On Monday 18th of June, a fintech company Square successfully obtained a virtual currency license, commonly known as ‘BitLicense’, granted by the New York Department of Financial Services (NYDFS).
Square is a financial services company that is based in San Francisco and is owned by Twitter CEO Jack Dorsey. The company aims to support businesses and individuals, in relation to the process of financial transactions. One of the first revolutionary fintech products to be created by this organisation is the Square Card Reader. This is a piece of technological equipment which is connected to a mobile phone or smart device, enabling users to make credit and debit card transactions. The transactions can be made in either the conventional chip and pin method or contactless, meaning that the world of financial technology has been further transformed, especially as the Square Card Reader is equivalent to having a card machine.
Not only does the organisation offer card readers that enable individuals and businesses to accept payments via credit and debit cards but they also offer a variety of innovative digital services, some include near field communication (NFC) payments and other software for mobile payment methods.
What this means, is that, customers can now legally engage in the sale and purchase of bitcoin through Square’s Cash App, in other words take part in bitcoin trading.
“DFS is pleased to approve Square’s application and welcomes them to New York’s expanding and well-regulated virtual currency market,” said Superintendent Vullo. “DFS continues to work in support of a vibrant and competitive virtual currency market that connects and empowers New Yorkers in a global marketplace while ensuring strong state-regulatory oversight is in place.”
“We are thrilled to now provide New Yorkers with Cash App’s quick and simple way to buy and sell bitcoin,” said Brian Grassadonia, Head of Cash App. “Square and the New York State DFS share a vision of empowering people with greater access to the financial system and today’s news is an important step in realising that goal.”
So far there are seven organisations in New York that are licensed to trade bitcoin under the NYDFS. This may indicate that New York is a state that highly values and recognises cryptocurrency and its use, especially as Square is the recipient of the seventh BitLicense that has been granted by the state. The six other organisations that obtained the same license previously include; Coinbase, Circle Internet Financial, Genesis Global Trading, Xapo, XRP II and bitFlyer USA.
Although virtual currency has gained regulatory approval across seven organisations, the process of obtaining a BitLicence is not as straightforward as it seems. There are a list of rules that companies must abide by before reaching the standards required by the NYDFS. On top of these requirements, the NYDFS also carry out a list of checks on the company to ensure that they are suitable, such as the financial condition, responsibility and business experience of the applicant. Square were successful in obtaining a virtual currency license after passing the comprehensive review that was carried out on the business.
“DFS has conducted a comprehensive review of Square’s application, including the company’s anti-money laundering, anti-fraud, capitalisation, consumer protection, and cybersecurity policies.”
The BitLicense Regulatory Framework can be found in the New York State Register’s June 24, 2015 edition (Title 23. Department of Financial Services. Chapter I. Regulations of The Superintendent of Financial Services part 200. Virtual Currencies).
In order for a business to be able to legally trade cryptocurrency, they must obtain a license under Section 200.3, without it they cannot ‘engage in any Virtual Currency Business Activity’. The initial step a business must take in order to obtain the license is to make an application under 200.4 which has a fee of five thousand dollars.
The NYDFS have stated that organisations who are involved in any of the following activities must obtain a BitLicense:
- Virtual currency transmission
- 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
- Controlling, administering, or issuing a virtual currency.
As well as the legislative framework, there is guidance available to all virtual currency businesses that are licensed under 23 New York Codes, Rules and Regulations (NYCRR) Part 200. The guidance issued by the NYDFS emphasises that:
- VC Entities are required to implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing; and market manipulation is a form of wrongdoing about which VC Entities must be especially vigilant, given that such manipulation presents serious risks both to consumers and to the safety and soundness of financial services institutions.
In order to minimise the risk of fraud, the virtual currency entities are also advised to implement a written policy that:
- Identifies and assesses the full range of fraud-related and similar risk areas, including, as applicable, market manipulation;
- Provides effective procedures and controls to protect against identified risks;
- Allocates responsibility for monitoring risks; and
- Provides for periodic evaluation and revision of the procedures, controls and monitoring mechanisms in order to ensure continuing effectiveness, including continuing compliance with all applicable laws and regulations.”
Another measure recommended in the guidance is that businesses must immediately inform the NYDFS if any wrongdoing is detected. The virtual currency entity must provide:
- a statement of the actions taken or proposed to be taken with respect to such developments, and
- a statement of changes, if any, in the VC Entity’s operations that have been put in place or are planned in order to avoid repetition of similar events
It can be said that the implementation of regulations has a strong impact on the users of digital currency and perhaps even the value of cryptocurrency. This can be assumed due to Square’s recent stock activity. Since the virtual currency license was obtained, the stocks of the company have dramatically increased. In addition to this, the price of Bitcoin also increased on the same day that Square received their license to trade cryptocurrency.
There is no doubt that cryptocurrency is volatile, especially as the cryptocurrency market is smaller in comparison to the forms of currency that are more established, and also due to the fact that the value is determined by the amount of people engaging in cryptocurrency trading. Although there is skepticism amongst many people due to the volatile nature, it can be assumed that the use of regulations and issuing of licenses to trade may in fact give digital currency more recognition. The fact that there is now legal validation of cryptocurrency trading across many countries, it means that more and more people will trust using digital currency, thus increasing its value. It can be assumed that virtual currency will be heavily used in the future, especially as there are legislation changes that now permit the use of virtual currency within businesses. The world of blockchain, financial technology and cryptocurrency is moving at a fast pace, and although there are regulations and measures being adopted in certain countries, regulations are not moving at the same rate, with many countries still very far behind.