NY Financial Regulator Lawsky Releases Final BitLicense Rules for Bitcoin Firms
Michael J. Casey
Rules to only regulate intermediaries with custody of customer funds, not software developers
Outgoing New York Superintendent of Financial Services Benjamin Lawsky released sweeping new rules for licensing digital-currency businesses in the state Wednesday, staking part of his legacy on launching a specialized regulatory regime for an industry that many experts believe could play a significant role in the financial system.
The new rules, which Mr. Lawsky announced during a speech in Washington—his last as superintendent before departing at the end of this month—were met with a mix of condemnation and support from bitcoin advocates, who have long feared that the regulations could stifle innovation in their nascent industry.
The first-of-their-kind rules will require certain providers of digital-currency services operating in New York State—in particular, those with custody of customers’ funds and which exchange virtual currencies for dollars and other fiat currencies—to apply for a specially tailored Department of Financial Services license. To maintain it they must fulfill various reporting requirements and comply with rules on consumer protection, anti-money-laundering, capital adequacy, changes of ownership and cybersecurity.
The BitLicense’s publication culminates an almost two-year draft-and-review process in which bitcoin-based service providers frequently locked horns with Mr. Lawsky. Given New York’s status as the country’s most-important financial hub, the rules are expected to become a template for other state financial regulators.
Mr. Lawsky described the final version, which explicitly carved out exemptions for software developers and has a significantly lighter regulatory touch than an initial draft released in July last year, as appropriately balancing a need to “protect consumers and root out illicit activity” with a commitment not “to doom promising new technologies before they get out of the cradle.”
Whereas some have questioned why existing money transmission regulations can’t be used for virtual-currency businesses, Mr. Lawsky said those Cold War-era laws “simply wouldn’t work” for digital currency, a technology “unlike anything we had ever seen before.”
Addressing five specific industry complaints, the superintendent said the final rules won’t require approval for standard software updates—only material changes to technology—and will only regulate intermediaries with custody of customer funds, not software developers. He said licensees that want both a BitLicense and a traditional money-transmitter license won’t have to duplicate the application process, and that there will be no need to duplicate anti-money laundering “suspicious activity reports,” or SARs, that have already been submitted to the U.S. Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN. Finally, investor changes will only require approval when an investor gains control over the management and policies of the firm.
Jerry Brito, executive director of Washington think tank the Coin Center, said that while the BitLicense is “improved from the original proposal” it “is far from perfect.”
Mr. Brito said that even taking into account the exemption from duplicating FinCEN and DFS reporting, the rules still “create an unprecedented new state-level money laundering requirement. And it’s discriminatory because banks don’t have to do this in New York State and money transmitters don’t have to do this in New York State.”
John Collins, head of policy and government affairs at bitcoin consumer-services and exchange operator Coinbase, echoed those concerns, calling it “troubling that this nascent industry is being subjected to more onerous regulations than those typically applied to legacy financial institutions.”
Other bitcoin advocates were more sanguine, however, viewing the announcement as an opportunity to bring legitimacy and confidence to a six-year-old technology whose advantages in lowering costs and creating efficiencies in finance have been marred by concerns over security and criminality.
Mr. Lawsky and “his team maintained an open mind to the criticism they received,” said Brian Forde, director of the MIT University’s new Digital Currency Initiative. The final product “is good for consumers in New York who will get the innovative financial services of the future from upstart entrepreneurs and large companies, faster.”
The BitLicense comes amid increased interest on Wall Street toward incorporating bitcoin’s core technology, a digital ledger known as the blockchain, into the financial system’s back-office and payment functions.
Exchange operator Nasdaq OMX Group has launched a pilot program to use the blockchain to handle the transfer and settlement of securities between investors; the New York Stock Exchange has invested in Coinbase; and Goldman Sachs Group Inc. has become a lead investor in bitcoin-focused financial services company Circle Internet Financial.
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