The New York Department of Financial Services announced revisions to proposed rules for virtual currencies in that state. The revised rules, which came in response to public comments, represent a small but important victory for digital currency advocates. Here is a summary of the changes.
These points aren’t really changes, per se, but confusing points that NYDFS made explicit under the revised proposal or in public comments.
- Software development is not a regulated activity under BitLicense. This means that companies that develop applications using the blockchain will not need to register.
- Virtual currency mining is not a regulated activity under BitLicense. This means that mining in itself is not considered creation of a new cryptocurrency or a money service business.
- Generally speaking, individuals who merely hold, invest in, or buy/sell with virtual currencies need not obtain a BitLicense. Note that this does not mean that the business of trading virtual currencies is exempt, only that a person whose activities do not rise to the level of a business activity would be. There is no bright line for making this determination.
- Merchants who merely accept virtual currencies in payment or spend them in the course of business are not required to obtain a BitLicense. This one was kind of a no-brainer, but also the source of much weeping and gnashing of teeth.
These points changed in response to public comment.
- Startups will have access to a transitional BitLicense with abbreviated compliance requirements. Presumably, this would make compliance less expensive for a period of time. NYDFS specifically points out that AML and consumer protection requirements will not be scaled back, though it wasn’t immediately clear what this meant.
- The NYDFS will pre-certify that certain parties claimed to be non-controlling actually aren’t. This is important, since licensees might otherwise be put in the position of making the determination on their own and hoping for the best. Pre-certification limits the risk of leaving someone off the list.
- Record keeping requirements are reduced from ten to seven years. I consider this to be a minor concession, since the cost of digital storage is so cheap as to be almost immaterial. There appears to be no change to the requirement that records be maintained in their original form; a powerful incentive to NOT keep paper records around.
- Licensees are only required to obtain name and address information from their own customers, not from all parties to a transaction. This is probably the most significant change to the original proposal. The original requirement was unworkable and was acknowledged as such by NYDFS. I engaged in a running Twitter battle over this issue with an official at one exchange. It appears that we were both right in the end.
- A “broader range of assets, including virtual currencies” will count toward capital requirements. The original proposal stated that cash and cash equivalents would be the only assets worthy of consideration as capital. Under the revised proposal, licensees would have the ability to maintain a portfolio of digital currencies and count them as part of their required reserves. This is really the only fair option. Virtual currencies are an actual thing that has actual value, so they should be treated as such by the Department.
BitLicense has been closely watched since its announcement last summer. Though the proposed rules will only apply to a small group of businesses that have regulatory nexus in the State of New York, many believe that they are likely to serve as a model for regulatory action in other states in much the same way as securities or money service business rules. Though the revisions to the proposed rules are small, they represent an important victory for digital currency advocates and show how engagement with regulators can actually make a difference.