appropriate balance between permitting innovation to proceed, while at the same time strongly protecting consumers and helping root out illicit activity.”
SEC Fines Virtual Currency Operator For Alleged Registration Violations
On December 8, the SEC fined a computer programmer $68,387.07 for operating two separate online exchanges that traded securities using virtual currency without registering the businesses as broker dealers. Further, the SEC charged that the programmer failed to register the online enterprises as exchanges as required by SEC regulations. Without admitting or denying the allegations, the programmer agreed to be barred from the securities industry for two years.
New Bitcoin Firms May Get Transitional License in New York
On November 2, New York Superintendent Lawsky delivered remarks at the Money 20/20 Conference on the state’s virtual currency and Bitcoin regulation. In October, Lawsky publicly stated that, as a result of the comments received on New York’s proposed BitLicense framework, there would be important changes made to the July 17 proposal. This week, on behalf of the NYDFS, Lawsky announced that additional changes are being considered to address “concern about the compliance costs of regulation on new or fledging virtual currency enterprises.” Specifically, Lawsky introduced the concept of a Transitional BitLicense, which would allow certain small, money transmitting startups to begin operating without huge compliance costs. Lawsky noted four main factors the NYDFS would consider when deciding whether or not to grant a Transitional BitLicense: (i) the nature and scope of the business and the associated risks for consumers; (ii) projected transactional and business volume; (iii) registration status as a Money Services Business with FinCEN; and (iv) previously established mitigating risk controls.
FinCEN Rules Proposed Virtual Currency Exchange, Bitcoin Payment System Subject to BSA
On October 27, FinCEN issued two administrative rulings to companies seeking guidance on whether they must register as MSBs and be subject to the required reporting, recordkeeping, and monitoring obligations. In its first letter, a company queried whether its plans to set up a virtual currency trading and booking platform, similar to a traditional securities or commodities exchange, would make it subject to FinCEN regulations. FinCEN responded that the proposed virtual trading platform would be classified as an MSB. As a result, the company would have to register as an MSB as defined under the BSA. In its second ruling, a company asked whether a bitcoin payment system would be subject to the agency’s regulations. The payment system would accept customers’ credit card payments and transfer the payments to merchants in the form of bitcoin. FinCEN ruled that if the company sets up the payment system, the company would be classified as a money transmitter, and subject to BSA regulations, because “it engages as a business in accepting and converting the customers’ real currency into virtual currency for transmission to the merchant.”