New York Department of Financial Services releases "BitLicense" rules draft

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New York Department of Financial Services (NYDFS) seal.

New York Department of Financial Services (NYDFS) seal.

The New York Department of Financial Services (NYDFN) published the draft version of their regulatory framework for bitcoin and other digital currencies this morning. The “BitLicense” rules are aimed largely at digital currency service providers, such as exchanges and hosted wallet companies, and would effectively exempt any company using a third-party bitcoin payment service from bearing any of the regulatory burden.

The regulation does require companies operating in New York to meet many of the standards common to traditional financial institutions. Firms must be bonded and have a full bitcoin reserve equal to all customer deposits, issue receipts, have a system for addressing customer complaints, provide meaningful risk disclosures, provide quarterly financial reports, and meet anti-money laundering and know-your-customer rules. Existing companies doing business in New York have 45 days after the final approval of the rules to comply.

Although technically a draft, the BitLicense rules are unlikely to change much over the 45-day public comment period. The draft rules borrow heavily from existing regulations, particularly the Financial Crimes Enforcement Network (FinCEN) rules, and largely apply to large companies already working within the financial system, such as Coinbase and BitPay. The clarity provided by the new rules, however, does take much of the uncertainty out of the equation for investors, particularly those who have been tentatively planning to launch a fully regulated U.S. bitcoin exchange under New York’s rules.

The rules have prompted plenty of skepticism and criticism, particularly among those who value bitcoin’s anonymity as a major selling point. It’s unclear how smaller, non-institutional uses of bitcoin would be impacted by the regulation, although there are some concerns that a company directly accepting bitcoin without going through a third-party processor would face a serious burden to comply with the rules. NYDFN Superintendent Ben Lawsky personally posted the BitLicense announcement to Reddit, noting that he’d be following the thread during the 45 day public comment period.

The NYDFN’s final rules will be in place in early September, with BitLicenses themselves being granted in a 90-day window after application. Even without finalized regulations in place, a boom of new digital-currency focused businesses from companies already in compliance with the draft rules is expected in the next few months.

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