On the fifth anniversary of the BitLicense’s introduction, the New York State Department of Financial Services (“DFS”) announced that it was proposing to introduce a conditional BitLicensing framework pursuant to the DFS Superintendent’s authority under 23 NYCRR 200.4(c) and that it was seeking comments regarding the proposed framework. Under the conditional BitLicense framework, new entrants may work in collaboration with an existing BitLicensee or a holder of a NY limited purpose trust charter to conduct virtual currency business activity in New York, before eventually applying for a full BitLicense.
This week, both Ketsal and Hailey Lennon, Principal of Lennon Legal Consulting submitted a join comment letter to the DFS. A copy of the letter can be found here: Ketsal and Hailey Lennon – NYDFS Comment LetterKetsal and Hailey Lennon - NYDFS Comment Letter (August 10 2020)
In summary, we encourage DFS to consider the following:
- Clarification of key steps in the conditional licensing process; i.e., which documents an applicant for a conditional licensee (“Applicant” or “Conditional Licensee”) must supply to DFS, the effect of approving an Applicant’s Conditional License on the Supervisory Agreement of an existing BitLicense holder (“Entity”), and whether and how the Supervisory Agreement between DFS and the Applicant affects the Entity’s Supervisory Agreement with DFS;
- Initial due diligence requirements should be minimal, while ongoing due diligence requirements should afford Entities a means to transition supervisory functions to DFS at certain milestones, and potential conflicts of interest should be elevated to outside counsel for review;
- The service level agreement between the Applicant and the Entity (“SLA”) will likely recognize the temporary nature of the business relationship, and will likely have terms that approach but do not exceed the market standard for SLAs between banks and third-party service providers;
- Clarification that Applicants can provide service offerings beyond that which the Entity engages in, whether such expanded service should come with enhanced supervision, and what limits should be placed on Entity sponsorships, especially with respect to reliance on an Entity’s capital reserves;
- Allowing an Entity to demonstrate mitigation of safety and soundness risk in an addendum to its Supervisory Agreement; and
- Consideration of folding oversight of licensed entities into existing money transmitter laws and cybersecurity regulations.