New York State Department of Financial Services (“DFS”) recently issued a memo where Superintendant Lawsky essentially proposed two courses of regulation for virtual currencies: (1) apply existing money transmission regulation; or (2) issue virtual currency specific regulations.
The fact that state regulators are following the footsteps of FinCEN is really not surprising. In an earlier article, I wrote that FinCEN chose to classify people who deal with virtual currency as money transmitters.
Money transmitters generally must register with FinCEN and with state financial regulators. By classifying virtual currency exchangers and administrators as money transmitters, FinCEN was almost inviting state regulators to step in and come up with their own regulation. This memo is nothing more than states answering the invitation. New York and California, to a certain extent, were the first ones to answer FinCEN’s call to regulate. Other states will follow suit.
Applying existing money transmission regulations to virtual currencies will effectively shut the door for many entrepreneurs. This is not just a doom and gloom prediction. The reason for this assessment is simple – cost.
First, only applying for a license costs $3,000. (see details here) The cost includes a “non-refundable investigation fee.” The cost of application alone will deter many potential entrepreneurs from applying.
Second, in New York State, every person licensed to transmit money must post a surety bond with at least $500,000 in principal amount. (See section 406.13 of Superintendant’s Regulations). A half a million surety bond will cost around $15,000 a year. $15,000 annually just to keep the money transmitter license seems a bit pricey.
Ways to Affect Regulation
The silver lining in all of this is that nothing is set in stone yet. This is not a regulation yet, this is just an information gathering. But any regulation that will result from this, will affect anyone who deals with virtual currency. If things stay the way they are, for a run-of-the-mill bitcoin miner it will be prohibitively expensive to do business legally. Even for the authorized resellers of the Linden Dollars things will get a lot more complicated and expensive.
The good this is that at some point, DFS will propose a rule on this and invite comments. At this point anybody who has an interest in the future of virtual currency is strongly encouraged to write and submit a thoughtful comment. This is not only for the purpose of moral satisfaction, but because an agency such as DFS is obligated by law to incorporate comments into the final rule or justify not doing so.
Alex Kadochnikov is an attorney license in New York and New Jersey. For further inquiries or a more narrowly-tailored plan, please feel free to contact him. email@example.com
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