Readers of this blog will know that we have been following the recent legal developments relating to bitcoin and other virtual currency systems [also here and here]. Yesterday, in a significant development reflecting the general maturation of virtual currencies as a recognized payment system, Benjamin M. Lawsky, Superintendent of the New York State Dept. of Financial Services (NYSDFS), announced New York’s final “BitLicense” rules.
The NYSDFS is the first state agency to release a comprehensive framework for regulating digital currency-related businesses. This has been the culmination of a two-year period of drafting and public comment, with the initial proposed rules having been published last July. The keystone of the regulations are consumer protections, anti-money laundering compliance and cybersecurity rules that are designed to place appropriate “guardrails” around the industry without “stifling beneficial innovation.”
In his remarks at the BITS Emerging Payments Forum in Washington, D.C., Lawsky stated that the agency had listened to the industry’s concerns that called for a more hands-off approach, and made a few minor changes from the prior drafts.
These changes include the following:
- Companies will not need prior approval for standard software or app updates – only for material changes to their products or business models.
- The agency will not be regulating software developers – only financial intermediaries. Under the regulations, the definition of “Virtual Currency Business Activity” generally involves entities that act as: (1) virtual currency transmitters; (2) digital wallet services; (3) those “buying and selling Virtual Currency as a customer business”; (4) virtual currency exchange services; (5) controllers or issuers of a virtual currency. The regulations explicitly state that the “the development and dissemination of software in and of itself does not constitute Virtual Currency Business Activity.”
- Companies will not be required to file a duplicative set of application submissions if they want both a BitLicense and a money transmitter license. Companies will be able to work with the agency to have a “one-stop” application submission.
- Companies that already file suspicious activity reports (also called “SARs”) with federal regulators such as FinCEN will not have to file a duplicate set of SARs with the NYSDFS.
- Companies won’t need prior approval from NYDFS for every new round of venture capital funding – a company would only need prior approval if the new investor wants to “direct the management and policies of the firm” as opposed to merely being a “passive investor.”
While Mr. Lawsky has announced his departure from the NYSDFS, he has fulfilled his promise to take steps towards bringing some regulatory oversight to bitcoin and other digital currencies. While the future of these currencies is still a matter of speculation, it will be interesting to see whether other states follow New York’s lead. We will keep you updated.