Regulation of the conduct of virtual currency businesses.
Purpose:
To regulate retail-facing virtual currency business activity in order to protect New York consumers and users and ensure the safety and soundness of New York licensed providers of virtual currency products and services. This regulation complements the Department of Financial Services’ Order of March 11, 2014, which provides for the regulation, pursuant to the Banking Law, of exchanges that interact primarily with institutions.
Substance of proposed rule (Full text is posted at the following State website: www.dfs.ny.gov):
The following is a summary of the proposed regulation:
Section 200.1, “Introduction,” sets forth the statutory authority for the rule.
Section 200.2, “Definitions,” defines terms used throughout the proposed regulation. Most significantly this Section defines “virtual currency” and “virtual currency business activity”.
Section 200.3, “License,” prohibits any Person from engaging in virtual currency business activity without a license.
Section 200.4, “Application,” sets forth the information to be included in a prospective licensee’s application.
Section 200.5, “Application fees,” requires applicants to pay an application fee to the Department of Financial Services (the “Department”) and provides that licensees may need to pay fees for the processing of additional applications related to the license.
Section 200.6, “Action by superintendent,” provides for the superintendent to approve or deny an application and, if approved, to suspend or revoke a license on specified grounds after a hearing.
Section 200.7, “Compliance,” requires licensees to comply with all applicable federal and state law, designate a compliance officer, and maintain and enforce various written compliance policies.
Section 200.8, “Capital requirements,” sets forth minimum capitalization requirements and a list of permissible investments.
Section 200.9, “Custody and protection of customer assets,” requires licensees to establish a bond or trust account for the benefit of their customers, requires licensees to hold virtual currency in the same type and amount as any virtual currency owed by the licensee, and prohibits licensees from encumbering customer assets.
Section 200.10, “Material change to business,” requires licensees to seek prior approval by written application to introduce a new, or materially change an existing, product or service.
Section 200.11, “Change of control; mergers and acquisitions,” requires licensees to seek prior approval by written application before executing a change of control or merger or acquisition.
Section 200.12, “Books and records,” requires licensees to maintain certain records pertaining to each transaction and make such records available to the Department upon request.
Section 200.13, “Examinations,” requires licensees to permit the superintendent to examine the licensee, including the licensee’s books and records, at least once every two years and to make special investigations as deemed necessary by the superintendent.
Section 200.14, “Reports and financial disclosures,” requires licensees to file quarterly financial statements and audited annual financial statements, to make special reports upon request, and to notify the Department upon discovery of any breach of law or upon a proposed change to the methodology used to calculate the value of virtual currency in fiat currency.
Section 200.15, “Anti-money laundering program,” requires licensees to establish and implement an anti-money laundering program, which includes customer identification and transaction monitoring, to maintain records, and to make reports as required by applicable federal anti-money laundering law.
Section 200.16, “Cyber security program,” requires licensees to design a cyber security program and written policy, designate a chief information security officer, make reports, and conduct audits.
Section 200.17, “Business continuity and disaster recovery,” requires licensees to establish and maintain a written business continuity and disaster recovery plan to address disruptions to normal business operations.
Section 200.18, “Advertising and marketing,” requires licensees to display a legend regarding its licensure by the Department, maintain all advertising and marketing materials, comply with all applicable federal and state disclosure requirements, and not make any false or misleading representations or omissions.
Section 200.19, “Consumer protection,” requires licensees to disclose material risks and terms and conditions to customers and to establish an anti-fraud policy.
Section 200.20, “Complaints,” requires licensees to disclose the licensee’s and the Department’s contact information and other information pertaining to the resolution of complaints.
Section 200.21, “Transitional period,” requires Persons already engaged in virtual currency business activity to apply for a license with the Department within 45 days of the effective date of the regulation.
Text of proposed rule and any required statements and analyses may be obtained from:
Office of General Counsel - Dana V. Syracuse, New York State Department of Financial Services, One State Street, New York, NY 10004, (212) 709-1663, email: dana.syracuse@dfs.ny.gov
Data, views or arguments may be submitted to:
Same as above.
Public comment will be received until:
45 days after publication of this notice.
This rule was not under consideration at the time this agency submitted its Regulatory Agenda for publication in the Register.
Regulatory Impact Statement
1. Statutory Authority.
Section 102 of the Financial Services Law (FSL) states the legislature’s intent that the superintendent of Financial Services regulate “new financial services products,” and “ensure the continued safety and soundness of New York’s banking, insurance and financial services industries, as well as the prudent conduct of the providers of financial products and services, through responsible regulation and supervision.” The definition of “financial product or service” in FSL section 104(a)(2) includes “any financial product or service offered or sold to consumers” other than those regulated under the exclusive jurisdiction of a federal or other New York state agency or where such regulation of such financial product or service would be preempted by federal law. Virtual currency meets the definition of “financial product or service,” and is therefore subject to regulation by the superintendent.
Moreover, the superintendent has the explicit power under FSL section 301(c) “to protect users of financial products and services,” and, under FSL section 302(a)(1), to “prescribe. . . rules and regulations. . . effectuating any power given to the superintendent under the provisions of this chapter.” The superintendent therefore has statutory authority to prescribe regulations regarding virtual currency for the purpose of protecting users of virtual currency and virtual currency-related services.
FSL section 201 is entitled “Declaration of policy” and states:
(a) It is the intent of the legislature that the superintendent shall supervise the business of, and the persons providing, financial products and services, including any persons subject to the provisions of the insurance law and the banking law.
(b) The superintendent shall take such actions as the superintendent believes necessary to:
(1) foster the growth of the financial industry in New York and spur state economic development through judicious regulation and vigilant supervision;
(2) ensure the continued solvency, safety, soundness and prudent conduct of the providers of financial products and services;
(3) ensure fair, timely and equitable fulfillment of the financial obligations of such providers;
(4) protect users of financial products and services from financially impaired or insolvent providers of such services;
(5) encourage high standards of honesty, transparency, fair business practices and public responsibility;
(6) eliminate financial fraud, other criminal abuse and unethical conduct in the industry; and
(7) educate and protect users of financial products and services and ensure that users are provided with timely and understandable information to make responsible decisions about financial products and services.
Virtual currency business activity is currently in its infancy and is almost entirely unregulated. The current lack of regulation, along with the dangers associated with virtual currency, may subject consumers and the businesses themselves to undue risk. The proposed regulation is intended to protect members of the public by imposing regulatory standards on virtual currency transactions and services that involve New York or New York residents, ensure the solvency, safety, soundness, and prudent conduct of persons or entities engaged in virtual currency business activity, and to foster the growth of the financial industry in New York by setting forth clear guidelines that will inspire confidence and allow for the establishment of legal virtual currency business activity.
3. Needs and Benefits.
Extensive research and analysis by the Department of Financial Services (the “Department”), including a two-day hearing held in January 2014, has made clear the need for a new and comprehensive set of regulations that address the novel aspects and risks of virtual currency. Existing laws and regulations do not cover proposed or current virtual currency business activity. The proposed regulation is therefore necessary to ensure that: (a) persons or entities engaged in virtual currency business activity operate in a safe and sound manner; (b) New York consumers and other residents are protected from the risks posed by virtual currency business activity; and (c) persons or entities engaged in new virtual currency business activity have a framework within which they can grow.
4. Costs.
Persons licensed under the proposed regulation will be responsible for ensuring that they are in compliance with this regulation, which will impose some costs on their operations. The Department will develop procedures to effectuate the licensing and examination of regulated persons or entities engaged in virtual currency business activity. In addition, the Department’s operating expenses will be assessed in accordance with the provisions of FSL section 206. There should be no costs to any local governments as a result of the proposed regulation.
5. Local Government Mandates.
The proposed regulation does not impose any new programs, services, duties, or responsibilities upon any county, city, town, village, school district, fire district or other special district.
6. Paperwork.
Persons licensed under the proposed regulation will be required to keep and maintain books and records, make quarterly financial reports to the superintendent, and provide written applications for the initial license, and to seek approval for changes in control of, or material changes to, their businesses.
7. Duplication.
The proposed regulation does not duplicate, overlap, or conflict with any other regulations.
8. Alternatives.
The Department considered amending existing laws or regulations, particularly under the Banking Law, to include virtual currency. The Department decided not to pursue that alternative because of the widespread and potentially unforeseen ramifications such modification could have on the financial services industry and currently regulated entities. The Department also considered not acting at all, but concluded that failure to regulate virtual currency business activity will place the public at risk.
9. Federal Standards.
There are no applicable federal standards.
10. Compliance Schedule.
Persons or entities engaging in virtual currency business activity as of the effective date of the regulation must file an application for a license within 45 days of the effective date of the regulation.
Regulatory Flexibility Analysis
1. Effect of the rule.
Local governments do not engage in the virtual currency business activity covered by the proposed regulation. This regulation will not impose any adverse economic impact or any reporting, recordkeeping, or other compliance requirements on local governments. To the extent a small business engages in any of the conduct specified in the proposed regulation, it will be required to comply with the requirements of the regulation. At this time, because virtual currency technology is relatively new, there exists no comprehensive estimate of the number of small businesses in New York that would be impacted by the proposed regulation.
2. Compliance requirements.
Small businesses, like all businesses licensed under the proposed regulation, will be required to make quarterly financial reports to the superintendent of Financial Services, keep and maintain accurate books and records, be subject to examinations, and provide written applications for the initial license and to seek approval for changes in control or material changes to their businesses.
3. Professional services.
Small businesses, like all businesses licensed under the proposed regulation, will be required to satisfy an annual audit requirement, which will require the retention of qualified professionals to perform the audit.
4. Compliance costs.
Persons licensed under the proposed rule will be responsible for ensuring that they are in compliance with the regulation, which will impose some costs on their operations. Although the cost of compliance, particularly with regard to anti-money laundering and cyber security, could be significant for small businesses, the overwhelming need for such compliance to protect New York residents outweighs such costs. In addition, very few, if any, small businesses currently engage in the conduct that is subject to regulation under the proposed rule. For small businesses that do not engage in virtual currency business activity, the regulation will impose no adverse impact or increased costs.
5. Economic and technological feasibility.
The Department of Financial Services (the “Department”) believes it will be economically and technologically feasible for small businesses to comply with the requirements of the proposed regulation.
6. Minimizing adverse impact.
To minimize any adverse economic impact of the proposed regulation on small businesses, the Department will adjust small businesses’ capital requirements to reflect the size of their operations. Small businesses generally will have lower capital requirements than large businesses.
7. Small business participation.
The proposed regulation will be published publicly, including on the Department’s website, for notice and comment, which will provide small businesses with the opportunity to participate in the rule making process. Further, prior to drafting this regulation the Department held a two day public hearing and sought input from dozens of virtual currency businesses, venture capital companies, and academics.
Rural Area Flexibility Analysis
1. Types and estimated numbers of rural areas.
Persons subject to the licensing requirements of the proposed regulation could possibly operate anywhere in this state, including rural areas.
2. Reporting, recordkeeping and other compliance requirements; and professional services.
Persons licensed under the proposed regulation will be will be required to make quarterly financial reports to the superintendent of Financial Services, keep and maintain accurate books and records, be subject to examinations, and must provide written applications for the initial license and to seek approval for changes in control or material changes to their businesses.
3. Costs.
Persons licensed under the proposed regulation will be responsible for ensuring that they are in compliance with this regulation, which will impose some costs on their operations. The costs are not expected to be any higher for entities in rural areas than for any other entity in the state.
4. Minimizing adverse impact.
The proposed regulation is not expected to have an adverse impact on public or private sector interests in rural areas. This regulation is specifically tailored to the pressing need to regulate virtual currency business activity involving New York or New York residents and is likely to have a positive impact on interests in rural areas by increasing the financial services available to them.
5. Rural area participation.
The proposed regulation will be published publicly, including on the Department’s website, for notice and comment, which will provide public and private interests in rural areas with the opportunity to participate in rule making.
Job Impact Statement
A Job Impact Statement is not being submitted with this proposed regulation because it is evident from the subject matter of the regulation that it will not have an adverse impact on jobs and employment opportunities in New York State. The proposed regulation is intended to protect members of the public by imposing a regulatory framework on persons or entities that wish to engage in virtual currency business activity involving the State of New York or New York residents and to provide the market with guidance and clarity with regard to the use of virtual currency. Based on the feedback the Department of Financial Services (the “Department”) has received from virtual currency businesses to date, the Department believes that the proposed regulation will have a positive impact on jobs and employment opportunities in New York by allowing for the establishment and growth of legitimate virtual currency businesses.
