DFS proposes new framework for virtual currency regulations

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Eversheds Sutherland (US) LLPNew York State’s Department of Financial Services (DFS) has released a Request for Comments on a Proposed Framework for a Conditional BitLicense1  (Request for Comments) that DFS says will make it easier for start-ups to enter the New York virtual currency market.

The new Framework, which uses DFS’s conditional licensing authority for the first time, is intended to reduce the barriers faced by prospective licensees that wish to commence virtual currency activities in New York. DFS noted that since issuing its BitLicense regulation in 2015 (23 NYCRR Part 200), it had granted only 25 virtual currency licenses and limited purpose trust charters. Due to concerns over the limited number of approved licenses, DFS conducted a review of the industry and its licensing process. The DFS acknowledges in the Request for Comments that companies that consider applying for a BitLicense face “actual or perceived hurdles” that include (1) capital requirements and (2) “a rigorous application process, which can involve a significant expenditure of time and resources for applicants fulfilling the regulatory requirements for strong governance, operational and compliance controls.”2

The proposed Framework would allow new market entrants to work with authorized BitLicensees or holders of New York limited purpose trust charters (collectively, VC Entities) during the term of the conditional BitLicense. The VC Entity would provide support and various services to the holder of the conditional license, which the DFS expects will eventually endeavor to seek and obtain a full BitLicense. DFS and the applicant for a conditional license will enter into a supervisory agreement, “which will detail, among others, the activities in which the Applicant may engage, the requirements it must meet, division, apportionment and sharing of responsibilities and liabilities with the VC Entity, and the oversight DFS will conduct with respect to the Applicant.”3

Importantly, the conditional BitLicense is meant to offer an alternative to the conditional licensee’s being required to meet full capital requirements on a stand-alone basis in order to commence virtual currency business activities in New York.

DFS also announced two practices regarding its review of BitLicense applications that are intended to “increase transparency and speed in the BitLicense application review process.”4 First, DFS will consider a BitLicense application to be ready for substantive review only when it includes all the documents required as part of the application process and “each such document appears to be adequate on its face in terms of organization and level of detail.”5 Second, once substantive review of an application begins, where DFS staff requests additional information in detailed deficiency letters, the letters will include a return date. If all deficiencies have not been “fully and effectively addressed by the end of the response period for the third deficiency letter addressing the requirement(s), DFS may, without further notice, deny the application.”6

DFS has also taken steps to provide avenues for start-ups and emerging companies to benefit from the proposed Framework. Specifically, DFS is in the process of establishing a new SUNY-related virtual currency incubator called “SUNY BLOCK.”7 SUNY BLOCK contemplates that SUNY will establish a licensed VC Entity that will collaborate with start-ups and emerging companies, which in turn will be able to apply for a conditional license from the DFS. Various SUNY campuses have already expressed interest in this program and DFS has recently entered into a Memorandum of Understanding to jumpstart SUNY BLOCK.

The current Request for Comments seeks feedback on the  Proposed Framework generally and also provides a list of 11 specific questions that DFS is seeking feedback on. For example, DFS asks “[i]n addition to the proposed framework, what other methods might DFS consider to safely and effectively facilitate entry into, and growth into, New York’s virtual currency marketplace?”8

The comment period with respect to the Request for Comments is open until August 10, 2020. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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