What New York is up to with cryptocurrencies
Decentralizing technologies in blockchain and cryptocurrencies were so disruptive in the global financial systems that no amount of regulation can stop its explosive influence. The Internet-based platforms blasted through walls and borders of regulation without signs of abatement to the wonder of fiat users who would not have even thought of experiencing breakthroughs beyond obsolete processes and mechanisms that bounded the world of finance for ages.
But the governance of money cannot just be let go by authorities and regulators of each country after the limitations of physical cash were finally overcome by the creation of digital cash, virtual money, and cryptocurrencies, all of whom generally refer to one and the same coin with a cash equivalent.
With states and countries urgently imposing legislations to control the onslaught of cryptocurrencies with nary an understanding of it, measures came varied from either limiting to not honoring to banning it outright, mainly to protect unsuspecting consumers from becoming potential victims of possible cybercrimes.
It was the State of New York that brought forth a highly debatable and resolutely regulating wall called BitLicense.
It was in 2015 that the New York State Department of Financial Services released BitLicense, to the consternation of not so few. While regulators view it as exacting measures to domesticate cryptocurrencies, it was, however, seen by the majority as unjustifiable violation of end-user privacy. It was also too punitive to crypto start-ups who must shell out $100,000 for a tedious 30-page application processing alone. Compliance includes business history, owners and operators profile, financial records, anti-money laundering, and know-your-customer programs, anti-fraud policies, and other procedural standards required like that by the US Treasury’s Financial Crimes Enforcement Network, or FinCEN.
Combatting Crypto and Cybercrimes
It has long been a known fact that cryptocurrencies were untraceable vehicles for money laundering, tax evasion, terrorism financing, and other criminalities. Law enforcement was helpless in tracking anonymous transactions involving virtual currencies that break protocols across borders with ease. It was against these backgrounds that BitLicense was conceptualized as mitigating measures to combat relentless cybercrimes.
It is good to study BitLicense to understand where New York is coming from. It can give a good measure to how its provisions can be applied to other states or countries that need a stringent framework to safeguard users. It will also make start-ups become aware of how cryptocurrencies, neutral as they are, can be dangerous to unbridled hands without regulation.
Decentralized platforms can react sharply to any intent to control it. BitLicense certainly is a compliance regulation that is expensive and taxing enough that only a big and well-funded company can afford. Licensees must have written compliance policies, possessing sensitive customer data that includes bank statements, physical addresses, names of transacting parties, that must be disposable upon request by the NYSDFS. Transaction records must be traced back up to seven years, while any material changes made by the licensee including M&A deals must be reported and can only be acted upon after consent is acquired.
To ensure its financial integrity and ongoing operations, the Licensee should maintain a specific amount of its assets based on factors to be determined by the NYSDFS superintendent. Factors can include the Licensee’s total assets and liabilities, actual and expected volume of Virtual Currency Business Activity, and types of products and services being offered.
Custody and Protection of Customer Assets
BitLicense requires that the Licensee must be maintaining a surety bond or trust account in USD to protect customer assets with the amount to be determined by the superintendent. When a Licensee is maintaining, storing, or holding in custody a customer’s virtual currency (VC), the Licensee must match the type and amount it is holding, while forbidden to sell or transfer the VC without the customer’s permission.
Any material changes to existing products and services or introducing new products, services, and activities are not to push through without consent from the superintendent.
Mergers, Acquisitions, and Change of Control.
These are not allowed without the approval of the superintendent.
Books and Records
It is the Licensee’s duty to make, to keep, and to preserve in an original format all books and records for seven years minimum. And the NYSDFS are to be allowed immediate access to all facilities, books, records, documents, and/or other information maintained by the Licensee, including its affiliates.
The superintendent has the right to examine the Licensee at least once every two years to make sure of the Licensee’s healthy financial condition, robust, safe, and sound practices, and compliance to regulations.
Reports and Financial Disclosures
The Licensee must submit quarterly financial statements and audited annual financial statements to the superintendent.
Anti-Money Laundering Program
AML policies must be written down, and suspicious activities must be monitored, signifying money laundering, tax evasion, or any other criminal or illegal activity. SARS must be filed when appropriate. The Department must be notified if transaction amounts to an aggregated $10,000 USD or more a day by an individual, even crypto-to-crypto transactions. The Licensee must also employ KYC, CDD, EDD, OFAC SDN when necessary.
An effective security program must be established and maintained by the Licensee to protect data integrity, confidentiality, and accessibility. A CISO, or Chief Information Security Officer must be appointed to oversee, implement, and enforce such policies with an ensuing yearly report and proposals.
Business Continuity and Disaster Recovery
A written Business Continuity Plan (BCP) and a Disaster Recovery (DR) plan must be in place to ensure availability and functionality in cases of unforeseen disruptive activities with annual testing employed.
Advertising and Marketing
All business advertisements must include the phrase, “Licensed to engage in Virtual Currency Activity by the New York State Department of Financial Services. Advertising and marketing materials must be kept for seven years minimum.
The Licensee discloses all risks pertaining to and associated with its products, services, and activities, including the risks associated with cryptocurrencies in general. Likewise, general terms and conditions and terms of transactions must be disclosed, including receipts’ provision upon evry completion of a transaction, establishing an anti-fraud policy.
Policies and procedures to resolve complaints fairly and timely must be written down. Included in the policy must be Licensee’s mailing address, email address, and telephone number posted online for the receipt of complaints. The same goes for the Departments.
Any BitLicense regulatory text deemed invalid to be applied to a Licensee does not invalidate the whole document.
BitLicense will require a quarterly financial report, annual audit, and annual inspection.
BitLicense is a thorough lot, but this kind of regulation gives customers comfort, confidence, and transparency in the way they are being served by who. Since cryptocurrencies are here to stay, crypto operators must, thus, operate responsibly. With more and more institutional investors coming in and mass adoption getting wider and wider, a scrutinizing regulation must be placed for the good of the operator and the user.