Crypto Regulation in New York: A Benchmark for Progress

With its epicenter of New York City and Wall Street, New York State is widely considered to be the financial center of the United States, and arguably the world. The New York State Department of Financial Services (NYDFS) supervises and regulates the activities of financial institutions representing approximately $7.3 trillion in total assets at the end of 2019. Almost six years after Bitcoin’s genesis block, NYDFS took notice of cryptocurrency businesses and codified crypto regulation called the “BitLicense” in 2015. For those looking for even greater fiduciary power, a Limited Purpose Trust Charter was also an available option.

By the end of 2016, only a few BitLicenses or Limited Purpose Trust Charters had been issued and a number of cryptocurrency companies halted operations in New York. However, as the cryptocurrency industry evolved, so has the attitude toward these crypto regulations. Today, there are numerous companies approved to operate under New York crypto regulations and they have become an important compliance accomplishment for many in the cryptocurrency industry.

Introduction and Approval

The NYDFS began receiving applications for money transmitter licenses from cryptocurrency businesses in 2013, putting the industry on its radar. In July of 2014, the former NYDFS superintendent Benjamin Lawsky announced a proposed regulatory framework for cryptocurrency businesses. The crypto regulation would affect businesses based anywhere in the world, as long as they served customers in New York State. This announcement kicked off a conversation between the industry and the department about potential bitcoin (and more broadly, crypto) regulation. 

In June of 2015, approval under the BitLicense or Limited Purpose Trust became a requirement for cryptocurrency businesses engaged in the following activities:

• Transmitting virtual currency

• Storing or custodying virtual currency

• Buying and selling virtual currency, including exchanging virtual currencies for fiat currencies

• Operating a virtual currency trading exchange

• Issuing virtual currency

A BitLicense or Limited Purpose Trust is not required for:

• Virtual currency mining businesses

• Businesses who accept virtual currency as payment for goods and/or services

Under New York crypto regulations, there are a number of requirements that companies must comply with on an ongoing basis, including consumer protection, cybersecurity, Know Your Customer (KYC), and Anti-Money Laundering (AML) rules.

In addition to those requirements, only “greenlisted,” pre-approved cryptocurrencies are covered under the BitLicense or Limited Purpose Trust. The breakdown of those coins (as of Q4 2020) is:

• Cryptocurrencies approved for listing:

  • Binance USD (BUSD)

  • Bitcoin (BTC)

  • Bitcoin Cash (BCH)

  • Ethereum (ETH)

  • Gemini Dollar (GUSD)

  • Litecoin (LTC)

  • Pax Gold (PAXG)

  • Paxos Standard (PAX)

• Cryptocurrencies approved for custody:

  • All cryptocurrencies approved for listing (above)

  • Ethereum Classic (ETC)

  • Ripple (XRP)

Difference Between BitLicense and Limited Purpose Trust Charter

Companies applying for a Limited Purpose Trust Charter have additional regulatory requirements than those with a BitLicense, namely, by having to apply to the New York Banking Board, rather than just the NYDFS. Recipients of a BitLicense must apply for a New York money transmitter license, whereas a Trust Company can engage in money transmission with their trust status.

The benefits of the Trust Charter over the BitLicense include having fiduciary powers that allow trust companies to manage their clients’ assets. As crypto regulations continue to develop and advance, these expanded fiduciary powers may play a part in what products and services trust companies may offer their customers. 

Adoption and Approval

When the New York crypto regulations were first enacted, many crypto businesses found the requirements overly expensive and onerous. This led to what some termed the “Great Bitcoin Exodus,” with companies including Shapeshift and Kraken deciding to stop serving customers in New York.

Nevertheless, over the past few years the number of companies that have obtained a BitLicense or Limited Purpose Trust has rapidly increased. The approved companies (as of Q4 2020) are:

Limited Purpose Trust:

• Bakkt Trust Company

• Coinbase Custody Trust

• Fidelity Digital Asset Services, LLC

• Gemini Trust Company, LLC

• NYDIG Trust d.b.a. Stoneridge

• Paxos Trust Company, LLC

BitLicense:

• Bitflyer

• Bitstamp USA Inc.

• Circle Internet Financial Inc. 

• Coinbase Inc.

• Coinsource

• Cottonwood Vending

• Eris Clearing, LLC

• Genesis Global Trading, Inc.

• LibertyX/Moon Inc.

• NYDIG Execution LLC

• Paypal (conditional BitLicense in partnership with Paxos Trust Company LLC)

• Robinhood Crypto

• Seed Digital Commodity Market, LLC

• SoFi Digital Assets

• Square, Inc.

• Tagomi Trading

• Xapo, Inc.

• XRP II LLC (Ripple)

• Zero Hash LLC

For these companies, securing these approvals have become a badge of honor. In November 2019, NYDFS Superintendent, Linda Lacewell, told Bloomberg: “Companies came to realize that if they received a license from us, that means that they had been vetted… and that DFS was willing to say this company is ok to do business, to interact with NY consumers. Reasonable regulation provides a safe place to innovate.”

The Future of New York Cryptocurrency Regulation

Although New York crypto regulations are working for many companies, NYDFS is still focused on providing the best possible environment for innovation. As outlined in their 2019 annual report, the NYDFS has created a Division of Research and Innovation that is currently focused on reviewing the BitLicense and crypto regulations in New York. One of the main items they plan to tackle is guidance for approved companies to self-certify new cryptocurrencies and allow listing without centralized approval from the NYDFS.

What started as a death knell for cryptocurrency companies operating in New York has quickly become one of the guiding forces for compliant innovation in the industry. We can look forward to new announcements regarding the BitLicense and other crypto regulations, rather than seeing it as a measure to stifle innovation.