How To Apply For A NY Crypto Trading License

How To Apply For A NY Crypto Trading License

cBy 2014 New York was at the forefront of the new age of crypto-oversight. New York State Department Head of Financial Services, Benjamin Lawsky, predicted that the New York Model would become the model for other states when they designed their regulations.

Six years later, Lawsky’s model has become a case study in how not to regulate.  The crypto industry, as it turned out, was too technically complicated to be controlled by overly broad and ill-defined rules such as contained in Lawsky’s Model.

Despite its proponent’s lofty recommendations, not a single state outside of New York enacted regulations that mimic BitLicense’s half a decade old rules.  And that says it all, according to some pundits.

According to Ian Calderon, Californa Assembly Majority Leader, the fact that less than a handful of enterprises secured a BitLicense,  proved that it is something that does not work.

BitLicense

The Department of Financial Services manages BitLicense with the nationwide Multistate Licensing System and Registry (NMLS).  NMLS is a safe web-based instrument for regulators to provide efficient state licensing and supervision of licensed industries.  This way, enterprises maintain only one record for all purposes, including license applications, amendments, surrender, and license authority  changes.  It also provides timely reporting and online safety.

NMLS Access

To gain entry into NMLS, applicants must complete a Company Account Request Form and nominate both a Primary Account Administrator and Secondary Account Administrator. On the website of the NMLS under the heading “Getting Started,” you can achieve this electronically. What is more, you only have to do it once despite the number of NMLS participating states where you are licensed.

The Primary Account Administrator will receive his login information within three days, and he has full access to submit information to his agency and other regulators. He can set up more company users in the system. At the NMLS Resource Center, instructions and tutorials are available.

License Management

Holders of BitLicense can manage their licenses on the NMLS if they create a company record in the system. Even current New York State BitLicensees who submitted applications before the integration into the NMLS can transition their licenses to NMLS.  The NMLS Website provides a transition checklist for these users.

A Complete Application

The Virtual Currency Business Activity Checklist provides all the instructions. A substantive review cannot begin until the Department received all the required information, documents, and fees.  The Department sometimes requires additional information and documents during their examination.   During the process, the Department will issue your NMLS Identification Number. You have to record this number. You will use if during the remainder of the process and have to display it on every hard-copy document provided to the Department.

More Answers

BITLICENSE: More answers to your questions
Who needs a bitlicense?Every person, individual or company that engages in Virtual Currency Business Activities that involves New York or New Yorkers
 1.     Buying or selling virtual currency as a customer business
 2.     Controlling, administering or issuing Virtual Currency
 3.     Performing Exchange Services as a customer business
 4.     Receiving Virtual Currency for transmission or which transmits virtual currency
 5.     Storing, holding or maintaining custody or control of Virtual Currency on behalf of others
Do I need a bitlicense if  I am only an investor in virtual currency?No
Do stores need a bitlicense to accept virtual currency as payment for goods and services?No.
Are charitable organizations exempt?No
Can a charitable organization accept a virtual currency donation without a bitlicense?

YES

Do  I need a bitlicense for virtual currency mining?NO
Can I sell coins I have mined for my account without a bitlicense?YES
Can I write code and build tools for the virtual currency space without a bitlicense?YES
Do I need a BitLicense if I want to advise my clients as a financial advisor about buying or selling a virtual currency?NO
Will my company need additional licenses except for the BitLicense?Sometimes a BitLicense does not replace any other licenses required under New York law
My company is registered under FinCen. Does it need a BitLicense to engage in Virtual Currency Business Activity?YES
Where can I get information about capital requirements for a BitLicense?See at 23 NYCRR 200.8
Where can I get information about the required surety bonds?See at 23 NYCRR 200.9(a)
 You have to provide a surety bond or fund an account for the protection of the BitLicensee’s customers. The typical minimum amount is $500,000, but this can vary.
Which coins can a BitLicensee adopt or list for offering or usage?1.     DFS BitLicense approved coins
 2.     Coins which the BitLicensee self-certified to the DFS
 3.     Coins on the DFS Greenlist
Are stablecoins virtual currency under BitLicense Regulations?As a general rule, stablecoins are considered virtual currency under these regulations.
Do the rules that require a BitLicense apply to an out-of-state business that wishes to engage in Virtual Currency Business Activity in New York or with New York Residents?YES

The basic philosophy of BitLicense was that it was better to raise some regulations about crypto operators rather than to leave them as a law unto themselves.  Today, this is widely accepted.  Lawmakers seem to agree that it was precautious to regulate crypto enterprises, but that baby steps are required.  So, if New York could do it, others can certainly follow.

For instance, Louisiana’s bill came into effect on the first of August,  is very similar to the model Virtual Currency Business Act (VCBA) drawn up by the Uniform Law Commission.  It is just different from BitLicense, which is known in Louisiana merely as a bill that leads to very high fees.  The VCBA then seems to be a viable alternative to BitLicense.

Virtual Currency Business Act VCBA

The ULC published the VCBA in October 2017.  It contains licensing definitions, consumer protections, forensic protocols and fee structures. It provides the required tools for lawmakers who want to build crypto license regimes.

The crypto industry was skeptical and worried that the VCBA would mimic the mistakes made by BitLicense, and specifically, wanted to see how VCBA defined the concept of ‘virtual currency business activity,’ which was one of the main objections many had against BitLicense.

Definitions of virtual currency business activity
BITLICENSEVCBA
In respect of the BitLicense definitions, a license is required in the State of New York, by any person who:The definition relates only to individuals who, acting on their own, can lose customer funds.
1.     Moves virtual currency for financial purposes 
2.     Retains custody of virtual currency that belongs to third parties 
3.     Buys or sells virtual currency as a business 
4.     Exchanges virtual currency as a business 
5.     Controls, issues or administers virtual currency 

The problem with the BitLicense definition is that it is too broad and regulates activities like lightning network node runners, bitcoin miners, and federated peg atomic swap members which do not belong under BitLicense regulations.  It came down to the judicious rendering of virtual currency business activities, according to some critics.

Despite the critics, Lawsky already made it clear in 2014 that the NYDFS would focus only on enterprises that had custody over customer funds. Despite the different approaches to the above definition, only Rhode Island and Louisiana enacted even parts of the VCBA language. VCBA then had been no more successful than BitLicense.

Explanation

In the US, only nine states can afford full-time lawmakers with robust legislative research staff.  The smaller states look up to their larger counterparts for precedence – states like New York and California.

Smaller states will copy legislation precisely, hence when one state takes the lead, others will typically follow. Despite that, no one followed BitLicense.  California tried some variations in different attempts to write a crypto bill. This included a carbon copy of one of the earlier drafts of BitLicense, but all the efforts failed.  The same happened in California with VCBA. A version of it was redeployed as an attempt to exempt some digital assets from state security laws.  This bill is sitting in the Senate waiting for approval.

In lawmaking, it is about persuasion and consensus.  If what you propose makes people uncomfortable, you will get nothing, Majority Assembly Leader Calderon explains.

Enter The Lobbyists

When lobbyists use BitLicense as a tool to scare lawmakers, they get results. This is how Louisiana avoided introducing a bill that would strangle operators, according to William Haynie of Pelican bitcoin ATMs.  When they saw the overzealousness of the New York approach, they went the other way in Louisiana.

What becomes apparent is that there might not be “only one way” to legislate crypto in the US.  Lawmakers tried BitLicense, VCBA, and even exempted bitcoin from money transmitter laws – some even selected to do nothing at all.  Nothing came of it.

New Models And The Wyoming Experiment

Now, the Conference of State Bank Supervisors is working on another new model law for money service businesses to attempt to provide clarity on when and how to regulate virtual currency enterprises.

Amongst the states, no one wants to risk ostracizing businesses. They seem to be waiting for significant government crypto regulations rather than to follow New York’s approach.

The only exception is Wyoming, where several crypto-friendly bills are enticing blockchain enterprises to the state.  Many are looking to Wyoming for a fresh approach.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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