Virtual Currency Guidance

Request for Comments on a Proposed Framework for a Conditional BitLicense

Virtual Currency Businesses Guidance

Introduction

In June 2015, the New York State Department of Financial Services (“DFS”) issued its virtual currency regulation, 23 NYCRR Part 200 (the “VC Regulation” or “BitLicense” regulation).  Since 2015, under that regulation or the limited purpose trust company provisions of the New York Banking Law, DFS has granted 25 virtual currency licenses and charters to ensure New Yorkers have a well-regulated way to access the virtual currency marketplace and that New York remains at the center of technological innovation and forward-looking regulation.

DFS recognizes that some firms may face actual or perceived hurdles in obtaining a BitLicense.  These include a rigorous application process, which can involve a significant expenditure of time and resources for applicants fulfilling the regulatory requirements for strong governance, operational and compliance controls, and capital, among others.

The New York State Legislature created DFS in part to “encourage, promote and assist banking, insurance and other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state.” N.Y. Fin. Serv. Law § 102(a).   

To meet these goals, DFS is proposing the following conditional BitLicensing framework, pursuant to the Superintendent’s authority under the VC Regulation,^[i] and is seeking comments from all interested parties and the general public regarding the proposed framework. 

Proposed Conditional Licensing Framework

The proposed conditional licensing framework is intended to allow a new entrant to work in collaboration with an authorized BitLicensee or a holder of a New York limited purpose trust charter (each, a “VC Entity”) during the term of the conditional BitLicense (a “Conditional License,” and the holder of such a license, a “Conditional Licensee”).  The framework can be utilized by a variety of entities, such as startups, growth-stage companies, established New York companies not yet conducting any virtual currency business activity, and established virtual currency companies now operating outside New York.   

Under the proposed framework, a firm (the “Applicant”) seeking to engage in virtual currency business activity in New York under a Conditional License would collaborate and engage with an authorized VC Entity for various services and support, such as those relating to structure, capital, systems, personnel, or any other support needed.  

DFS expects that an entity that seeks a Conditional License will endeavor to eventually seek and obtain a full BitLicense.

The Superintendent has the authority, under the VC Regulation, to suspend or revoke a Conditional License, and to impose “any reasonable condition” on a Conditional Licensee, which “may be subject to heightened review, whether in regard to the scope and frequency of examination or otherwise.” 23 NYCRR 200.4(c).

The proposed framework includes the following general process:

1. An Applicant for a Conditional License will contact DFS ([email protected]) to indicate its intention to enter into an arrangement to collaborate with a specific VC Entity and seek to begin the application process by providing a draft of a service level or similar agreement (the “SLA”) between the Applicant and the VC Entity, with the understanding that entry into an SLA, or any other agreement, with a VC Entity is not, in itself, sufficient for DFS to grant the Conditional License.
2. Pursuant to VC Regulation requirements, an Applicant will be required to submit certain documents and information, based on, for example, the type of business the Applicant expects to conduct, and the risks presented by that business.
3. Once an Applicant submits all required information and documentation and DFS finds those to be informationally complete, DFS will begin its substantive review.  
4. Consistent with DFS’s standard practice, DFS and the Applicant will enter into a supervisory agreement, which will detail, among others, the activities in which the Applicant may engage, the requirements it must meet, division, apportionment and sharing of responsibilities and liabilities with the VC Entity, and the oversight DFS will conduct with respect to the Applicant. As noted above, the VC Regulation contemplates that a Conditional Licensee may be subject to heightened review, including through examination.
5. If DFS approves the application, it will issue to the Applicant a Conditional License under the VC Regulation.  Once licensed, the Conditional Licensee may engage in any virtual currency business activity, as approved by DFS.

This proposed framework is not intended to limit the scope or applicability of any law or regulation; and DFS may, at any time, discontinue the conditional licensing approach as outlined here.

Request for Comments

DFS is seeking comments from all interested parties and the general public regarding the above proposed framework, and is particularly interested in receiving comments with respect to the following questions:

1. What types or categories of Applicants would be most suitable and benefit most from the proposed framework, including the characteristics and requirements, such as those relating to size, business model, potential impact on innovation and the New York financial markets, revenue, customer base, experience, management, and operational history of Applicants, and the reasoning? 
2. What types or categories of VC Entities would be most suitable, and what characteristics and requirements, such as those relating to size, expertise, corporate governance, controls, compliance, operational capacity, and supervisory experience, should they possess in order to effectively and safely work in collaboration with a Conditional Licensee? 
3. What types of services and support should a VC Entity provide to a Conditional Licensee with the ultimate goal of enabling the Conditional Licensee to obtain a regular non-conditional BitLicense from DFS?
4. What limits should be placed on the types and levels of services and support a VC Entity may provide to a Conditional Licensee, including capital infusion, guarantees, day-to-day management and operations, board representation, policy making decisions, and control of the Conditional Licensee and the reasoning?  
5. How should a VC Entity ensure that its own safety and soundness, including operations, controls, and compliance with its supervisory agreement would not be adversely impacted by these collaborative arrangements, including caps and limits on the total number of such arrangements for the VC Entity?
6. What initial due diligence should a VC Entity conduct on an Applicant for a Conditional License, and what initial due diligence should such an Applicant conduct on the VC Entity before they start collaborating under this framework?
7. What ongoing due diligence should a VC Entity conduct on a Conditional Licensee, and what ongoing due diligence should the Conditional Licensee conduct on the VC Entity (including, in each case, the frequency of such due diligence) in order to assess their continued collaboration under this framework? 
8. What would be the most appropriate way to divide, apportion, and share responsibilities, obligations, and liabilities between a VC Entity and an Applicant for a Conditional License?  For example, how should the responsibility or liability associated with any potential failure to meet statutory, regulatory, or other obligations be divided, apportioned, or shared, and what would be the mechanics for achieving that?
9. How should a VC Entity and an Applicant for a Conditional License ensure that any conflicts of interest that may exist between them are identified and effectively addressed, and what would be the mechanics for achieving that?
10. How should a VC Entity and a Conditional Licensee’s collaboration be structured to mitigate the risk of an adverse impact on markets as a result of such joint effort and collaboration?
11. In addition to the proposed framework, what other methods might DFS consider to safely and effectively facilitate entry into, and growth into, New York’s virtual currency marketplace?

Comments should be submitted by August 10, 2020, to [email protected]. (Please use “Proposed Conditional Licensing Framework” in the subject line.  Comments may be subject to public inspection and should not include any sensitive or confidential information.)