Jan 24, 2023 - Economy & Business

New York regulator reminds BitLicense holders to follow the rules

Illustration of a caution sign with a person falling off of a cube.

Illustration: Shoshana Gordon/Axios

New York, a state known for having the most onerous operating requirements, is putting digital asset firms on notice: Don't trip up.

Driving the news: The Department of Financial Services (NYDFS) yesterday reiterated custody and disclosure requirements for holders of its BitLicense and limited purpose trust charter. It's the second such reminder in two months.

Why it matters: New York is one of the few states where digital asset firms are subject to examinations — as well as other rules — that require them to comply with know-your-customer, anti-money laundering and capital standards.

  • And in the wake of high-profile meltdowns and the string of crypto lender bankruptcies, NYDFS appears to be bearing down on the industry.

The big picture: Companies with licenses and charters to operate in the state include Coinbase, Circle Internet Financial, Fidelity, NYDIG, Paxos, PayPal, Robinhood and SoFi Digital Assets.

  • Gemini, the exchange owned by Tyler and Cameron Winklevoss, has a limited purpose trust charter; Genesis Global Trading, the sister of now bankrupt lending unit Genesis Global Capital, holds a BitLicense.

The intrigue: How NYDFS handles Gemini, after the Securities and Exchange Commission's complaint, remains to be seen.

Flashback: NYDFS in the last 12 months levied its first ever crypto-related enforcement actions against Robinhood, which paid a $30 million fine, and more recently, Coinbase, which agreed to a $100 million settlement.

  • Meanwhile, New York Attorney General Letitia James earlier this month sued Alex Mashinsky, founder of the now-bankrupt Celsius Network, for allegedly defrauding investors out of billions of dollars in digital asset funds.

What they're saying: "Today’s guidance reminds DFS-regulated virtual currency companies of our expectations regarding the safekeeping of customer assets," superintendent Adrienne Harris said in a press statement.

Details: Among the list of reiterated rules:

  • Keeping customer funds segregated from corporate assets.
  • Making sure customer funds aren't used in a way that establishes a debtor-creditor relationship.
  • And ensuring Terms of Use are clear, transparent and show a custodial agreement (Read: not a debtor-creditor one).

What we're watching: NYDFS could end up taking a bigger part in managing restructuring or liquidation proceedings:

  • Banking law grants Harris the authority to take possession of any banking organization's business and property under some conditions, like if it were insolvent.
  • And trust companies are considering banking organizations under this law.
  • Of note: Gemini would be considered a banking organization as a holder of the state's charter.

What's next: NYDFS is also working on guidance to come later that will touch on stablecoins, consumer protection safeguards as well as advertising and disclosure requirements.

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