Regulation and regulatory compliance can be confusing and controversial issues in cryptocurrency, especially when users of crypto appear to be so divided. On one side of the division are individuals who take pride in the unregulated nature of virtual currencies and eschew all legal obligations associated with them. On the other side are those who recognize the potential for shady activities in crypto – or may have even been burned by those shady activities – and embrace increased regulation.
The BitLicense, issued by the NYSDFS, represents one of the older and less often discussed regulatory frameworks in cryptocurrency. Whether you’ve arrived at this article because you’re simply curious about New York BitLicenses or you’re actively engaged in obtaining one, you are in the right place.
What is a New York BitLicense?
Actually, the phrase “New York BitLicense” is a bit redundant because BitLicenses, thus far, are issued in the state of New York exclusively. BitLicenses are business licenses that permit individuals and businesses that obtain them to conduct various activities pertaining to cryptocurrencies. As mentioned earlier, BitLicenses are issued by the New York State Department of Financial Services (NYSDFS, for short), which is a New York regulatory agency.
History of BitLicenses
The concept of the BitLicense was introduced on July 17, 2014 by the first superintendent of Financial Services in New York, Benjamin Lawsky. It was over a year before BitLicenses became official in New York; on August 8, 2015, it became mandatory for individuals and businesses carrying out certain activities with cryptocurrencies to obtain BitLicenses.
When discussing the motivations and goals of the BitLicense regulation, Lawsky spoke of exchanges specifically – mentioning that the requirements of a BitLicense might prevent certain catastrophes from happening – namely full exchange collapses.
Perhaps unsurprisingly, the mandate of BitLicenses was met with resistance and avoidance at first. In fact, a number of crypto-related businesses ceased activity within the state of New York immediately following the mandate of the BitLicense. It wasn’t until December of 2016 that the first BitLicense was issued to Circle, a peer-to-peer payment based tech company. Since then, a number of other businesses have also been granted BitLicenses, but adoption of the regulatory permit seems slow. Indeed, BitLicense is not universally approved in the crypto community.
Controversy Around BitLicense
Critics of BitLicense state that the regulatory framework has made New York one of the least friendly crypto environments in the United States, perhaps the world. While it is difficult to say whether the regulations have been successful in protecting consumers – as was their stated goal – it’s simple to see that BitLicense has deterred crypto activity in New York significantly. Some of the main arguments against BitLicense are:
- Crypto businesses are incentivized to avoid New York in favor of friendlier environments. It’s been noticed that some crypto startups that would have been registered in New York have opted for New Jersey instead.
- Many perceive BitLicense as expensive and difficult to obtain.
- The framework imposed by BitLicense may be redundant; the SEC already mandates many of the same requirements as BitLicense.
Even the mayor of New York, Eric Adams, spoke out against BitLicense. Labeling the regulation as “stifling,” Adams explained that BitLicense made New York less competitive in the crypto landscape.
Due to the importance of New York as both a regulatory environment and as a source for potential growth, crypto-minded companies have ramped up lobbying efforts in New York politics. According to at least one report, several crypto firms, including Blockchain.com, spend a combined $100,000 per month in their efforts to champion cryptocurrency-friendly legislation. The hope of the lobbying efforts is to replace more stringent and cumbersome regulatory frameworks – like BitLicense.
What Type of Activity Falls Under the BitLicense?
Earlier in this article, we explained that the BitLicense permits its holder to engage in various cryptocurrency related activities. At this point, we’ll get more detailed and explain what types of activities are included. The rules and regulations of New York’s BitLicense explain that the the following activities fall under its purview:
- Sending or receiving crypto over a certain amount when the purpose is financial in nature.
- Taking responsibility for cryptocurrency (by maintaining custody of its private keys) for another party.
- Buying or selling cryptocurrency as a business.
- Acting as an exchange for the sale of cryptocurrency as a business.
- Creating, managing, or controlling a cryptocurrency.
While it should go without saying that regulations tend to be complex in nature, the language used in the official BitLicense paperwork seems relatively clear. If you are unsure of whether or not you need a BitLicense, however, it is advisable to contact a reputable lawyer who will be able to give you a definitive answer.
Do You Need a New York BitLicense?
With the above concession (about contacting a lawyer) made, we can still move on and discuss what types of people and businesses absolutely need BitLicenses and what types of people and businesses absolutely do not.
You absolutely do not need a BitLicense if…
Your base of operations is not in New York, you don’t live in New York, and you do not deal with customers from New York.
Yes, it’s that simple. BitLicense applies to cryptocurrency activities in the state of New York only. If you’re outside of New York and you don’t have any ongoing or planned crypto-related business with New York residents, you don’t need a BitLicense.
You might need a BitLicense if…
- You conduct cryptocurrency transactions in New York.
- You perform cryptocurrency transactions with residents of New York.
- You run any sort of ATS or exchange in New York OR
- Your ATS or exchange caters to New York-based customers.
- You’re creating an emerging crypto project based out of New York.
Again, unless you’re already 100% sure on needing or not needing a BitLicense, consulting a lawyer for clarity is an excellent idea.
How do you Obtain a New York BitLicense?
If you end up deciding to apply for a BitLicense, you will do so through the Nationwide Multistate Licensing System (NMLS, for short). The new application checklist can be accessed with this link.
Of course, the first step will be completing the required forms. In order to submit the form and apply, you must also pay a $5,000 “NY-DFS” application fee.
Along with the completed form, you will need to supply a number of documents. Depending on your specific situation and why you’re applying for a BitLicense, some of the documents you may need to supply include:
- A detailed business plan of how your business utilizes blockchain technology or interacts with its customers using cryptocurrency.
- Documents related to AML/BSA (Anti-Money Laundering and Bank Secrecy Act) policies.
- Company staffing and internal policies.
- Ownership itemization.
- Customer disclosures.
- Receipts and/or customer confirmations.
- Flow of funds structure.
- Classification of legal status.
- Photo identification.
- NY Authority to Release Information form.
The above list is greatly simplified and abbreviated. Unfortunately, applying for a BitLicense will not be a quick and easy process.
Once your application and necessary documents have been submitted, the review process can begin. Should you decide to go through this process, please be sure that you have included absolutely everything that’s required. The NMLS expressly states that one of the main causes of delay in processing is that the review cannot begin until everything is supplied.
Are there any Alternatives to the BitLicense for New York Businesses Dealing with Cryptocurrency?
Yes. It has been declared that businesses who seek out and receive the first superintendent’s approval to operate without BitLicenses may do so. This option is available to businesses that have been “chartered under the New York Banking Law.”
Should You Get a New York BitLicense?
If, after going through this article, you believe that you need a New York BitLicense to begin or continue operating, then it is certainly in your best interest to get one. You have to consider the opportunity cost in the decision. If you find that your operations require a BitLicense but you fail to obtain one, you might find yourself violating New York regulations and you may suffer serious consequences, as a result.
Alternatively, you might decide that it is preferable to change your operations in ways that exclude the state of New York from your scope. In fact, many businesses have already concluded that the process of obtaining a BitLicense is simply too costly and cumbersome and have done exactly this.
Regardless of the time and financial costs associated with New York BitLicenses, however, if you need one to comply with appropriate regulations, the worst option would be deciding to continue operations in New York without one. The risk is simply too high and – of course – it would be illegal.
The simplest and best advice for anyone unsure is to consult a lawyer regarding any decision associated with a New York BitLicense. With an attorney’s input, you can make the most informed decision for your individual situation.