NYS DFS takes aim at virtual currency regs

Published Date:
Sep 8, 2014

The New York State Department of Financial Services (DFS) has proposed a set of regulations to govern the transfer and use of virtual currencies such as Bitcoin, making this the first state in the country to do so. The proposal is intended to provide a framework for businesses that use virtual currencies, with consumer protection, anti–money laundering efforts and cybersecurity in mind.

“We have sought to strike an appropriate balance that helps protect consumers and roots out illegal activity—without stifling beneficial innovation,” Benjamin M. Lawsky, New York state’s Superintendent of Financial Services, said in a statement. “Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”
The past few years have seen an explosion of online virtual currencies, the oldest and most popular of which is Bitcoin. Unlike traditional mediums of exchange—such as dollars, pounds and yen—virtual currencies are linked to no one nation, are not regulated by a central bank and transactions that use them are not processed by an intermediary financial institution.

The state isn’t alone in its efforts to make sense of an unfolding, and often unwieldy, phenomenon. In the spring, the NYSSCPA’s Board of Directors voted to establish a new Virtual Currency Task Force to identify for the public and other relevant stakeholders the associated risks and benefits of electronic currencies. The task force, whose members represent diverse areas such as audit, tax, accounting and anti-money laundering, is currently in the process of drafting a response to the DFS proposal, with the public comment period closing on Oct. 21.

Comparing Bitcoin to the California gold rush of more than a century ago, Edward J. Torres, the task force chair, said the group had made it a goal to “try to help financial regulators and the public better understand an issue that is really going to change the landscape.”

“Our role as CPAs is one of educators,” he said. “We should be able to tell the public the benefits and risks of virtual currency.”

In addition, he said that it was important for the profession to have a voice during any talks about possible regulation of electronic currencies and to help bring a common sense approach to the discussion.
“I’ve seen in the past how regulations are created that don’t seem to be practical in their implementation,” he said. “If we can participate on the front end, we can help ensure that the things that are proposed make sense.”

Task force member Karina Pinch agreed.

“[Virtual currency] is becoming more widely used and accepted by mainstream businesses,” she said. CPAs, therefore, must stay on top of “how businesses can account for and understand” it, she added.

Setting a high bar for businesses
Under the proposed DFS rules, entities dealing with virtual currencies will need to acquire a license from the DFS, called a BitLicense, if they are—

•receiving or transmitting virtual currency on behalf of consumers;

•securing, storing or maintaining custody or control of such virtual currency on the behalf of customers;

•performing retail conversion services, including the conversion or exchange of fiat currency or other value into virtual currency, the conversion or exchange of virtual currency into fiat currency or other value, or the conversion or exchange of one form of virtual currency into another form of virtual currency;

•buying and selling virtual currency as a customer business (as distinct from personal use); or

•controlling, administering or issuing a virtual currency. (This does not refer to virtual currency “miners,” or those who manufacture units of virtual currency through computational work.)

Exempted from the licensing requirements are those who utilize virtual currencies solely for the purchase or sale of goods or services, or those firms that have been chartered under New York banking law to conduct exchange services and are already approved by the DFS to engage in virtual currency business activity.

To get a license, applicants will need to fulfill a long list of requirements. For starters, they will be asked to provide a background report prepared by an independent investigatory agency; detailed biographical information from the applicant and the applicant’s staff; a complete set of fingerprints; an organizational chart of the firm’s management structure; a list of affiliates (complete with an organizational chart detailing the various relationships); and an affidavit that describes any administrative, civil or criminal action, litigation or proceeding before a government agency, court or arbitration tribunal, in addition to any existing, pending or threatened actions.

Licensees will then need to follow a number of rules and regulations in order to retain their permission to operate in New York state. Among many others, they will be required to hold virtual currency of the same type and amount as any virtual currency owed or obligated to a third party, to maintain a bond or trust account in U.S. dollars for the benefit of its customers, and provide clear and concise disclosures to consumers about potential risks associated with virtual currencies.

There are also a number of rules related specifically to anti–money laundering, not the least of which is a requirement that entities maintain the identity and physical address of all parties involved in virtual currency transactions, the amount or value of the transactions, when the transactions occurred, and a description of the transactions. Furthermore, firms, at minimum, must verify the identity of customers when opening accounts; maintain records of that identity; and monitor transactions that might be indicative of money laundering, tax evasion or any other illegal activity.

Licensees would also be required to maintain a cybersecurity program, have a designated qualified chief information officer, establish and maintain a written business continuity and disaster recovery plan, and notify the DFS of any emergency or other disruption to operations that may impair their ability to fulfill regulatory obligations.

While, at press time, the Society’s task force was still conferring on the specifics of its response to the proposed regulations, Torres said the fact that the state is even discussing regulation is encouraging.
“I’m very happy New York is taking the lead on this as the financial capital of our country,” he added.

“This could be a game changer, and it’s important to hear from all areas, so as to make sure that the rules are implemented in an effective way.”

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