New York has become one of the first jurisdictions to formally lay out the rules of the road for Bitcoin businesses. These rules will not only affect businesses in New York, they will also affect everyone trying to innovate in this emerging field.
Now combined with FINCEN, the BITLICENSE rules make it extremely difficult for a foreign business in the Bitcoin or Blockchain space to work with any individual, or virtual currency related business based in the US, more so in New York.
Here’s why: (specific to the New York Bitlicence)
Definitions that are important:
(g) New York means the State of New York;
(h) New York Resident means any Person that resides, is located, has a place of business, or is conducting business in New York;
(i) Person means an individual, partnership, corporation, association, joint stock association, trust, or other entity, however organized;
(q) Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident:
(1) receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of Virtual Currency;
(2) storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3) buying and selling Virtual Currency as a customer business;
(4) performing Exchange Services as a customer business; or
(5) controlling, administering, or issuing a Virtual Currency.
In my opinion, this means that anyone, anywhere in the world who has a relationship with any individual or business in New York, and are exchanging any form of digital currency (with some exclusions) as a business, or holding digital currency for clients, will need to register for a Bitlicense. You may also need to register if any business that you deal directly with, in turn, has their own business dealings with individuals or entities based in New York.
For example, if you are working with an exchange in California (or anywhere else outside of New York), the latter which has their own pool of clients in New York, it will be considered as doing business in New York. Under such circumstances, the above mentioned exchange will be considered resident in New York, as per definition (h). Your company may now be required to be Bitlicensed. You may also need to register if you deal with any crypto-currency issuer, such as Ripple Labs, which has dealings with New York residents.
(I could be wrong in my interpretation of (h), please comment if you think this is incorrect, and why)
“OK, no big deal, I will get registered then”, you might say. However, unless you are extremely well funded, the overhead costs involved in operating under the Bitlicense will put you under tremendous pressures.
Applying for the license:
As the owner or director of the business, or shareholder, or employee with access to customer funds, you will need to send your fingerprints to the FBI.
Background reports on all principals in the business.
Personal financial statements of all principals in the business.
Reports on the operational and business structures of the business.
Information on all banking arrangements for the business.
— Such strict reporting requirements seem understandable as you could be potentially holding millions of dollars’ worth of customer funds, especially when you consider that once you put the ‘licensed by’ label on, the public will be inclined to think that the business is safe, and has adequate risk management policies in place.
Ongoing reporting for the business:
Every quarter you will be required to submit your business financial information.
Yearly audited financial statements.
Any transaction over $10,000 must be reported (similar to the SARS reporting by banks).
Additional suspicious activity reports. (the usual AML/KYC procedures)
Direct examination of your management accounts / bookkeeping every two years (and at no later intervals).
Maintaining all historical records of transactions for a minimum of seven years.
— $10k is a low threshold. In Singapore the reporting requirement on gold for example is $20,000. A business with good book-keeping and account practices should be able to submit quarterly reports easily, although such requisite submissions seem a bit too frequent.
A security bond or reserve must be held- the amount is to be determined by the superintendent.
Requisite Appointment of a Chief Compliance Officer
Requisite Appointment of a Chief Security Officer
— Such audits could potentially be very expensive and difficult for a start-up. With no on-ramp, or minimums, a new entrant will need to raise hundreds of thousands or even millions of dollars to cover the costs of compliance. A 2-person start-up, will quickly become a 6 person compliance team before an MVP is even built.
Inhibitions on innovation:
Any changes in the business model must be approved by the superintendent.
Any new product or service offerings must be approved by the superintendent.
Additionally, any merger or change to the structure of corporate ownership must be approved by the superintendent.
Here’s the thing, if you run a foreign corporation, with foreign principals, you probably won’t be concerned about these regulations, as long as you do not hold assets which can be seized by the US regulators. However, it is very likely that regulators from your local jurisdiction will be reading and creating their own versions of the Bitlicense, based on the New York version.
The unintended consequences from the Bitlicense will be dramatic, for it is likely that more businesses outside of the US will choose not to do business with firms that are residing in New York. Other businesses in the US will also cut off access to their services to NY residents.
Note: I am not a lawyer, and do not pretend to be one on the Internet. This is my personal opinion on the implications of the Bitlicense as it will undoubtedly affect my own business in Singapore. I have seen first-hand how laws intended to prevent money laundering and tax evasion wind up hurting legitimate start-ups and small businesses. FATCA, for example, is making it very difficult for American-owned businesses abroad to open bank accounts or do business in financial markets.