Following hearings early this year on bitcoin and the regulation of such non-sovereign currencies the NYS Department of Financial Services (“Dept”) has released proposed “Virtual Currencies” regulations, formerly noticed in the NYS Register as “Regulation of the Conduct of Virtual Currency Businesses,” No. DFS-29-14-00015-P), (“Regs”) for public comment, due 45 days after the official publication on July 17th, that would have direct and serious effect on New York-based firms dealing with or considering embracing virtual currencies.
In our view (shared by many) the proposed regulations, if enacted, will likely be counterproductive, are overly burdensome, grant the Dept broad and nearly unfettered discretion and, ultimately prevent start-ups and smaller players from partaking in the nascent virtual currency economy.
The centerpiece of the proposed Regs include a required “BitLicense” for firms that conduct any of the following”Virtual Currency Business Activities” in New York:
- Receiving Virtual Currency for transmission or translating
- Handle currency conversion, whether it be from a virtual currency to another virtual currency, or from fiat to virtual currency (and vice-versa)
- Act as a custodian of virtual currency (such as a virtual bank)
- Maintain a virtual currency exchange, or
- Retain control of possession, administering or issuance of said virtual currency.
Despite the above, the Regs state that two groups are exempt from obtaining a license. Namely:
- Persons that are chartered under the New York Banking Law to conduct exchange services and are approved by the superintendent to engage in Virtual Currency Business Activity; and
- Merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services.
Firms who decide to attain a “BitLicense” must:
- Maintain the same amount and type of digital currency to meet its obligations to any parties. The firm must also hold a bond or a trust account in Dollars in an amount that the Department of Financial Services deems acceptable to protect their customers.
- Virtual Currency Receipts must display the following: a telephone number to lodge complaints, time and value of respective transaction, any fees levied, any pertinent exchange rates, liability disclosures in event of delayed transaction, and a refund policy.
- Firms will be required to have means of resolving any customer disputes in a timely manner and they must also notify customers that the NYS Department of Financial Services can investigate any claims as well.
- Firms must make clear that any losses due to cyber-attacks or volatility are generally not recoverable and that since virtual currencies are not seen as legal tender, they lack the protections from the FDIC and other government agencies.
- Firms must comply with AML programs, retaining records of transactions containing personally identifiable information and the transaction amount. EDD or Enhanced Due Diligence may be needed if the individual is high risk or they have been flagged for suspicious activity.
- License holders will be required to monitor and analyze transactions for the possibility of theft, fraud, or other criminal activity. Any transaction made in an aggregate amount in excess of $10,000 shall be reported to the Department of Financial Services.
- A cyber security program must be in place in order to locate potential or actual risks. The program must also be able to safeguard the firm from intrusions and be able to ameliorate from an attack. Every year, the firm will be required to engage in penetration tests to assure the integrity of the firm’s respective systems. Similarly, the firm will assess its vulnerabilities every quarter.
- Every firm will be required to have a CISO whose responsibilities would include the oversight and implementation of cybersecurity programs and subsequent policies.
- The Department of Financial Services will hold audits at least every two years to examine finances of company, to ensure that the firm is sound. Likewise, annual financial statements and an opinion from a CPA must be submitted within 120 days of its fiscal years end.
- Capital requirements will be set by analyzing the assets and liabilities of the firm, the total leverage of the company, the overall liquidity of the respective firm, and any protections already afforded to customers.
- A compliance officer will be assigned by firm to ensure compliance with “BitLicense” statutes
- Every Licensee is required to develop a continuity of business plan to ensure continuing of operations if there are service interruptions because of disasters or other issues.
- Appropriate regulatory department must be notified if there are any interruptions to business operations that could affect the firm’s nature of complying with regulations.
- Firms that are currently in operation will have 45 days to attain a license before the laws become effective. In that time frame, the superintendent will have 90 days to approve or deny the license.
For the full copy of the proposed regulations, please click here.
If you may be affected by the proposed virtual currency regulations, please contact us at info@SmartedgeLawGroup.com or (203) 307-2665 to discuss any concerns your firm may have.