The BitLicense is a business license issued for cryptocurrency operations in New York State.[1] Intended for companies who operate in New York State and serve New York residents, the license and its regulatory framework is administered by the New York State Financial Services Department or “NYSDFS.”[2] Without a BitLicense, companies and individuals who engage in any “Virtual Currency Business Activity,” as defined by Part 200 of the Virtual Currencies of the New York Codes, Rules and Regulations, are prohibited from operating in New York or serving New York State residents.[3]
From its enactment on August 8, 2015, the BitLicense has been a source of controversy.[4] Regulators contend that the BitLicense is a reasonable response to the dangers posed by the rise of virtual currencies.[5] Cryptocurrencies may be used as a vehicle for money laundering, tax evasion, and other criminal activities.[6] The seemingly anonymous nature of virtual currencies, ease of cross-border and interstate transport, and the lack of a formal banking structure may make it more difficult for law enforcement to monitor and apprehend individuals who use cryptocurrencies for illegal activities.[7] Furthermore, individuals and merchants who use cryptocurrencies as a payment mechanism for goods or services, or those who merely develop software related to cryptocurrency, are exempt from licensing requirements.[8]
However, proponents of cryptocurrencies argue that the BitLicense is onerous and intrusive, and unfairly targets small companies and startups.[9] The application, which is thirty pages long and includes a five-thousand-dollar application fee,[10] asks numerous questions about the history of the business, as well as information about its owners and operators, financials, and the company’s anti-money laundering and compliance procedures.[11] Compliance with the BitLicense also requires the appointment of a dedicated compliance officer,[12] written compliance and anti-fraud procedures,[13] and the maintenance of minimum capital reserves.[14] Gathering this information and enacting complex anti-money laundering procedures is undoubtedly a difficult and expensive process and can be prohibitively costly for a small and nimble startup. Large and well-funded companies however, can afford to hire legal and compliance experts who will ensure compliance with the BitLicense. Additionally, any company which plans to introduce a “material change” to their business model, such as a new product or service, must notify and obtain consent from the superintendent of the NYSDFS.[15] Permission from the superintendent is also required for any merger or acquisition of any company holding a BitLicense, requirements that no ordinary business is subject to.[16]
The intrusive nature of the regulations was a major source of controversy and was far too disruptive and costly for many cryptocurrency companies.[17] The BitLicense requires that records be kept for up to seven years of every cryptocurrency transaction carried out by a company.[18] Sensitive information, such as the physical addresses, bank statements, and names of customers who are parties to that transaction, must also be recorded and be made available to the NYSDFS upon request.[19] A large part of the ethos surrounding cryptocurrencies is a desire for privacy and freedom from intrusive government regulation,[20] and many cryptocurrency advocates felt that complying with the BitLicense would be a betrayal of their fundamental values.[21]
Shortly after the enactment of the BitLicense, numerous cryptocurrency companies exited the state of New York and ceased all operations with New York residents.[22] Critics seized upon this as evidence of the onerous nature of the BitLicense and maintained that regulators were unfairly stifling innovation and crippling a nascent bitcoin economy.[23] Further fueling the ire of critics is the fact that to date, only four BitLicenses have been approved by the NYSDFS, and all four of them have gone to large and well-established companies.[24] Some startups have even claimed that the BitLicense has forced them to shut down entirely.[25]
As cryptocurrencies have grown to be increasingly popular, calls to amend or repeal the BitLicense have increased.[26] At a recent roundtable between legislators and cryptocurrency advocates, some lawmakers seemed open to the idea of introducing a bill to amend or abolish the BitLicense.[27] Attendees at the meeting pointed to the high costs of compliance for small startups, as well as the fear that even those who are seeking to use blockchain technology for a broader purpose other than as currency or tokens may fall afoul of the BitLicense regulatory framework, and lawmakers seemed sympathetic to their concerns.[28] While it is still unclear exactly how the New York legislature will approach cryptocurrencies, recently passed bills in Wyoming[29] are friendly to the blockchain industry. This may signal that regulators do not wish to snuff out the growing industry, and instead wish to work with blockchain companies to ensure compliance with all relevant laws.
[1] BitLicense Frequently Asked Questions, NYSDFS, http://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework_faq.htm.
[2] Id.
[3] 23 NYCRR § 200.3 http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf.
[4] BitLicense News, Cointelegraph, https://cointelegraph.com/tags/bitlicense (last visited, Mar. 9, 2018).
[5] In the Matter of Virtual Currency Exchanges, New York State Department Of Financial Services, http://www.dfs.ny.gov/about/ea/ea140311.pdf.
[6] See Christian Brenig Et Al, Economic Analysis Of Cryptocurrency Backed Money Laundering (2015), https://pdfs.semanticscholar.org/cccb/f96b3efa46cdb74233f1e5b13209ffab8c9e.pdf.
[7] Id.
[8] See supra note 1.
[9] Stop the BitLicense, Action, https://act.eff.org/action/stop-the-bitlicense (last visited Mar. 9, 2018).
[10] 23 NYCRR § 200.5.
[11] APPLICATION FORMS FOR: LICENSE TO ENGAGE IN VIRTUAL CURRENCY BUSINESS ACTIVITY, NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES, available at http://www.dfs.ny.gov/legal/regulations/vc_license_application.pdf.
[12] 23 NYCRR § 200.7.
[13] Id.
[14] 23 NYCRR § 200.8.
[15] 23 NYCRR § 200.10.
[16] 23 NYCRR § 200.10.
[17] New York’s bitcoin hub dreams fade with licensing backlog, CNBC (Oct. 31, 2016), https://www.cnbc.com/2016/10/31/new-york-bitcoin-hub-dreams-fade-with-licensing-backlog.html.
[18] 23 NYCRR § 200.12.
[19] Id.
[20] Paul Vigna & Michael J. Casey, The Age of Crypto Currency 67-72 (2015).
[21] Daniel Roberts, Behind the “exodus” of bitcoin startups from New York, Fortune (Aug. 14, 2015), http://fortune.com/2015/08/14/bitcoin-startups-leave-new-york-bitlicense/.
[22] Id.
[23] Id.
[24] Who we supervise, NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES https://myportal.dfs.ny.gov/web/guest-applications/who-we-supervise.
[25] Michael del Castillo, BitLicense Critic Wages One Man War, Coindesk (Nov. 2, 2016), https://www.coindesk.com/one-man-fight-new-york-bitcoin-regulation-wages-on/.
[26] Stan Higgins, New York Lawmakers Open to Revisiting the BitLicense, Coindesk (Feb. 23, 2018), https://www.coindesk.com/bitcoin-crypto-ny-lawmaker-pledges-make-bitlicense-something-works/.
[27] Id.
[28] Id.
[29] Kent Weare, State of Wyoming House Unanimously Pass Two Blockchain Bills, InfoQ (Mar. 9, 2018), https://www.infoq.com/news/2018/03/Wyoming-Blockhain-Bills.
