New York’s BitLicense: Important Revisions Part 1

The curtain has been drawn back, and the much-anticipated BitLicense revisions stand ready for comment.

As 2014 drew to a close, Benjamin Lawsky, Superintendent of New York’s Department of Financial Services (DFS) gave a small peek behind the curtain of pending revisions.

Now, in 2015, the updated BitLicense comes revised in response to over three thousand comments. A refreshed 30-day comment period ends on March 27, 2015.

Over this and a subsequent post, we will present summaries of important revisions to the prior proposed BitLicense regulations.

Definition:  Virtual Currency Business Activity

Perhaps the most important changes come to the definition of “Virtual Currency Business Activity.” Because the BitLicense only requires a license for anything it calls “Virtual Currency Business Activity,” if a business falls outside of this definition, or works with technology that is not “Virtual Currency,” it falls outside of the regulation.

With the revisions, Virtual Currency Business activity no longer includes a transmission of Virtual Currency done for “non-financial purposes [in a] nominal amount.” This change seems to protect non-financial applications of blockchain technology from falling under the BitLicense.

The definition no longer includes activities that “secure” Virtual Currency on behalf of others, but because it had not previously defined “secure,” it may remain to be seen  what is now permissible as a result. The revisions now exclude the development or dissemination of software in and of itself, a boon to pure software developers working in New York.

Definition:  Virtual Currency

As for Virtual Currency, the definition no longer includes language that sweeps in “any type of digital unit . . . that is incorporated into payment system technology.” Thus, it appears that a value token does not automatically become Virtual Currency just because it is a part of a payment system technology.

The definition of Virtual Currency now excludes online gaming units, or digital units used in customer affinity or rewards programs that, while they can be used for real-world items, cannot be converted into fiat or virtual currency. Finally, the definition excludes digital units used as part of gift cards.

Custody and Protection of Customer Assets

The new version clarified that a company can sell, transfer, or assign assets held for another person only at that person’s direction. The prior version appeared to contain an absolute prohibition on moving custodial assets.

Also, if a company maintains a trust account, this account must be held with a “Qualified Custodian,” a newly defined term that sweeps in a range of institutions permitted to provide banking services under New York law.

Application Process

The revisions reveal the cost to apply for a license:  $5,000.

The revisions expand the class of people who need to submit fingerprints and a 2×2 photo to anyone with access to customer funds (whether fiat or virtual).  However, they do not indicate to what extent an already-licensed business would need to obtain fingerprints or a photo for a new hire who can access customer funds.

All applicants now need to take an additional step to their application, in that they must obtain verification from the New York State Department of Taxation and Finance that the applicant is compliant with New York tax law.

Exemption:  Investment

Placing its policy in line with language from federal guidance, merchants and consumers that utilize Virtual Currency solely for investment purposes will not need to obtain a license.

This post continues here with “New York’s BitLicense: Important Revisions Part 2”.