BitLicense: Guidance Notes
Virtual currency regulation within the United States began in March 2013, where it was determined money exchangers must implement the same anti-money laundering controls and monitoring requirements as stipulated by both the Bank Secrecy Act and the Money Laundering Act.
This essentially put pressure on intermediaries to carry out enhanced customer due diligence, to ensure they understood who their customer was, and that the funds had been obtained legitimately.
However, in 2015, in a move dubbed by various commentators as an “excessive regulatory burden”, the New York Department of Financial Services (NYDFS) ratified its BitLicense proposals to those operating within its jurisdictional borders.
As a result of the regulator’s attempt to safeguard the digital economy in similar ways to its financial sector, companies engaged in specified virtual currency activities are now required to hold a BitLicense.
So who needs a BitLicense, and how would it be obtained?
In a nutshell, the regulations state a BitLicense is required from the NYDFS if a business does any of the following activities – involving New York, or a New York resident:
Receiving virtual currency for Transmission or Transmitting virtual Currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of virtual currency;
Storing, holding, or maintaining custody or control of virtual currency on behalf of others;
Buying and selling virtual currency as a customer business;
Performing Exchange Services as a customer business, or;
Controlling, administering, or issuing a virtual currency.
The above activities would most commonly involve businesses that hold customer funds, such as wallet providers, or those that exchange virtual currency into or for fiat money, such as third-party exchangers.
To meet the requirements of the NYDFS, entities hoping to obtain a BitLicense must ensure they have a designated compliance officer to deal with issues such as AML vulnerabilities, have policies in place for customer complaints, and must also issue transactional receipts for potential audit.
The application process is stringent, and will cost approximately $5,000 to file. This will include compliance manuals, full transparency on ownership, finances and insurance, and a long-term business plan. This was implemented to allow the NYDFS to know who the business is, where they come from, how well backed they are, and what they are planning to do.
Once a BitLicense has been issued, regulatory compliance does not stop. Entities must ensure they provide periodic financial statements, as well as maintain a financial reserve – a figure which would subsequently be set by the NYDFS.
Furthermore, there are also detailed rules related to cyber security safeguards, and what the company would do in the result of an external attack. Moreover, there are also regulations pertaining to the ongoing keeping of records, which would need to be made available on request.
Consumers who initiate a business relationship with a holder of a BitLicense must also have the risks disclosed to them, similar to that of a mutual fund or publicly traded stock.
BitLicense is a fundamental requirement for any business that plans to engage with the virtual economy.
Although the regulations may appear overly daunting, advice from a qualified practitioner may help alleviate any concerns.