New York BitLicense May Be Replaced by Digital Seal Getting Rid of Fees
Just over a year ago on January 2017, Coinbase became the third virtual currency business to obtain a New York Bitcoin license, or ” BitLicense, ” granted by the New York Department of Financial Services (DFS). The New York Bitcoin Licensing scheme was implemented in 2015, and the third BitLicense recipient made headlines just over a year ago after applying in 2015. A New York legislator is poised to change that by introducing a new bill titled The New York Cryptocurrency Exchange Act A9899, which he claims would replace the New York BitLicense with a digital seal and rid of costly licensing fees.
Shortcomings of the New York BitLicense
Stating the New York Bitcoin License scheme is restrictive to novel technology is an echoing understatement within the cryptocurrency community. New York State Assembly legislator Ron Kim is aware of this sentiment and believes that exchanges that go unregulated because of denied New York BitLicense in the state are hurting the future of Blockchain technology and digital currency. “Some of the companies that left acknowledged the value of government oversight,” He stated in a three page report, “but found the requirements and fees associated with BitLicenses to be far too burdensome.”
Indeed, one of the first BitLicense applicants, Bitstamp, calculated the total cost of applying to $100,000 in compliance fees, legal services, and time devoted to the endeavor as reported by Coindesk. That first year, 22 entities applied, each paying a non-refundable fee of $5,000 along with the time-consuming legal ordeal. Those granted a BitLicense have reported costs of $50,000. “Placing such high startup costs on a new industry, where the majority of new companies are startups, has left the state cryptocurrency industry in the dust,” Kim added.
Aside form high costs, Kim also noted that regardless of the DFS efforts to set security requirements for new exchanges, it fails to protect users from hacks to the storage system exchanges employ. The Novelty of Blockchain is its distributed ledger techonolgy (DLT) that keeps transactions secure, but exchanges store the cryptocurrency in a centralized repository. He alluded to the 2013 Mt. Gox exchange hack, which at the time was processing approximately 70% of all Bitcoin transactions. Regardless of the scrutiny for approval by the DFS, the New York Bitlicense does not have any protocols in place for decentralizing user cryptocurrency information to protect it from hacks. In an interview with Bitcoin Magazine Kim exclaimed, “What New York needs now are common-sense laws and security procedures to provide a degree of clarity for both businesses and the public. This legislation will give consumers and companies the confidence needed for widespread adoption of cryptocurrency in New York.”
How Many Exchanges Have a New York BitLicense? Only Four.
To this day a total of only four cryptocurrency exchanges have been granted a BitLicense by the New York Department of Financial Services, including Circle Internet Financial, XRP II, LLC (Ripple), Coinbase, Inc, and most recently Bitflyer USA, Inc. Two others have been granted “Charters” under New York Banking Law, these are itBit Trust Company, LLC, and Gemini Trust Company, LLC (founded by the Winklevoss brothers within the State of New York). Only one license was granted in the entire year of 2016 in June to XRP. That brings the grand total to six entities allowed to operate virtual currency business in the state of New York under heavy regulations. The companies that have received application denial letters ordering them to stop any New York operations are ChangeCoin Inc., Ovo Cosmico Inc., Snapcard Inc. and OKLink PTE. LTD. New York was proactive in being one of the first states to regulate cryptocurrency, but its licensing scheme has become a detriment to the Blockchain economy.
Digital Seal to Replace New York BitLicense
If The New York Cryptocurrency Exchange Act is signed into law, it would still be monitored by the DFS, but it would get rid of the cumbersome BitLicense. In order to qualify for for a New York Digital Seal, cryptocurrency business will still have to,
• Be based in the state of New York
• Submit to regular and frequent auditing
• Establish security protocols to safe guard from theft
• Regularly examine holdings to ensure proper ownership of assets
A digital seal would replace the license for all approved cryptocurrency businesses and serve as a credential to maintain consumer confidence. It would assure their assets are safe by having exchanges commit to decentralizing their information storage systems. Investors would also rest assured that an exchange with the digital seal holds their assets in high security. Fees would still fund the program, but assessed by the number of accounts, transactions, or market value of information held so that smaller businesses remain competitive.
The current DFS security regulations have focused on measures that identify consumers’ personal information and transactions, deterring potential consumers, investors, and companies in the process. A better licensing program would encourage companies to base their businesses in America’s financial capital as an attractive and reliable investment for their customers. It would give their consumers confidence in an effective, nonintrusive system that truly protects their virtual money.
—Ron Kim, New York State Assembly Legislator
Like other Bitcoin-friendly states do now, the digital seal could designate exchanges as money service businesses and be regulated under New York State money transmitters law. Under the current New York BitLicense exchanges do not need to register for a money transmitter license. Exchanges will have to make sure a capped portion of their costumers assets are insured similar to banks under the Federal Deposit Insurance Corporation (FDIC) system. Funds can be maintained internally or by the State of New York, and subject to audits for consumer protection.
Leigh Cuen reported in an interview with CoinDesk, Kim said he’s hopeful the bill would be reviewed this summer but it could take as long as next year. Last month the State of Wyoming made headlines adjusting its restrictive cryptocurrency laws to become one of the friendliest Blockchain jurisdictions. The assemblyman calls for leadership in the cryptocurrency space from the State of New York, the financial capitol of the nation.
Felix Shipkevich is a principal of Shipkevich PLLC. His practice focuses on providing counsel to FinTech and financial services firms, including financial technology, payments and emerging digital currency space. He has spoken at national panels in the money transmitter space and payments industry. Mr. Shipkevich’s payments practice has brought him into contact with money transmitter registration requirements in all fifty U.S. States.
To read his full profile, click here.