In our comment to the draft BitLicense last summer, we proposed changes intended to encourage a more efficient and effective regulatory structure for virtual currency businesses operating in New York. In December, the Department of Financial Services (DFS) released its revised BitLicense, which, to DFS’s well-deserved credit, accepted many of the industry’s proposed comments. But despite its improvement, the BitLicense retains two fundamental design flaws.
First, the BitLicense unnecessarily duplicates federal anti-money laundering (AML) obligations.
Federal guidance requires virtual currency exchanges (among others) to register as Money Service Businesses (MSBs) and establish risk-based AML policies in accordance with federal law. DFS should treat such businesses in the same manner it treats licensed money transmitters and simply require them to comply with existing federal law. Instead, DFS has proposed its own sweeping AML regime that requires licensees to: (i) collect the identity and physical address of any parties to a virtual currency transaction, (ii) file state-mandated activity reporting on a 24-hour deadline, and (iii) verify the identity of any customer who establishes an account, among many other requirements. Although (i) and (iii) are conditioned with vague “practicality” caveats, these requirements would appear to eliminate opportunities to establish a reasonable risk-based approach to AML programs. The result would indiscriminately force all Coinbase customers in New York to pay a toll, vis-a-vis aggressive personal disclosure and verification procedures, as a prerequisite to establishing a Coinbase account. In imposing recordkeeping and verification requirements not supported through the Bitcoin Protocol and which go far beyond what is required of money transmitters under New York or federal law, the draft Bitlicense would effectively force licensees to operate closed, proprietary virtual currency networks, thus quietly eliminating the greatest feature of the Bitcoin Protocol: its global open access.
Second, the BitLicense unnecessarily duplicates New York’s own money transmission regulations.
As we understand it, virtual currency businesses engaging in money transmission in New York will need to acquire both a money transmission license and a BitLicense. We won’t spill more ink describing the redundancies of this dual-track construct—you can read more about them in our original comment—but as we’ve stated before, the DFS can eliminate this duplicity, inefficiency, redundancies, and ambiguity by simply amending its money transmission regulations to add definitions for Virtual Currency and Virtual Currency Business Activity. We hope to continue working with DFS to assist in proposing appropriate, targeted amendments to existing laws or regulations which will work for the virtual currency industry.
To conclude, we understand that businesses entrusted to safe keep and transfer virtual currency on behalf of others hold special responsibilities that DFS may wish to address through a form of regulation more akin to financial services regulation than to light-touch technology regulation. But there is no need to hold virtual currency businesses to standards which far exceed those applied to money transmitters under existing state or federal law. We believe existing regulations, appropriately tweaked, give regulators the tools they need to usher fresh technology and long-overdue innovation into the well-established financial space.
We will continue to work with DFS to provide residents of New York with the same access to useful technologies and services we provide to people all around the world.