On December 15, 2022, the New York Department of Financial Services (NYDFS) released immediately effective guidance that updates its expectations for banking organizations engaging in virtual currency activity. The guidance expands the scope of activities that require prior approval from the NYDFS and outlines its approval request process and evaluation criteria. The guidance applies to all New York-regulated banking organizations, including branches and agencies of foreign banking organizations licensed by the NYDFS (“Covered Institutions”). It directs Covered Institutions that currently engage in virtual currency-related activities to promptly notify their NYDFS contact if they have not already done so.
Under the NYDFS’s BitLicense law,[1] Covered Institutions that receive prior approval from the NYDFS before engaging in “virtual currency business activity” are exempt from licensure. Under the new guidance, however, prior NYDFS approval is required for virtual currency-related activity, which encompasses a wider range of activity than virtual currency business activity. Thus, NYDFS approval may be required even for virtual currency activity that does not trigger a BitLicense requirement. The difference between virtual currency business activity and virtual currency-related activity is discussed in greater detail below.
Prior approval is now required from the NYDFS to engage in any: (i) new virtual currency-related activity; and (ii) additional virtual currency-related activity that is significantly different from the virtual currency-related activity in which a Covered Institution is currently engaged. Covered Institutions should consider the virtual currency activities they perform or support to determine whether further engagement with the NYDFS is required.
Virtual currency business activity includes four specific types of activities, which generally include: (i) virtual currency money transmission; (ii) holding virtual currency on behalf of others; (iii) buying and selling virtual currency as a customer business; and (iv) performing virtual currency exchange services as a customer business.[2]
Virtual currency-related activity is broader, encompassing all virtual currency business activity and “the direct or indirect offering or performance of any other product, service, or activity involving [virtual currency] that may raise safety and soundness concerns for the Covered Institution or that may expose New York customers of the Covered Institution or other users of the product or service to risk of harm.” The guidance provides a non-exclusive list of examples of virtual currency-related activity, which include:
Under the new guidance, a Covered Institution is expected to submit a request to the NYDFS at least 90 days before it intends to commence a new or significantly different virtual currency-related activity. This includes virtual currency activity performed by or through a third-party service provider. In evaluating a request, the NYDFS will assess the scope of the Covered Institution’s proposed activities, and any impact on the institution’s safety and soundness, including implications for New York customers and other users of the proposed product or service. Covered Institutions are expected to submit detailed information about the proposed activity, including:
Applicants will be able to provide or cross-reference existing materials, such as materials submitted to federal banking agencies.
Upon receiving a request, the NYDFS will review the materials to establish an expected timeline, and this will be communicated to the Covered Institution. Receiving prior approval for one virtual currency-related activity is not general consent to engage in any virtual currency-related activity, and it does not authorize other Covered Institutions to engage in that activity.
The NYDFS was a pioneer with respect to developing a virtual currency framework when it created the BitLicense regime. The new guidance, which was issued shortly after a high-profile collapse in the virtual currency market, is notable in striking a more holistic and prescriptive approach to the oversight of Covered Institutions’ virtual currency activities. In releasing the new guidance, Superintendent Adrienne Harris emphasized that regulators must communicate the evolution of their regulatory approach in a timely and transparent manner to ensure Covered Institutions remain “resilient and competitive” while ensuring consumer protection. Even though the guidance is final, it is not exhaustive. The NYDFS continues to engage with stakeholders on important issues and will continue to supplement and refine its supervisory framework. Questions regarding the guidance may be directed to any of the authors of this alert.
[1] 23 NYCRR Part 200.
[2] 23 NYCRR § 200.3(c)(1); 23 NYCRR § 200.2(q).
[3] Since the guidance is specific to virtual currency, this example likely refers only to digital wallet services for virtual currency (e.g., Bitcoin or stablecoins) and does not encompass digital wallet services for fiat currency.