New York regulates Bitcoin

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New York just became the first state in the United States to propose a regulatory framework for Virtual Currency.  The regulation is similar to other regulated financial firms both in the New York and under federal laws such as FINRA and NFA regulated firms.  The regulatory frame work is out for a 45 day comment period.  Comments may be submitted though “Ask Me Anything” forum on Reddit hosted by DFS.

The proposed framework covers who needs to be regulated and specific areas where bitcoin firms operating under BitLicenses need to comply with relevant regulation.

Who is required to be licensed?

Receiving or transmitting virtual currency on behalf of consumers;

Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;

Exchange services for retail customers, i.e. market-making in Virtual Currency against Fiat Currency, property of other value, or against another Virtual Currency;

Buying and selling Virtual Currency as a customer business (as distinct from personal use); or

Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.)

Who is not required to be licensed?

Merchants and consumers using Virtual Currency only for the purchase or sale of goods and services; and

Companies chartered under the banking laws of New York to engage in exchange services and are approved by CFS to operate in Virtual Currency.

BitLicense Requirements

All firms required to be licensed need to apply for and obtain a BitLicense.  BitLicensed firms are need to comply with the following:

  • Safeguard Customer Assets;
  • Virtual Currency Receipts:  Firms must provide customers with a receipt following any transaction.  Each receipt must include: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee;
  • Written Complaints Policies and Proceedures that include informing customers that complaints may be submitted for NY DFS for review and investigation; 
  • Consumer Disclosures:  Firms must issue proper disclosures about the risk inherent with Virtual Currency, including their volatility, tax exposure, and accounts are not protected by SIPC or FIDC;
  • Anti-Money Launder Procedures and Compliance:  For every transaction involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency, each firm must maintain: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transaction was initiated and completed, and (4) a description of the transaction.  In addition, each Firm must perform proper KYC when opening customer accounts and firms must submit illegal activity through normal FinCEN channels, such as SARS reports;
  • Appoint a Compliance Officer;
  • Cyber Security Program and appoint Chief Security Officer;
  • Business Continuity Plan, Disaster Recovery, and Notification of Emergencies and Disruptions;
  • Capital Requirements – the required capital will be determined by the DFS at the time of application and on an ongoing basis;
  • Independent DFS Examinations: minimum examination periods by NY DFS;
  • Maintain Books and Records.

Implications

Depending on the net capital requirements, this should be a boon for the Virtual Currency industry.  It seems any business operating in Virtual Currency needs to be licensed with NY DFS.  These laws address customer protection and a framework that is not dissimilar to US Securities regulation.  Once finalized, these rules will allow firms to operate in a clear legal manner, thereby making operating in a more definitive environment.  For further information and assistance, please visit cryptocurrencylawfirm.com

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