NYDFS Regulation - Final Rule - BitLicense

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BitLicense
Proposal Date Comment Deadline Re-Proposal Final Rule Issue
July 14th, 2014 August 28th, 2014 February 25, 2015 June 3rd, 2015

"BitLicense" is the New York State regulation that seeks to be the example Bitcoin regulation. It was first proposed in 2014, and with a revised proposal coming out in 2015 before being finalized in June of that year.

Background

Bitlicense was proposed in response to the rise of virtual currencies. Bitcoin rose in popularity after the closure of "Silk Road", which was an online market for illicit drugs. The Bitcoin quickly rose in value, before collapsing from it's high of $1100 to $100. In response to the hacking of Mt. Gox Bitcoin exchange and it's subsequent bankruptcy, New York State regulators began to design new regulations to govern the the exchange of virtual currencies such as bitcoin. The new Bitlicense regulation will be the first of its kind.

Major Changes from Prior Proposal

The major changes include:

  • Banks and other regulated companies will be subject to the rules
  • Single application for both BitLicense and money transmitter license
  • Conditional Licenses can be granted
  • Virtual currencies can be held as capital
  • Allows licensee to sell or transfer bitcoins on behalf of the customer
  • Suspicious activity reports only on transactions greater than $10000 with NYDFS
  • 7 year requirement for records instead of 10
  • Counter-party information will only be need be to the practical extent possible[1]

Capital Requirements

BitLicense creates a capital requirement mandate for licensed firms. It will be determined by the New York Department of Financial Services for each firm dependent on a variety of factors. These include, but are not limited to:

  • Composition of assets
  • Composition of liabilities
  • Actual and expected volume of activity
  • "whether the Licensee is already licensed or regulated by the superintendent under the Financial Services Law, Banking Law, or Insurance Law, or otherwise subject to such laws as a provider of a financial product or service"[2]

Know Your Client, Anti-Money Laundering, & Consumer Protection

Under the new regulations, there is a strict new requirement on AML procedures. It includes the following requirements:

  • Risk Assessment of customers
  • Designated compliance officer and a compliance system
  • AML policy must be approved by the corporate board
  • Independent testing of compliance program and annual report to NYDFS[3]


Cybersecurity Rules

Firms operating under NY law will be subject to strict cybersecurity requirements. These will include:

  • Being able to Identify information on a licensed firm's system, sensitivity of the information, as well as who can access it
  • Protect system from unauthorized intrusion
  • Being able to detect unauthorized attempts at accessing sensitive information
  • Being able to respond to intrusions
  • Being able to recover from cyberattacks that disrupt service [4]

Final Rule as It Appears in the New York State Register


References

  1. NNew York’s Final “BitLicense” Rule: Overview and Changes from July 2014 Proposal. Davis Polk. Retrieved on June 11th, 2015.
  2. NNew York’s Final “BitLicense” Rule: Overview and Changes from July 2014 Proposal. Davis Polk. Retrieved on June 11th, 2015.
  3. NNew York’s Final “BitLicense” Rule: Overview and Changes from July 2014 Proposal. Davis Polk. Retrieved on June 11th, 2015.
  4. NNew York’s Final “BitLicense” Rule: Overview and Changes from July 2014 Proposal. Davis Polk. Retrieved on June 11th, 2015.

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