In this article, we will provide you with a summary of New York’s Department of Financial Services (DFS) development of regulatory framework for the fintech. The Department embarked on this process in responding to the Mt. Gox collapse and culminated in the adoption of the BitLicense Framework in 2015. The regulators at the Department share a unanimous view that a creation of a thoughtful regulatory oversight will spur the growth of a thriving global fintech marketplace. As part of the oversight, NYDFS confirmed that not all applicants have been able to meet its strict requirements on anti-money laundering, anti-fraud, capitalization, consumer protection and cyber security. It has also indicated as confirmed in its 2016 Annual Report that it had begun a periodic examination of licensed virtual cryptocurrency companies as required of all regulated financial services entities.
This positive view was not wholly shared by the respondents at the inquiry and consultation process that preceded the adoption of the BitLicense. Adam Ettinger and Judith Rinearson, two leading attorneys in the fintech space for instance, expressed their concerns on the requirements impose on licensee especially as regards the acquisition, retention and sharing with DFS highly-confidential, non-public, personal information than any other similar federal or state regulations have required of financial service or technology companies previously.
It is also important to put into perspective the unique and complex state-federal regulation competition in the United State. How this traditional political rivalry over jurisdicti
onal sovereignty will in impact the fintech regulations is yet to be fully studied. In announcing the approval of Coinbase application for BitLicense, Superintendent Vullo interestingly referred to the state’s tussle with federal regulators in the banking sector and insisted on the states determination to resist what he viewed as a usurpation of state sovereignty.
Summary of DFS Activities Related to FinTech
Department of Financial Services
On August 12, 2013, the Department announced an inquiry into the use of virtual currencies. The inquiry covered:
- investor activity in the virtual currency space;
- consumer protection issues;
- law enforcement concerns linked to the pseudo-anonymity of virtual currency users;
- the potential and limitations of the related technology; and
- fundamental safety and soundness considerations;
This inquiry was subsequently followed by a public hearing held on January, 28-29 2014 that sought to get more facts and explore a potential regulatory framework for virtual currency related transactions.
Based on the facts and testimonies gathered on the two occasions, the Department issued an order pursuant to Banking Law 2-b, 24, 32, 102-a, and 4001-b that facilitated the Department of Financial Services, Office of General Counsel to consider proposals and applications in connections with the establishment of virtual currency exchanges located in the State of New York.
May 07, 2015
On May 7th, 2015, the NYDFS granted the first charter under the New York Banking Law to itBit Trust Company, LLC – commercial Bitcoin exchange. In determining the application, the NYDFS said that it had conducted a rigorous review of that application, including, but not limited to, the company’s anti-money laundering, capitalization, consumer protection, and cybersecurity standards and also confirmed that the firm will be subject to ongoing supervision by the NYDFS and required to meet the obligations for operating a trust company under New York law, as well as those under the final BitLicense regulations.
June 24, 2015
NYDFS announced the publication of the final rules on BitLicense Regulatory Framework.
NYDFS issued regulatory framework (Regulation of the Superintendent of Financial Service; Virtual Currencies). The comprehensive regulations cover a wide spectrum of the business, its owners and personnel and protection and security of the client’s funds.
The regulations cover the requirements of licensing, the manner and details required to be included in the application, expected actions of the superintendent on submission of the application, the compliance process, the capital requirements, the custody and protection of customer assets, rules governing material change to business, change of control, mergers and acquisitions; Books and records; Examinations; Reports and financial disclosures; Anti-money laundering program; Cyber security program; Business continuity and disaster recovery; Advertising and marketing; Consumer protection; Complaints; Transitional period and Severability
October 5, 2015
In July 2015 the founders of the exchange submitted an application for licensing which was subjected to the rigorous review that included but not limited to the company’s anti-money laundering, capitalization, consumer protection, and cybersecurity standards. As a chartered limited purpose trust company with fiduciary powers under the Banking Law, Gemini can begin operating immediately and is subject to ongoing supervision by the NYDFS.
June 13, 2016
XRP II application submitted on August 2015 and received the NYDFS approval (XRP II BitLicense) on June, 2016. The announcement of the approval was also accompanied with an announcement of denial of license application for virtual currency firms – OKLink PTE LTD and Snapcard.
January 17, 2017
The NY DFS announced the granting of BitLicense to Coinbase, Inc., a wholly owned subsidiary of Coinbase Global, Inc., to offer Ethereum and Litecoin for New York customers. DFS has also approved Coinbase to offer users in New York to access “Shift Card”, a Coinbase linked debit card service.
November 27, 2017
New York State Assembly established a task force named as The New York State Digital Currency Taskforce to provide the governor and the legislature with information on the effect of the widespread use of cryptocurrencies and other forms of digital currencies and their ancillary systems in the state of New York. The Taskforce is expected to present its findings by December 15th, 2020. The taskforce is mandated to interrogate, inter alia:
- a review of the digital currency, cryptocurrency and blockchain industries in New York state;
- the number of digital currencies currently being traded and their approximate percentage of market share;
- the number of exchanges operating in New York state and their average monthly trade volume;
- the use of digital currencies’ impact on state and local tax receipts;
- the types of investment entities that are large investors in digital currency;
- the energy consumption necessary for coin mining operations and other policy considerations related thereto;
- the transparency of the digital currency marketplace and the related potential of market manipulation and other illegal activities;
- a review of laws and regulations on digital currency used by other states, the federal government, foreign countries, and foreign political and economic unions to regulate the marketplace; and
- legislative and regulatory recommendations, if any, to increase transparency and security, enhance consumer protections, and to address the longterm impact related to the use of cryptocurrency.
April 17th, 2018
New York Attorney General Eric T Schneiderman launched the Virtual Market Integrity Initiative, a factfinding inquiry into the policies and practices of platforms used by consumers to trade virtual or cryptocurrencies. “With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money. Yet too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” said Attorney General Schneiderman. “Our Virtual Markets Integrity Initiative sets out to change that, promoting the accountability and transparency in the virtual currency marketplace that investors and consumers deserve.”
As part of this initiative, the AG office sent letters to thirteen major virtual currency trading platforms requesting key information on their operations, internal control, and safeguards to protect customer assets.
May 17, 2018
NYDFS authorized Paxos Trust Company LLC, formerly known as itBit Trust Company (first company to get the BitLicense), to offer a permission, blockchain-based post-trade platform settlement service called Bankchain. Paxos Trust Company, a subsidiary of Kabompo Holdings Ltd., offers the Bankchain Precious Metals post-trade platform settlement service, which facilitates settlement among buyers in the “Loco London” market of gold bullion physically held in vaults recognized by the London Bullion Market Association.
Genesis Global Trading, on the other hand, was issued BitLicense for its business which includes conducting of over-the-counter virtual currency block trading of Bitcoin, Ether, Ether Classic, Litecoin, Ripple, Bitcoin Cash with counterparties on a proprietary basis and offerings of Zcash.
June 14, 2018
NYDFS announced granting of BitLicense to Xapo, Inc. DFS has also authorized Paxos Trust Company LLC, formerly known as itBit Trust Company, to offer exchange and custody services for Ether, Litecoin, Stellar Lumens and Bitcoin Cash, emerging cryptocurrencies, on its virtual currency exchange.
June 18, 2018
In announcing the issuance of BitLicence to Square, Inc., the DFS reiterated its firm licensing process which includes a thorough examination of the licensee’s company’s anti-money laundering, anti-fraud, capitalization, consumer protection, and cybersecurity policies and its subjection to ongoing supervision by DFS. Square Inc., which had a prior money transmitter license from DFS, had expanded its businesses to include the provision of tools that enables sellers to accept credit cards and contactless payments.
June 22, 2018
The NYDFS announced its communication with the Japanese Financial Service Authority (JFSA) regarding the latter’s improvement order issued against Bitflyer Japan amongst other virtual currency exchanges in Japan. The NYDFS confirmed that Bitfler US, had publicly supported and is obligated to follow the DFS comprehensive regulatory regime that requires compliance with BSA/AML laws and that it was closely working with the US entity to preserve the continued operation of Bitflyer USA and to protect consumers.