Businesses engaged in virtual currency activities with a BitLicense or limited purpose trust charter from the New York State Department of Financial Services (NYDFS) may now face additional fees for supervision in New York, as provided by New York State’s FY2023 budget bill. Signed into law on April 9, 2022, by Governor Kathy Hochul, Senate Bill S.8008C (the “Legislation”) amends New York’s financial services laws to defray NYDFS’ operating expenses for supervision of businesses that engage in virtual currency business activity.
In June of 2015, NYDFS issued virtual currency regulation 23 NYCRR Part 200 under the New York Financial Services Law. According to NYDFS, to engage in “virtual currency business activity” in New York State, entities can either apply for a “BitLicense” or for a charter under the New York Banking Law—for example, as a New York State limited purpose trust company—with authorization to conduct virtual currency business activities. The law defines “virtual currency business activity” as conducting any one of the following types of activities involving New York or a New York resident:
- 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;
- Storing, holding, or maintaining custody or control of virtual currency on behalf of others;
- Buying and selling virtual currency as a customer business;
- Performing exchange services as a customer business; or
- Controlling, administering, or issuing a virtual currency.
A few differences exist between a BitLicense and a limited purpose trust charter. For example, a limited purpose trust company can exercise fiduciary powers, while a BitLicensee cannot. In addition, a limited purpose trust company can engage in money transmission in New York without obtaining a separate New York money transmitter license.
NYDFS first approved a BitLicense application in 2015, and since has issued numerous virtual currency licenses and limited purpose trust charters with approval to conduct virtual currency business. Application fees are $5,000 (BitLicense) and $12,500 (limited purpose trust charter). However, applicants typically expend far more to prepare applications, which provide information relating to the financial condition of the applicant as well as the responsibility, financial, and business experience, and character and general fitness of the management and board of the applicant. Licensees are subject to examinations not less than once every two years to determine, among other things, the financial condition of the licensee, safety and soundness of the business conduct, and compliance with the license requirements, including anti-money laundering and sanctions compliance. With the recent Legislation, virtual currency businesses should now expect to be subject to additional fees associated with these biennial examinations.
NYDFS’ Increased Authority Under the Legislation
According to the Legislation:
- NYDFS will annually assess entities engaging in licensed virtual currency business activities in amounts NYDFS’ Superintendent deems “just and reasonable” to defray NYDFS’ operating expenses that are solely attributable to regulating such entities;
- NYDFS operating expenses not covered in the assessments (i.e., not solely attributable to a specific regulated entity) will be assessed industry-wide on all entities that engage in virtual currency business activities;
- Virtual currency businesses undergoing examination by NYDFS will bear the burden of those examination expenses, though NYDFS at its discretion, may reduce or eliminate those charges. No guidance, however, has been provided yet to determine the criteria under which NYDFS will potentially lessen or eliminate examination fees; and
- To align the supervision of virtual currency businesses with other NYDFS supervised industries, persons engaging in virtual currency business activities will not be assessed for NYDFS’ expenses that benefit only persons regulated under New York’s insurance or banking laws.
The Legislation will take effect on Wednesday, June 8, 2022.
In a statement about the FY2023 budget, NYDFS Superintendent Adrienne A. Harris welcomed the new authority to collect supervisory costs from licensed virtual currency businesses, noting that the ability to recuperate these costs for supervising virtual currency companies—just as NYDFS does for banking and insurance companies—will allow DFS to “build staff with the capacity and expertise to best regulate and support this rapidly growing industry.”
Digital assets businesses operating in New York, or planning to engage in licensed virtual currency activities in New York, should anticipate the added operation and examination fees associated with obtaining and maintaining virtual currency licenses in New York. These institutions should account for those increased costs when evaluating their business strategies, fundraising, and budgeting for application and annual expenses.
Crowell & Moring LLP is highly experienced at advising startups and established companies operating in the digital assets space.
For further information, please contact:
Carlton Greene, Partner, Crowell & Moring