The New York State Department of Financial Services (“NYDFS”) released its revised proposed BitLicense regulations on February 4, 2015. Changes from NYDFS’ initial proposed regulations are listed below. Among the more significant changes are: (a) helpful modifications of the definitions of “Virtual Currency” and “Virtual Currency Business” and (b) the addition of provisions giving the Superintendent broad discretion to issue a “conditional license” for a business not meeting all the criteria for a full license.

1. Definition of “Virtual Currency”

  • Deleted “or that is incorporated into payment system technology”
  • Added exclusion for digital units used within online gaming platforms that can be redeemed for real-world goods, services, discounts of purchases, but cannot be converted into or redeemed for Fiat Currency or Virtual Currency
  • Added exclusion for digital units used as part of a closed loop payment card

2. Definition of “Virtual Currency Business”

  • Added exclusion for transmitting or receiving Virtual Currency for non-financial purposes not involving more than a nominal amount of Virtual
  • Added exclusion that development and dissemination of software in and of itself does not constitute Virtual Currency Business

3. §200.3 License

  • Added exclusion merchants and consumers utilizing Virtual Currency solely for investment purposes

4. §200.4 Application

  • Modified requirement for fingerprints and portrait photos so no longer required from all employees, but only from employees having access to customer funds (whether denominated in Fiat Currency or Virtual Currency
  • Added requirement for verification from NY Dept. of Taxation and Finance that applicant is compliant with all NY tax obligations)
  • Added section giving Superintendent discretion to issue conditional licenses to an applicant not otherwise satisfying all the regulatory requirements. Term of license limited to two years, but may be renewed by Superintendent. Conditions, modification or removal of conditions and revocation of conditional license within Superintendent’s discretion. Among relevant factors Superintendent may consider are: (i) nature, scope and volume of Licensee’s business; (ii) risks to consumers and mitigation measures taken by Licensee; (iii) whether applicant is registered with FinCEN; and (iv) applicant’s experience and history as a holder of a conditional license

5. §200.5 Application Fee

  • $5,000 (previously, was amount prescribed by Superintendent)

6. §200.8 Capital Requirements

  • Amount to be determined based on assessment of the specific risks applicable to each Licensee
  • List of factors Superintendent may consider increased to include (i) types of entities to be serviced by Licensee and types of products or services to be offered by Licensee
  • Virtual currency added to list of permitted investments of required capital; however, proportion held in each type of investment must be acceptable to Superintendent

7. §200.9 Custody and Protection of Consumer Assets

  • If maintaining trust account rather than surety bond, account must be maintained with a “Qualified Custodian” (defined as: a bank, trust company, national bank, savings bank, savings and loan association, federal savings association, credit union, or federal credit union in the State of New York, subject to the prior approval of the Superintendent)
  • Prohibition on selling Virtual Currency held for another Person modified to allow for sale at the direction of such other Person

8. §200.10 Material Change to Business

  • The requirement to obtain approval of any new product, service or activity found in subsection (a) is unchanged from prior version, but there was a minor, nonsubstantive change to wording in subsection (c) regarding submission of a written description of any new product, service or activity.

9. §200.11 Change of Control; Mergers and Acquisitions

  • Added new subsection giving Superintendent power to determine whether a proposed action constitutes a change of control. Among factors Superintendent may consider are: (i) whether common stock purchased solely for investment purposes; and (ii) whether Person could direct management or policies of Licensee, could propose directors in opposition to nominees of board or management, seek representation on board, or solicit proxy votes regarding any matter presented to shareholders.

10. §200.12 Books and Records

  • Requirement to maintain record of names and addresses of parties to each transaction revised to limit it to (i) customers or accountholders of Licensee and (ii) other parties “to the extent practicable”

11. §200.15 Anti-Money Laundering Program

  • Minimum requirement for annual AML testing clarified so if conducted by Licensee’s personnel, must be conducted by someone who is not responsible for the design, installation, maintenance or operation of the AML program or the policies and procedures that guide its operation
  • Recordkeeping modified in same manner as §200.12, so that identity etc. of Persons not customers or accountholders limited information “to the extent practicable”
  • Required identification and verification of accountholders applies not only when opening an account, but also when establishing a service relationship

12. §200.16 Cyber Security Program

  • Deleted requirement to enclose hardware in locked cages
  • Deleted requirement to maintain records produced as part of the audit trail for a period of ten years
  •  Deleted requirement for source code reviews
  • Added requirement to maintain written procedures, guidelines and standards reasonably designed to ensure the security of all applications utilized by the Licensee and require such to be reviewed, assessed and updated annually by Licensee’s CISO

13. §200.18 Advertising and Marketing

  • Added requirement to maintain, for Superintendent’s review, all advertising and marketing materials for at least seven years

14. §200.19 Consumer Protection

  • Deleted requirement to disclose Licensee’s liability to customers under any applicable federal or state laws, rules or regulations
  • Deleted language that customers of Licensees that are victims of fraud are entitled to claim compensation from any trust account, bond or insurance policy maintained by Licensee