Overview of the Cryptocurrency Licensing Regime in New York
As cryptocurrencies continue to make headlines, questions continue to arise about the regulatory landscape applicable to market participants. While there have been no new laws or regulations related to the cryptocurrency space from federal agencies (although in the Coinflip order, the CFTC stated that bitcoin is a virtual currency), some states are beginning to examine cryptocurrencies with New York as a forerunner in this space. In 2015, New York created a BitLicense Regulatory Framework whereby certain cryptocurrency market participants were required to obtain a license to transact business within New York (and/or with New York residents). This post focuses on New York’s regulatory action regarding cryptocurrencies with the issuance of the BitLicense, and the potential impact this may have on investment managers.
New York BitLicense
Pursuant to the Part 200. Virtual Currencies regulations, any persons involved in “virtual currency business activity” in New York must obtain a license known as the “BitLicense.” The regulation defines a “virtual currency business activity” as:
- 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; and
- controlling, administering, or issuing a virtual currency.
The above categories really seem to apply to those groups who are acting as cryptocurrency exchanges and/or are offering “wallet” type services. For most fund managers who are simply managing a fund which is investing in virtual currencies, the above items would not implicate such managers and such managers would not need to obtain the BitLicense. However, if a manager (or an investment fund) was engaged in activity other than simply buying/selling/holding cryptocurrencies, the manager should be aware of the above items.
In order to receive the license, an applicant must complete a 30-page Application for License to Engage In Virtual Currency Business Activity and pay a $5,000 application fee. The application requires information on the history of the business, its owners and operators, operational items, financials, information on AML procedures, and information on its general compliance processes. In total the application is fairly onerous and costly and will likely deter many potential companies for applying for the license. Few BitLicenses have actually been granted to date, and those that have been granted were to major players in the industry such as Coinbase and Ripple.
Other Related Items
There are a number of interesting related items and a discussion about these can be found on the BitLicense FAQs page. A couple of the more interesting items:
- Chartered New York Bank – if a group is already chartered under the New York Banking Law, that entity does not need to apply for the BitLicense but must first receive prior approval from the New York Department of Financial Services to engage in the activity.
- Money Transmitter License – groups who engage in certain activities may also need to apply for a money transmitter license in New York. Groups who are applying to engage in both activities only need to submit one application.
The two items above are most likely not applicable to fund managers.
The establishment of a BitLicense demonstrates that states are trying to figure out how to assert authority over a space that prides itself on decentralization. The New York BitLicense has been seen as controversial, along with similarly proposed licenses in other states. Although this appears to not have a direct impact on investment managers yet, investment managers that engage in certain kinds of virtual currency activity may fall within the scope of requiring a license.
Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.