July 17 marked exactly four years since the Department of Financial Services of the State of New York (NYDFS) introduced a proposal to introduce BitLicense for the first time, the regulatory and legal framework for regulating the cryptocurrency market in the state of New York. Since that time, only eight companies managed to obtain this license, without which it is impossible to work with cryptocurrencies in one of the largest financial centers of the world. The last of these companies was the BitPay cryptocurrency payment operator, which received the BitLicense on July 16, 2018. Also, two crypto exchanges that did not receive BitLicense were given a special permission for operations. What is the difficulty of getting a BitLicense, how much does this license cost, who wants to work in the state of New York, and who has already managed to get it? All of that and more is covered in this article.
How Did the BitLicense Come About?
On July 17, 2014, the NYDFS first introduced a project to introduce a special BitLicense for any company working with digital currencies in the state of New York. The final version of the license was issued on August 8, 2015, after a long period of discussions and amendments to the regulation of cryptocurrencies and related technologies. According to the license, commercial activity with cryptocurrencies includes the following operations:
Obtaining digital currencies for transferring and conducting transfers with digital currencies, except for non-financial transactions.
Storage, maintenance, or management of digital currencies in the interests of third parties.
Purchase or sale of digital currencies as a part of customer service.
Providing exchange services as part of customer service.
Management, administration, or issuance of digital currencies.
At the same time, the license does not consider the following operations as commercial activities with cryptocurrencies:
Development and distribution of specialized software.
Actions of sellers and buyers of cryptocurrencies that use their digital assets to buy or sell goods and services, or hold them for their own investments.
As a result of the regulation, many companies and startups working in the cryptosphere decided to leave New York. Among them were such big players of the crypto market as Bitfinex, Poloniex, LakeBTC, ShapeShift, Korbit, LocalBitcoins, BitQuick, Genesis Mining Company, BitMex, and Eobot. In August 2015, Kraken published the post "Farewell, New York,” in which it called the compulsory license "so foul, so cruel that not even Kraken (the name of the exchange is attributed to the mythical sea monster. DeCenter) possesses the courage or strength to face its nasty, big, pointy teeth."
Moreover, in October 2015, Theo Chino, one of the first members of the Bitcoin Foundation, entrepreneur, and software developer filed a lawsuit challenging the introduction of the mandatory licensing enforced on cryptocurrency companies. According to the entrepreneur, NYDFS acted illegally and had no right to impose such restrictive rules of market regulation. This claim was supported by the Bitcoin Foundation, which launched a special Bitcoin purse to raise funds to pay court costs. Despite the support of the crypto community, however, in December 2017, the court rejected this claim.
Among the participants of the crypto market were those who were not ready to transfer their operations out of the financial capital of the U.S. So, by mid-August 2015, 22 companies had submitted their applications for BitLicense. As noted by Deputy Superintendent NYDFS Matt Anderson, the introduction of a license will ultimately help mass adoption of the cryptocurrency and this market both among businesses and among buyers:
"We believe that in the long term this will benefit everyone and will probably weed the seeds from the chaff. We believe that companies willing to work within the parameters of the mandatory regulatory requirements will continue to file applications."
In September 2015, crypto payment company Circle was the first organization to receive the license and authorization to conduct operations in New York. The next license was issued almost a year later. In June 2016, the financial services provider Ripple Labs Inc. became the second owner of BitLicense. Then, in January 2017, the license was issued to Coinbase. In addition to the Coinbase platform itself, a license was also granted to the company's GDAX exchange. In November of the same year, the fourth license was issued to the Japanese bitFlyer. The fifth licensed NYDFS organization was the Genesis Global Trading platform, which received a BitLicense in May 2018. Next, on June 15, the license was issued to the Swiss Bitcoin wallet provider Xapo, and on June 19, Square received its permission to develop solutions for electronic payments as well.
The eighth and the final company in this list of licensed participants on the New York crypto market is the well-known crypto payment processor BitPay, which received a license on July 16, 2018. To secure this, BitPay had to undergo a comprehensive NYDFS review, including an examination of the company's policy regarding anti-money laundering and fraud measures, as well as an examination of the security level of all systems and the implementations of the KYC (Know Your Customer) policy. The company also had to provide detailed information on their financial books and operations. Moreover, the financial watchdogs reserve the right to further supervise the activities of the company. As Stephen Pair, CEO of BitPay, noted:
"The state of New York has one of the most stringent policies regarding businesses related to cryptocurrencies, but for us it was extremely important to go through the process of obtaining this license. We believe that our work will pay off in full since New York opens significant business opportunities for BitPay."
It is worth noting that the special permissions for operations with cryptocurrencies issued by NYDFS also have been granted to the Gemini and itBit exchanges.
How to Get a BitLicense
The process of obtaining a license requires not only careful preparation but also significant financial and time resources, which are not always justified. According to Jesse Chenard, the former CEO of the Bitcoin exchange MonetaGo, who was one of the first to apply for a BitLicense back in 2015, it took 30 days for his legal group to prepare a document 500 pages long. Moreover, regardless of the NYDFS solution, the filing of an application will cost each company $5,000. It is worth noting that the consideration of the documents requires a lot of time, during which the company has no right to conduct operations. In this connection, by April 2016, the MonetaGo management decided to withdraw the application for BitLicense, which at that time had already taken about eight months to review.
Among other companies that have not yet received licenses from the New York financial regulator was the well-known crypto exchange Bittrex. In 2015, the CEO of the crypto exchange, Bill Shihara, told CoinDesk that the submission of documents for BitLicense cost the company about $20,000, and the team spent more than 80 hours preparing all the necessary documentation:
"Ultimately, I think customers should be happy about the BitLicense. While it is burdensome for us, the core of the paperwork involved consumer protection. The BitLicense requires background checks on the principals who handle your funds; detailed information of how the funds are stored and credited to our users; proof that the company is profitable; as well as security and incident response plans."
A similar opinion is shared by the management of Bitstamp, one of the largest Bitcoin exchanges. George Frost, former executive vice president and director of the legal department at Bitstamp, said:
"Applying for the BitLicense is an expensive and difficult process, as many have noted. Some other firms have chosen to abandon the New York market entirely, rather than comply. We do not fault them for doing so."
Bitstamp still intends to obtain a license, though. First, with approval, this will allow the company to provide the market with a new platform that fully meets all the requirements of the local authorities. Secondly, the license will expand the range of financial instruments offered, allowing for things such as an automated clearing house, provision of local electronic transfers, and operations with debit cards. At the same time, Frost noted that, despite all the complexity, the introduction of new regulations is inevitable:
"Like others, we regret the loss of economic freedom occasioned by the onset of regulation. [But] by participating, we are better positioned to help create an industry – and regulatory environment – that achieves widespread adoption and preserves as much individual autonomy as possible."
Possible Revision of the License
At the request of numerous participants of the crypto market, on February 23 of this year, New York senators Jesse Hamilton and David Carlucci held a roundtable discussion on the BitLicense, whose participants agreed on the need to reform the strict regulatory standards that were originally introduced in 2015:
"We want to put that out there, circulate it and really figure out how we can make this license in New York state something that works for the residents of New York state and the state economy," Carlucci said, noting that the reform bill could be submitted "very soon."
The hearing was attended by the Bitcoin Foundation member Theo Chino, who challenged the validity of BitLicense in court, as well as the co-founder of the blockchain startup Kadena Will Martino, who stated that because of the document's requirements, his company faced challenges that might eventually drive it out of the state altogether, even though the firm did not "transmit or exchange real digital currencies for the customers" and was "a tech startup company, not a financial institution." During the roundtable discussion, many participants agreed that BitLicense is hitting hard on a small business focused on technology. Presumably, as a result of this meeting, the NYDFS has already issued three BitLicenses during the first seven months of this year to Genesis Trading, Xapo, and Square. Still, no significant changes have been made to the legal framework itself.