While the United States Securities and Exchange Commission (SEC) is still working on regulatory measures at a federal level for cryptocurrency, there are some states that have taken the matter into their own hands through the years. New York was one of the first states to create their own regulatory measures, and they have remained strict since they enacted the policies on June 24th, 2015. In a recent report by Trifin Roule with the Abacus Journal, Roule examined the protocols that Coinsource had to go through in their endeavor.
Roule states that the requirements established by New York seem to favor larger and more lucrative financial institutions and virtual firms. Any platform requires a “Bitlicense” from the state to operate within their jurisdiction, though Roule says that the process is “likely overly burdensome” for companies that lack the size and funding.
The Bitlicense is only obtainable through the New York State Department of Financial Services. It is required for any company or individual that participates in any of the following activities:
- Transmitting any virtual currency
- Storing, holding, or controlling custody of virtual currency for someone else
- Purchasing and selling virtual currency as a business
- Issuing, controlling, or administering a virtual currency
However, the requirement of a Bitlicense for operation is not confined to companies that are based out of New York directly; it applies to any of the above entities that has any business in New York at all.
In order to be approved, the party must meet certain criteria. Though this list in incomplete, some of those requirements for operating under a Bitlicense include:
- Meeting the minimum for capital reserves
- Keeping a seven-year record of transactions
- Submitting quarterly financial statements to the DFS within 45 days of the quarter ending
- Performing background checks for every employee, which must be done by an independent third-party
- Establishing a dedicated compliance officer
- Enforcing the procedures involved with anti-fraud, anti-money laundering, privacy, and cybersecurity
- Maintaining prior-written approval from the superintendent of New York’s DFS before any “material change” is made to the model, including new products and new services.
- Maintaining prior-written approval from the superintendent of New York’s DFS before merging with another company that has a Bitlicense
Even as companies abide by these regulations, they are still subject to a $5,000 application fee before any of those rules apply to them. To accompany the fee, the applicant is required to fill out an application form that is 31 pages long. There are no exceptions provided for smaller companies, and there is no deadline established still for the end of the licensing process.
In the time since the regulations have gone into effect, there have been only 11 BitLicense approvals for virtual currency companies. In fact, Genesis Global Trading waited three years for a license approval, while BitFlyer USA, Inc. waited over a year. Roule predicts that the issuance of licenses “will likely increase over the next 12-24 months.
The concerns of the New York Attorney General seem to fall into three categories – conflicts of interest, the lack of aggressively pursuing action against abusive trading activity, and the lack of protection for consumers. The NYAG even went as far as to report three exchanges to the regulator – Kraken, Binance, and Gate.io – based on their potential price manipulation. In the report issued by the NYAG, they concluded with saying,
“virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading.”
Amendments to the original regulations have been brought to the attention of the State Assembly already this year. However, considering the task force report that they have to complete reviewing by the end of next year, no changes will likely be implemented until 2020.