On June 24, 2020, the New York State Department of Financial Services (NYDFS) announced a series of initiatives designed to provide further guidance and resources for businesses operating in, and potential new entrants into, the virtual currency industry. The initiatives represent the first major update to NYDFS’ “BitLicense” – the regulatory regime set up in 2015 that governs virtual currency activity involving New York residents and companies. These updates include:
Since the regulatory framework’s inception in 2015, NYDFS has granted only 25 BitLicenses and limited purpose trust charters with the authority to engage in virtual currency activities (“BitLicensees”). To encourage more entities to operate under the BitLicense regime, NYDFS has proposed a framework that allows new entrants to partner with BitLicensees to secure a BitLicense that can be awarded outside of the regular application process (a “Conditional BitLicense”). The framework can be used by entities such as startups, emerging companies or established companies that are new to the virtual currency space.
Obtaining a Conditional BitLicense is a five-step process under the proposed framework:
The proposed framework regarding the Conditional BitLicense is open to public comment. Comments are due by August 10, 2020.
To help demonstrate the efficacy and nature of the proposed framework, NYDFS also announced its new partnership with SUNY. Under the “SUNY BLOCK” program, NYDFS will issue a BitLicense to a SUNY-related entity, which will then help startups and emerging companies run by students, alumni or local community members secure their own Conditional BitLicenses. SUNY BLOCK illustrates what this process could look like in practice for the many consortia and startups operating in, or looking to operate in, the virtual currency space in New York.
NYDFS released its final guidance regarding adopting and listing new virtual currencies. In the initial application to NYDFS for a BitLicense, applicants must list the digital assets they would like to trade or store on their platform. However, the BitLicense did not provide a way for BitLicensees to trade new digital assets that were not specifically listed on their initial applications. Given that the universe of virtual currencies available at any given time is highly dynamic and constantly evolving, this ambiguity posed a problem for BitLicensees who wanted to offer additional products and services while staying within the letter of the law. To address these concerns, the finalized guidance offers two avenues for BitLicensees to utilize new coins – self-certification and “Greenlisting.”
A BitLicensee can list a virtual currency for trading by self-certifying that the coin is consistent with the consumer protection standards of the BitLicense. This process has two basic steps. First, if a BitLicensee wants to self-certify the use of new coins, it must create a detailed coin-listing policy and submit it to NYDFS. Then, if NYDFS approves the policy, the BitLicensee may follow that policy to self-certify the listing or adoption of new coins without further approval from NYDFS.
NYDFS will also independently designate certain virtual currencies as being safe for trading (the “Greenlist”). The Greenlist will be a record of NYDFS-approved digital assets and their uses, including those listed through the self-certification process described above. Once a new coin is approved, the agency will announce a six-month waiting period during which the coin cannot be traded. Once that period is complete, all other BitLicensees can use the coin for its approved purposes, though any company planning to adopt or use coins on the Greenlist should have policies and procedures in place to continually monitor that instrument. Coins contemplated for the Greenlist include Bitcoin, Bitcoin Cash, Ether, Ether Classic, Litecoin, Ripple, Paxos Standard and Gemini Dollar.
Finally, NYDFS provided clarifications to help improve applicants’ success rate in obtaining a BitLicense and reduce the number of incomplete applications submitted. As a threshold matter, NYDFS will only proceed with a substantive review of applications that have all of the elements on the requirements checklist. Additionally, once a substantive review begins, NYDFS stated that it intends to limit the number of deficiency letters for a given application. If all deficiencies involving a particular application have not been fully addressed by the end of the response period for the third deficiency letter, NYDFS may deny the application without further notice.
The procedures for adopting new digital assets for storage and trading are effective immediately, and, as a result, current BitLicensees can take steps to self-certify new digital assets while NYDFS prepares to publish the initial Greenlist. Businesses can also immediately consult the updated checklist of requirements for a BitLicense application, as well as the new Frequently Asked Questions web page.
A special thanks to Amani Carter for her contributions to this client alert.
 See DFS Superintendent Lacewell Launches Series of Virtual Currency Initiatives, Press Release, N.Y. Dep’t of Financial Services (June 24, 2020), available at https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202006241.
 See 23 NYCRR Part 200. Under New York law, any individual or company that engages in “Virtual Currency Business Activity,” within the territorial boundaries, or involving residents, of New York State by, for example, buying and selling cryptocurrencies as a business or providing digital asset custodial or wallet storage services, is required to obtain a BitLicense or charter under the limited purpose trust company provisions of the New York Banking Law. See also 23 NYCRR Part 200.2(q).
 See BitLicense FAQs, Dep’t of Financial Services (last accessed June 26, 2020), available at https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/bitlicense_faqs.
 See Request for Comments on a Proposed Framework for a Conditional BitLicense, N.Y. Dep’t of Financial Services (June 24, 2020), available at https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/gn/req_comments_prop_framework.
 NYDFS has requested input on 11 specific questions on matters including, but not limited to, applicant suitability, due diligence requirements and responsibility apportionment between applicants and BitLicensees. Comments should be submitted by August 10, 2020, to firstname.lastname@example.org with “Proposed Conditional Licensing Framework” in the subject line.
 See Memorandum of Understanding, available at https://www.dfs.ny.gov/system/files/documents/2020/06/mou_dfs_suny_20200618.pdf.
 See Guidance Regarding Adoption or Listing of Virtual Currencies, N.Y. Dep’t of Financial Services (June 24, 2020), available at https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/gn/adoption_listing_vc.
 NYDFS states that “privacy coins,” namely, coins that conceal the identity of the user, or coins designed or substantially used to avoid laws and regulations, cannot be self-certified under this policy. See supra note 7.
 The self-certification process also applies to entities that hold a charter under the limited purpose trust company provisions of the New York Banking Law.
 If a BitLicensee wants to use these coins during the waiting period, they can do so either through self-certification or by obtaining direct approval from NYDFS. NYDFS may also add coins to the Greenlist that have been approved privately and in a centralized manner. See supra note 3.
 See Proposed Guidance Regarding Adoption or Listing of Virtual Currencies, N.Y. Dep’t of Financial Services (Dec. 11, 2019), available at https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/pr_guidance_regarding_listing_of_vc.
 The checklist can be found on the Nationwide Multistate Licensing System and Registry website at this link: https://mortgage.nationwidelicensingsystem.org/slr/PublishedStateDocuments/NY_Virtual_Currency_New_Application_Checklist.pdf.
 At the time of publication, the initial Greenlist is not available but NYDFS has stated that it is “forthcoming.” For a list of digital assets that are expected to be on the Greenlist, please refer to note 11, above.