New York's Department Financial Services has opened public comment on a proposed "BitLicense" regulatory framework for New York virtual currency businesses. It would become the first state in the nation to directly regulate the controversial payment method.
The proposal includes requirements for protecting customer assets, disclosure, compliant resolution, anti-money laundering compliance, reporting fraud, business continuity, account verification, capital requirements, cyber-security, audit demands, and the establishment of a compliance program. The proposed rules will be published in the New York State Register's July 23, 2014 edition, triggering a 45-day public comment period.
New BitLicenses will be required for businesses receiving or transmitting virtual currency on behalf of consumers, maintaining custody or control of virtual currency on the behalf of customers, performing retail conversion services, or, aside from so-called virtual currency miners, issuing a virtual currency. The license is not required for merchants or consumers that use virtual currency solely for the purchase or sale of goods or services.
Key requirements for firms holding BitLicenses include:
Holding virtual currency of the same type and amount as any virtual currency owed or obligated to a third party. Each licensee must also maintain a bond or trust account in U.S. dollars for the benefit for the protection of customers.
Maintaining written policies and procedures to resolve consumer complaints and provide “clear and concise disclosures” about potential risks.
As part of an anti-money laundering compliance program, maintaining detailed information for all transactions, verifying customer identities, and checking customers against the Specially Designated Nationals list maintained by the U.S. Treasury Department's Office of Foreign Asset Control. Enhanced due diligence may be required based on additional factors, such as high-risk customers, high-volume accounts, or accounts triggering a suspicious activity.
Firms are subject to enhanced due diligence requirements for accounts involving foreign entities and a prohibition on accounts with foreign shell entities.
Monitoring for transactions that may flag money laundering, tax evasion, or other illegal or criminal activity and notify the DFS immediately upon detection. When a Licensee is involved in a transaction, or series of transactions, in an amount exceeding the U.S. dollar value of $10,000 in one day, by one person, they are required to notify state officials within 24 hours.
Implementing a cyber-security program and conduct penetration testing of its electronic systems, at least annually, and vulnerability assessments, at least quarterly.
Designating a qualified employee to serve as Chief Information Security Officer, responsible for overseeing the cyber-security program.
Submitting quarterly financial statements within 45 days following the close of the fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant evaluating the accounting procedures and internal controls of the firm within 120 days of its fiscal year end.
Capital requirements will be determined by DFS based on a variety of factors, including total assets and liabilities, the amount of leverage used by the firm, and its liquidity position.
Designating a qualified individual, or individuals, responsible for coordinating and monitoring compliance with New York's regulatory framework and all other applicable federal and state laws, rules, and regulations.
Maintaining a written business continuity and disaster recovery pla.
Applications for the new license will be accepted beginning on the date the proposed regulations become effective. Those already engaged in virtual currency business activity will have a 45-day transitional period to apply for a license from the date regulations become effective. The state will issue or deny the license within 90 days of a complete application submission.
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