BitLicense By The Numbers

Update 12/19/2014: This article describes costs associated with BitLicense as originally proposed. Since then, some requirements have been scaled back or eliminated in response to public comment.

Among the most significant problems with New York’s proposed BitLicense requirements cited by opponents is cost.  This survey lists the major requirements for licensing and ongoing compliance under rules proposed by the New York Department of Financial Services and estimates the cost to comply. The source of the requirements is New York Department of Financial Services Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200- Virtual Currencies (hereafter referred to as “BitLicense Proposal”).  Unless otherwise cited, costs are the author’s estimates, based on personal or professional experience.  If you have something to add to these estimates, you can e-mail us at info@bitcointaxblog.com.

Assumptions

-A hypothetical applicant is a virtual currency trading platform and hosted wallet service located in the State of New York.
-The company is not currently licensed to perform any money related business, but is a legal entity in New York and possesses a complete business plan.
-The company has five principal officers and has sufficient resources to fully comply, but may use in-house expertise when doing so is appropriate.

Application for Virtual Currency License

Requirements

(BitLicense Proposal section 200.9)

Applicants must submit a NYDFS provided application form with the following attachments:

-Listing of affiliates
-List of directors and individual applicants
-Background report prepared by independent investigatory agency
-Fingerprint cards for each applicant prepared by NYDFS’ approved vendor
-Passport type photograph of each person named in the application
-Organizational chart of applicant
-Personal financial statements for each principal officer, stockholder or beneficiary
-Pro-forma financials for the next year for applicant
-Description of the applicant’s business, business plan, bank details, written policies and procedures, insurance policies and explanation of value calculation methodology

Cost

-The amount of the application fee is not currently known, but is $3,000 for MSB applications. The Virtual Currency fee is likely to be similar (source: http://www.dfs.ny.gov/banking/ialfmti.htm).
-Negligible cost for filling out forms and reproducing elements of the company’s business plan, such as the organizational chart and list of affiliates, directors, etc.
-Background reports will cost approximately $650 each from a NYDFS approved vendor (source: http://www.investigations.bizland.com/id15.html).
-Fingerprint cards cost $105 each from a NYDFS approved vendor (source: http://www.dfs.ny.gov/banking/iafpplfs.htm).
-Personal financial statements will cost $150 to $300 for a CPA to compile, but applicants may be able to use a standard form, such as the one provided by the SBA (source: http://www.sba.gov/content/personal-financial-statement).
-Passport photos cost $11.99 each (source: http://www.cvsphoto.com/passport-photos).
-Pro forma financial statements will cost $600 to $900 for a CPA to compile if they are not already included in the business plan.
-Developing written policies and procedures will cost $3000 to $5000 (source for templates: http://www.bizmanualz.com/ceo-company-management-procedures-manuals).
-Cost and requirements for insurance are unknown, but likely $500 to $1000 per year for business liability insurance only. Additional insurance requirements are expected.

Post Licensure Requirements

Compliance Officer and Compliance Policies

Requirements

(BitLicense Proposal section 200.7)

-Licensees must designate a qualified compliance officer
-Licensees must have a written compliance policy.

Cost

-Likely $60,000 to $100,000 per year to hire a “qualified compliance officer,” if one of the officers is unwilling or unable to serve.
-The cost for a compliance policy template is $324.95 (source: http://www.msbcomplianceinc.com/compliance-products/), but more for a custom product.

Capital

Requirements

(BitLicense Proposal section 200.8)

-Licensees must comply with capital requirements to be specified by the NYDFS.
-Licensees may only keep their profits and retained earnings in cash or near-cash equivalents.

Cost

-Cost of meeting minimum capital requirements depends on company’s capital structure (ratio of debt to equity, interest rates, etc.).
-Cost of keeping profits and retained earnings in cash or equivalents is the opportunity cost of being unable to pursue higher yielding investments (a conservative estimate would 6% to 8% per annum).

Bonding

Requirements

(BitLicense Proposal section 200.9)

-Licensees must maintain a surety bond in an amount to be determined by the New York Department of Financial Services.

Cost

-The cost of a surety bond depends on applicant, industry, and vendor. For high risk applicants, cost is typically 5% to 15% of the bond amount (source: http://www.suretybonds.org/faqs).

-For a $500,000 high risk surety bond, the cost would fall between $25,000 and $75,000 per year.

Reserves

Requirement

(BitLicense Proposal section 200.9)

-Licensees must maintain reserves of identical type and amount to those deposited by customers (i.e. cannot engage in reserve banking or lend customer assets).

Cost

-There is no direct cost for this requirement
-This requirement limits the flexibility of a licensee to leverage customer assets to generate trading revenue, but should prevent slow fulfillment of purchase or sale orders due to low virtual currency inventory or low fiat reserves.

Record Keeping

Requirements

(BitLicense Proposal section 200.12)

-Licensees must maintain extensive business records for a minimum of ten years “in original form or native file format.”
-Licensees must maintain records of accounts for at least five years after the point at which such accounts fall under the “abandoned property law.”

Cost

-Negligible incremental cost beyond the record keeping that would already be expected of a well run business for tax or investor relations purposes.
-Companies with poorly planned business processes may face difficulties with storing paper records, but this can be effectively mitigated by planning for a “paperless” office up front.

Examinations

Requirements

(BitLicense Proposal section 200.13)

-Virtual currency businesses must submit to examination by NYDFS of all aspects of the business affecting safety, soundness and compliance, at least once every two years.
-Licensees must also cooperate with special investigations of the NYDFS, if requested.

Cost

-The cost of cooperation with a NYDFS examination depends on scope and timing of examination procedures, but is likely to involve part time involvement by multiple employees over a period of weeks or months.
-If the business chooses to retain representation or consultation during the examination, the cost of such representation is likely to range from $150 to $300 per hour.

Financial Statements

Requirements

(BitLicense Proposal section 200.14)

-Licensees must submit financial statements and certain other reports certifying compliance with NYDFS rules on a quarterly basis.
-Licensed companies must submit audited financial statements that have been prepared in accordance with Generally Accepted Accounting Principles and certified by an officer of the company annually.

Cost

-If prepared by an outside CPA, quarterly / interim financial statements will likely cost $1000 to $2000. This is not a requirement, but likely to be common among licensees that engage a CPA on an ongoing basis.
-The cost to produce audited financial statements will depend on the size and complexity of the licensee, but believed to be a minimum of $5,000 to $10,000.

Anti Money Laundering / Know Your Customer

Requirement

(BitLicense Proposal section 200.15)

-Licensed virtual currency businesses must develop and implement an anti money laundering program that includes a “know your customer” component.

Cost

-No comprehensive compliance costs for these requirements are publicly available. However, an annual survey by KPMG suggests that aggregate costs are both significant and growing.
-FINRA and the SEC have information pages and templates online for use by small firms. Templates are also available to purchase. (source: http://www.msbcomplianceinc.com/compliance-products/)
-Compliance costs are higher among firms that have previously been cited for non-compliance. AML consultants typically charge $200 to $400 per hour for specialized compliance support.

Cybersecurity

Requirements

(BitLicense Proposal section 200.16)

-Licensees must establish and a cyber security program and written cyber security policies in accordance with NYDFS standards.
-Cyber security program must include audit functions, such as penetration testing.
-Licensees must appoint a qualified Chief Information Security Officer.

Cost

-Cyber security costs are heavily dependent on the company’s individual circumstances, network configuration, etc.
-A “qualified Chief Information Security Officer” would likely be found among the principal officers of the licensee. If not, then the cost to retain one would likely fall in the $60,000 to $100,000 per year range.

Advertising

Requirements

(BitLicense Proposal section 200.18)

-Virtual currency businesses may not advertise in New York without a disclosure that the advertiser is licensed to engage in virtual currency activity, and must disclose material risks
-Licensees must keep samples of advertising materials for inspection by the NYDFS.

Cost

-The cost of compliance with advertising disclosure requirements is thought to be negligible.
-Licensed companies may incur costs from the requirement to adapt advertising materials already in use to meet NYDFS requirements.

The Bottom Line

The estimated total cost to apply for a New York BitLicense for the hypothetical company described above would be $12,000 to $15,000. Keep in mind that this is just for the BitLicense and does not include other business related startup expenses.

The cost of compliance on an ongoing basis cannot be estimated, due to the wide variety of factors that play a role in pricing for the various requirements. Nevertheless, ongoing compliance expenses will be considerable for all licensees.