New Developments for New York BitLicense Holders and Applicants

In 2015, the New York Superintendent of Financial Services came up with a response to the growing popularity of Bitcoin and other cryptocurrencies. The idea was a new charter based on the historic template for bank and trust charters. Called BitLicense, it came with many of the trappings of a bank or trust charter, including:

• Mandatory minimum capital
• Periodic examination by State examiners 
• Periodic reporting to the Superintendent
• Required policies and procedures (e.g., anti-money laundering, risk management and disaster recovery)
• Controls on new product and service offerings
• Regulation of changes in control

Similar to a bank charter, the procedure to obtain the license included fees payable to the State and a long application. The application included complete personal financial disclosure required of individuals associated with the proposed entity. Fees to professionals (lawyers, economists, or other advisors) have been estimated by outside observers to total $100,000 or more.

Also like a bank charter, the BitLicense process is daunting. Despite the challenge and expense, 20 firms signed up for one immediately, though not all of them completed the process. As of late 2021, according to industry newsletter CoinDesk, there were 25 firms authorized to operate under the regulation, including 6 that chose a limited purpose trust option license. Notably, the CoinDesk list shows there were no new licenses approved through September of 2021. Another news article published in May, 2022 cites 22 firms as license holders.

The list of license holders is revealing. The group includes Square, the payments company established by Twitter founder Jack Dorsey. Others on the list intend to use the BitLicense for options trading, and several licensees are providing services as fintechs in the payment services area.

The six firms that have received a limited purpose trust license appear to be interested primarily in providing custody services. Fidelity is the best-known name of the group, adding crypto custody to its array of other financial and investment services. One other, Paxos, is an issuer of cryptocurrency.

A Cloudy Future

The current inflation-riddled environment is a problem for any new business. For a crypto-based business, the difficulties have been magnified by serious declines in the value of cryptocurrencies. For example, Bitcoin has fallen from over $68,000 in November 2021 to around $20,000 in late June 2022. Terra, an issuer of “stablecoins” based on the U.S. Dollar, failed to hold its value at $1.00. A successor, Luna, has also failed to the point of being virtually worthless. CoinBase, the leading cryptocurrency exchange, may be the subject of a short squeeze that threatens its existence.

All of this is resulting in major financial pain to owners of crypto, issuers of crypto and of crypto-backed assets (such as ETFs), and companies serving the crypto industry, like the BitLicense holders. This last group can expect New York examiners—among other regulators—to peer into their books and records and to demand corrective action to respond to any noted deficiencies.

The FDIC is not likely to be involved, so any failure will pose only a minimal threat to the banking system. There is a significant threat to the BitLicense holders, however, because New York examiners will follow examination procedures based largely on those created by the FDIC. The corrective action might include a demand for additional capital, civil money penalties, management changes and closure of the institution.

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New Developments

In mid-May 2022, Adrienne Harris, superintendent of New York's Department of Financial Services, announced that she was speeding up the BitLicense process. The Superintendent reported that her office had revised processes and approved three licenses this year compared to only one in 2021. (The previous process had taken years from application to approval.) There was not a statement on the length or other aspects of the revised process.

What to think about BitLicense?

The BitLicense has been controversial from the start. Proponents argue that it brings some order to a chaotic market. They also argue that it brings important consumer protections to an inherently risky endeavor. Opponents see it as just more regulatory overreach while noting that the BitLicense erodes some of the anonymity that has been a compelling selling point for crypto assets. Notwithstanding these opinions, New York continues to move forward in issuing BitLicenses. While there are only a few BitLicenses active, the State has granted more of them in the last 8 years than it has commercial banking licenses. For those seeking a BitLicense, new regulatory and process revisions are a welcomed start.

Paul Nelson is a Consulting Expert at Bates Group with more than 45 years of involvement with the regulatory and legal compliance issues facing banks and nonbank financial services providers. His five years as a Senior Attorney and Acting Regional Counsel with the Comptroller of the Currency formed the basis of his education in the principles of bank regulation as practiced in the U.S.

Paul has also served as a General Counsel of the U.S. House Banking Committee and as a registered lobbyist in private practice. In his long history in financial services regulation, Paul has represented clients in courts, before both federal and state financial regulatory agencies, the U.S. Congress, the NASD (now FINRA), and arbitration panels.