After N.Y. Makes 'BitLicense' Official, Focus Moves to Who's Next

WASHINGTON — New York's financial services regulator revealed its final version of a new digital currency regulatory framework Wednesday, but a big question already is whether the effort will get replicated in other states.

California is already said to be considering a similar framework for digital currency businesses, and, according to Benjamin Lawsky, New York's departing banking superintendent, harmonization between different state regimes would be a positive step.

"That certainly would be a very good world if we had … a number of the larger states, where a lot of these companies are doing most of their operations, … were largely aligned," Lawsky told reporters on the sidelines of a Washington event, where he spoke about New York's framework.

The version unveiled Wednesday is the third update to the New York Department of Financial Services' framework, which has been developed over the past 18 months. It was initially expected to be completed in January.

In December Lawsky announced substantial updates to the first draft. Both were followed by comment periods in which the department invited industry feedback. It is one of the first and most comprehensive attempts to tailor rules for a nascent technology that Lawsky lauded for its potential to modernize the country's "disco-era payments system."

The latest changes clarify who exactly the department seeks to regulate under this framework and offers a simplified process for license applications.

"We are excited about the potential digital currency holds for helping drive long-overdue changes in our ossified payments system," Lawsky said at the BITS Emerging Payments Forum sponsored by the Financial Services Roundtable. "We simply want to make sure that we put in place guardrails that protect consumers and root out illicit activity — without stifling beneficial innovation."

The department will require digital currency businesses to seek prior approval for changes to their products or business models, but not for minor software or app updates. To that point, Lawsky said the agency intends to only regulate financial intermediaries, not software developers that aren't holding customer funds.

The department also strives to avoid duplication where possible, he added. Digital currency firms that seek both a BitLicense and a money transmitter license won't have to submit separate applications if they can satisfy the requirements for both. Lawsky said the department will work with these companies to have a one-stop submission process that covers all their bases.

Further, companies filing suspicious activity reports to federal regulators like the U.S. Treasury's Financial Crimes Enforcement Network can also avoid duplicating the process with the state for the same SARs.

Finally, Lawsky said that digital currency startups don't require prior approval from the department for each round of venture capital funding, unless the investor seeks to oversee the company's management and policies. (Lawsky recently announced he would leave the department to start a consulting firm, reportedly catering to digital currency firms.)

But a particular draw for digital currency firms is the potential for the New York license to be used out of state.

Answering questions from the audience, Lawsky said although the BitLicense is for companies operating in New York, in theory a firm could serve "consumers all over the country."

"It would be a nationwide opportunity to operate unless another state had a problem with that," he said.

Greg Kidd, the chief risk officer at Ripple Labs, said in an interview that that would be a "huge" benefit from the new regime.

"It implies reciprocity by default unless somebody objects, so instead of having to go to 49 states you can go to New York" and "service customers nationwide," he said.

Yet now much of the attention is on what California will do. A statement initially released by officials in the state last month had signaled California might abandon plans to regulate digital currency businesses, instead deferring to the state's lawmakers. But the statement was later retracted and an official said state regulators were "still assessing the extent to which, if at all, we want to regulate virtual currencies under existing California law."

Kidd said he believed California would release a framework similar to that finalized by New York. "I haven't seen anything to suggest that anything that comes out is going to be contradictory," he said. "It might just give folks an alternative venue to do the same thing New York has done."

Speaking to reporters, Lawsky said his department has spoken to California officials at a staff level. The state is already home to Ripple Labs and other companies involved in the digital currency sphere. He called California "obviously a big, big player in this area."

In his remarks, Lawsky said he hoped the New York framework would attract a steady group of companies seeking licenses.

"My hope is that this regulation is going to create a race to the top and what I mean by that, you will see companies getting licensed, you will see customers who maybe before were wary or other firms who were wary to invest in this world of digital currency saying, 'Wow, there is a group of companies now that actually have licenses from a state and a state that cares about this and is keeping good track of these firms,'" he said.

However, some in the industry said New York's new BitLicense is far from perfect.

Peter Valkenburgh, director of research at the cryptocurrency trade group Coin Center, said the new framework unfairly subjects the industry to certain cybersecurity and anti-money laundering requirements never imposed before on "legacy payments" providers.

"The final BitLicense still creates a lopsided regime as between digital currency businesses and traditional money transmitters and banks," Van Valkenburgh said in a press release.