New York Proposed Guidance on Virtual Currencies
On December 11, 2019, the New York State Department of Financial Services ("DFS") issued two proposed changes to the regime that is in place in New York for the regulation and licensing of virtual currency ("VC") businesses. Unfortunately, these changes do not affect the licensing requirements in NY and do not make it easier for non-licensed companies to do business in NY.
The DFS proposed regulating VC businesses in mid-July 2014 and started issuing licenses at the end of 2015. So far roughly 25 companies have been licensed by NY in the last 4 years. It is not a secret that the NY licensing requirement has been a huge disincentive for VC businesses to do business in NY.
Because NY recognizes that other states are benefiting from the exponential growth of VC business activities, NY is reappraising its VC licensing regime and has promised to reevaluate the requirements that it now imposes on VC proposals.
As the first step in this reappraisal process, the DFS is proposing to issue guidance that applies only to the couple of dozen existing licensees to permit the use or issuance of new coins without prior regulatory approval. The DFS is referring to this change in policy as its "Coin Listing Policy Framework." In a nutshell, the new policy will provide for:
- A DFS web-page listing of all the coins that NY licensees are permitted to use as part of their VC business in NY without any DFS approval; and
- A model framework to be adopted by a NY VC licensee for listing or adopting new coins that if approved by the DFS will permit NY licensees to in effect self-certify the listing or adoption of new coins without DFS approval.
DFS Listing of Approved VC
Many NY licensed VC companies have petitioned DFS to expand the types of VC that they handle as part of their NY business. Accordingly, the types and the volume of VC in the NY marketplaces grows steadily. To avoid delays and increase efficiency, the DFS will promulgate a list that they will update regularly of all the VC that NY licensees can use as part of their NY businesses. It is likely that the initial list will include: Bitcoin, Bitcoin Cash, Ether, Ether Classic, Litecoin, Ripple, Paxos Standard, and Gemini Dollar. All VC licensees would be required to advise the DFS of all coins used in their NY businesses.
Framework for Policies for Creating New VC
The DFS wants to encourage companies that want to create or list or adopt new VC to have an in-house policy of the procedures they will follow with regard to new VC offerings. VC companies that adopt such policies and get the policies approved by the DFS will be able to issue and list and adopt new VC without prior DFS approval. Each policy will be company-specific and tailored to the business that is regulated by NY; however, the DFS has listed a minimum of 17 considerations that such a policy should cover.
The principal considerations that an acceptable policy should cover are:
- Directors should approve the policy and any coins issuances and careful minutes are kept on all decisions and all supporting materials are retained, particularly on the application of the policy to the new VC issuances.
- any new VC shall receive a full risk assessment that is independent and free of conflicts and that should assess these risks among others: the legal status of the issuer, purpose of the issuance, AML risks, and the governance of the issuer, operational risks, including increased demand on the licensee’s resources, risks associated with new IT, cyber security, market risks, risks of code defects, including how to manage and report any defects, capital requirements and any supervisory agreements with the DFS, legal risks such as all regulatory risk or unlawful use of the VC and an independent audit review should be done of all these risks to make sure that all have been assessed and addressed.
- new VC should be monitored to insure that its use remains prudent, including periodic evaluating of the VC for material changes or other factors, continued review of the effectiveness of control measures for managing risk and a procedure for de-listing a coin in the proper circumstances, including how to notify affected customers and users.
Once the DFS approves such a company policy, the company could issue or adopt or list new VC without prior approval from DFS, but give the DFS prior notice of any new VC with details on the use and offering of such coins.
The bottom line is that this would expand the universe of crypto that existing licenses players can transact in but does nothing to expand the universe of licensed players.
The DFS is accepting comments on this proposal until January 27, 2020.