New York’s Bitlicense Regulations Know-How
State licensure requirements are ambiguous for companies using blockchain technology for applications other than payments. Regulations and laws will be enacted to protect consumers. Blockchains can trigger money transmitter laws and regulations. In the United States, it’s clearer at a federal level what types of businesses are considered money transmitters. Being engaged in money transmission in many U.S. states is a felony. The hard consequences of overstepping law through innovation compel blockchain companies to spend significantly more money and time on compliance — to the tune of an average of $2 million to $5 million per year per company. The legal fees are heavy burdens for these technology startups.
The legislation of each state as applied to the blockchain industry are not clear yet. New York and Vermont have begun integrating this technology into law. New York has increased the cost to be in compliance and driven innovation to move to friendlier locations. Vermont, on the other hand, passed a law that makes blockchain records admissible in court.
Let’s have a broader look at various aspect of New York’s Bitlicense.
If you’re planning on operating a blockchain startup in New York City, plan for extra fees. In June 2015, the New York State Department of Financial Services (NYDFS) put out the final version of Bitlicense, the regulatory framework for digital currency aimed to give the industry more clarity. In reality, it pushed many blockchain startups out of NYC.
The license itself costs $5,000 and can be up to 500 pages. It requires the fingerprints of each company’s leaders and an extensive background check on the applying businesses. The chief complaint is that it costs roughly $100,000 for expenses associated with the application. This estimate includes time allocation, legal, and compliance fees. Bitlicense is in stark contrast to the efforts made by other financial centers in London, Singapore, and Dubai.
The final Bitlicense was a result of almost two years of research and debate over how this technology should be regulated. It came into play after it was deemed that the existing regulations were not suitable for the virtual currency companies. On a positive note, NYC blockchain businesses no longer need approval from the NYDFS for new software updates or further rounds of venture capital funding. The framework states that digital currency firms only need approval for changes that are “proposed to an existing product, service, or activity that may cause such product, service, or activity to be materially different from that previously listed on the application for licensing by the superintendent.”
The first company to receive a Bitlicense was Circle, the Bitcoin wallet providers. The license allows them to operate in New York under a regulatory framework. The circle is one of the few companies that can legally do so. Most blockchain startups are avoiding working in New York as the cost and effort of the license outweighs the benefit. Only the highest-funded startups are making an effort.
Lately, Ripple was awarded its second license. This iteration of their license has allowed them to sell and hold XRP, which is the digital asset behind the Ripple Consensus Ledger (RCL). It will enhance Ripple’s ability to deal with business customers who want to use its technology for international fund transfers. Other U.S. regions have also put up similar bills to regulate digital currency and require licensing. California bill AB 1326, would have done that for the region but failed after the Electronic Frontier Foundation (EFF) opposed it. (The EFF is a group based in San Francisco that defends consumer rights and new technology.)
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