In June 2015 New York leapt forward and introduced the BitLicense. The BitLicense regulations prohibit companies from engaging in “virtual currency business activity” in New York, or with New York residents, without a license. The idea is that the state will act as a gatekeeper for what is seen as high-risk business activity to ensure that companies dealing in virtual currency are structurally sound and have in place adequate protective measures, such as capital requirements and anti-fraud, anti-money laundering, privacy, and cyber security systems.
The BitLicense was seen as radical. While some jurisdictions had brought virtual currency activity under existing schemes designed for money transmitter companies, no one had put in place a framework aimed at addressing the breadth of virtual currency activities. The BitLicense was much broader in scope, covering not only the transmission of virtual currency, but also maintaining custody of virtual currency, exchanging and buying/selling virtual currency, and controlling or administering a virtual currency. Equally, the requirements to get the license were stricter than other regimes as a response to what is seen as elevated risk inherent in the technology.
In enacting the BitLicense legislation, New York hoped to become a global hub for bitcoin and other cryptocurrencies. It has not worked out that way. Rather, the breadth of the regulation, as well as the protective measures, attracted heavy criticism. Numerous fintech companies and financial institutions described the regulations as unfriendly, to say the least. They argued that the regulations captured pretty much any business experimenting with virtual currency, creating a problem for small-to-medium size “innovators” because they do not have the resources to put in place the protective measures prescribed in the regulations. In essence, the barrier to entry in New York became exceedingly high.
This may be why the BitLicense issued on May 18, 2018 was only the fifth one ever issued. While New York may not have admitted it publicly, uptake of the regime has been underwhelming. It may also be why New York lawmakers have started talking openly about revisiting the regulation to correct its perceived weaknesses.