NYDFS Announces a Series of Virtual Currency Initiatives

On June 24, 2020, the New York State Department of Financial Service (NYDFS) announced a series of virtual currency initiatives aimed at providing additional opportunities and clarity for BitLicense and limited-purpose trust company applicants and licensees. These initiatives include:

  • A proposed framework for obtaining a conditional BitLicense when partnering with an existing licensee
  • A proposed approach for NYDFS pre-approval of certain virtual currencies and a licensee’s ability to self-certify the use of new virtual currencies
  • New procedures aimed at creating a more transparent and timely process for reviewing BitLicense applications
  • A BitLicense FAQ page

The NYDFS’s press announcement stated that these initiatives were developed based on feedback from the industry to make it easier for virtual currency companies to successfully operate in New York. If the stated intent is achieved, these initiatives will be a welcome change for virtual currency businesses, which have often faced long timelines and a burdensome review process when submitting a BitLicense application or attempting to expand their approved activities. It remains to be seen, however, whether those objectives can be met.

Proposed Conditional Licensing Framework

The New York BitLicense regulation issued in 2015 provides that the Superintendent may, in his or her sole discretion, grant a conditional license to an applicant who has not satisfied all licensing requirements. However, since that time, NYDFS has been reticent to grant conditional licenses.

The proposed framework provides that NYDFS may grant a conditional license to an applicant that will enter into an arrangement with an existing BitLicensee or New York limited-purpose trust company (a “VC Entity”) whereby the VC Entity will provide services and support, such as capital, systems and personnel, to assist in the provision of the virtual currency service. To obtain a conditional license, the applicant will need to submit information to NYDFS regarding the proposed arrangement between itself and the VC Entity along with its proposed services and risks associated with those services. The VC Entity would be expected to share in the responsibilities and liabilities of the conditional licensee with respect to the proposed activities. The proposed framework provides that NYDFS expects the conditional licensee would also apply for a full BitLicense but does not detail any expectations as to the timing of that application.

While the proposed framework may provide new opportunities to potential applicants, it is not clear if the conditional licensing process will result in new entrants being able to more quickly get to market with their products. It appears the conditional license application and review process will be comprehensive and involve the additional challenges of balancing the capabilities and expectation of NYDFS, the applicant and the existing VC entity. While the intent of the framework is to streamline an applicant’s ability to launch under the effective supervision of a VC Entity, as well as NYDFS itself, the added complication of negotiating an arrangement with a VC Entity (which may be a competitor) and the requirements that NYDFS assess that relationship, as well as the capacity of the applicant itself, makes it unclear whether NYDFS will process an application for a conditional license more quickly than a full BitLicense application. However, if an existing VC Entity develops a “white label” business that NYDFS reviews, such an entity may be able to provide other applicants a leg up to accelerate the conditional approval process. In any event, the proposed framework does not address whether a conditional licensee can expect the processing of its full BitLicense application to occur on an expedited timeline, given that the NYDFS will have already reviewed substantial materials regarding the licensee’s structure, personnel, activities, and operations.

The proposed guidance includes a list of questions for consideration by the public and request for comment by August 10, 2020.

Adopting and Listing of New Virtual Currencies

Prior to granting a BitLicense or trust company license, NYDFS typically requires the applicant to enter a supervisory agreement that will require the licensee to seek prior NYDFS approval before expanding its services to include any additional virtual currencies not addressed in its initial application. This process can be burdensome for licensees and slow their ability to roll out new services. In December 2019, NYDFS issued proposed guidance to ease this process, and on June 24, 2020, NYDFS finalized that guidance.

Under the new guidance, NYDFS is implementing a three-pronged approach to approval of new virtual currencies: (i) NYDFS approval, (ii) self-certification, and (iii) publication by NYDFS of a list of pre-approved virtual currencies (the Greenlist) that will be permitted for all licensees without further approval from NYDFS. First, the existing NYDFS approval processes remain in effect for any VC Entity that seeks to expand its list of permitted virtual currencies. While the guidance does not detail the standards that the NYDFS will use in this regard, presumably NYDFS will consider all the same factors that are required for VC Entities engaged in self-certification.

The new guidance provides for the first time that VC Entities may implement a policy of self-certifying new virtual currencies, which policy NYDFS must approve. If the policy is approved, the VC Entity may expand its services to include new virtual currencies and self-certify that the new currency complies with its approved policies. The proposed guidance provides NYDFS’s expectation regarding the components of an acceptable self-certification policy. Although VC Entities must notify NYDFS of their self-certification decisions, no further NYDFS approval is required.

Once a virtual currency has been approved for three different unrelated VC Entities, either by NYDFS action or by self-certification, NYDFS will add the virtual currency to the Greenlist. Six months after a virtual currency appears on the Greenlist, all VC Entities will be permitted to add the new virtual currency to their businesses. This waiting period presumably was intended to create a disincentive for licensees to simply free-ride on the listing efforts of others. However, once a currency is Greenlisted, other VC Entities interested in expanding into that new virtual currency will presumably have an easier time getting approval of the virtual currency, including by self-certification.

Notice Application Procedures

NYDFS has announced two new practices aimed at streamlining the application review process and speeding the time to approval for qualified applicants. Specifically, NYDFS has announced that it will do a high-level review of an application when received to confirm that all necessary materials have been included and will no longer begin processing any application that is not complete. In addition, if the applicant does not completely and satisfactorily resolve any deficiency in the application within the timeframe designated in the third letter from NYDFS with respect to that deficiency, NYDFS may deny the application.

The announcement attributes the currently lengthy process for application review to applicants’ inefficient behavior rather than practices internal to NYDFS and aims to more quickly deny applicants that — due to their failure to efficiently provide the necessary materials to NYDFS — slow the application process for themselves and others. While applicants have expressed a different view of many elements of the historical NYDFS processes, the NYDFS announcement will likely result in more early unfavorable actions than have been the case historically.

BitLicense FAQs

As a further tool for delivering guidance to the industry, NYDFS has provided an FAQ page with respect to the BitLicense. The FAQs largely address items within the text of the BitLicense regulations themselves but do provide NYDFS’s position on whether certain specific virtual currency activities require licensure, including mining and selling mined tokens, writing code for the virtual currency space, and providing virtual currency investment advice.