In Part 1 of this series, I discussed the purpose of the BitLicense regulation and the scope of the requirement to obtain a BitLicense. In Part 2, I outlined most of the major obligations a BitLicense imposes on the Licensee. In this third and final article of this series, I will discuss the requirement to report any material change to a licensed business’ services, the application cost and process, and provide concluding remarks on this regulatory framework.
Requirement to Report Material Changes to Business Services
In an effort to carefully monitor all developing activities in the digital currency industry, Section 200.10 requires each Licensee to obtain written approval from the superintendent for any new product or service, as well as any material change to an existing product or service. The costs and delays that will result from compliance with this section is a major hindrance to innovation for a number of reasons.
First, the scope of this section is difficult to ascertain. The term “material change” is poorly defined as occurring when a product, service, or activity becomes “materially different,” which is merely a repeat of the phrase it attempts to define. A material change may also occur when it might “raise a legal or regulatory issue,” which is completely in the discretion of the superintendent and is guesswork for business owners. Finally, changes that “may raise safety and soundness or operational concerns” will also require prior written approval.
Second, the length of the compliance process may be impracticable. The regulation invites Licensees to seek clarification from the superintendent if it is unsure of the materiality of its proposed change. As stated above, the vagueness of its definition will force many businesses to first seek such clarification. Next, the Licensee must prepare a detailed written “description of the business operations, compliance policies, and the impact on [its] overall business,” and any other information requested by the superintendent.
This multiple step, back-and-forth process between the Licensee and the superintendent could take weeks or months to approve mere simple changes to software protocols. These changes happen constantly in the software and technology industries, especially in one growing as fast as the digital currency space. Licensees will be much slower to innovate and constrained from an inability to live test new services.
Finally, the time and other resources required to be spent complying with this requirement may be rejected on the whim of the superintendent. This may discourage some businesses from even attempting to innovate. While understandably cautious of new technology, this provision will slow down the pace of development to the speed of government, rather than promoting regulatory efficiency and allowing needed infrastructure growth.
How to Obtain a BitLicense
Now that we have discussed who is required to obtain a BitLicense and what becoming a Licensee entails, I can discuss how to obtain one. All applicants are required to submit a lengthy list of documentation in their application in accordance with Section 200.4.
A complete application will contain names, employees, and biographical information for key individuals, including background reports. For all individuals that will have access to customer funds, fingerprints and portraits are also required. Finally, detailed business plans, financial statements, banking arrangements, written compliance policies, and tax and insurance documentation must be submitted.
The final part of the application is a $5,000 application fee to cover administrative costs, found in Section 200.5, which is non-refundable. It is notable that most businesses that are required to obtain a BitLicense will also be required to obtain a money transmitter license. Costs quickly add up when seeking licensure in all US jurisdictions, with one estimate requiring $176,266 upfront plus $136,855 in yearly expenses to maintain all the requirements. If other states begin using New York’s BitLicense as a model, these total costs could roughly double.
The licensure process also takes a significant amount of time. Though Section 200.6 requires the superintendent to approve or deny a BitLicense application within 90 days, achieving money transmitter licensure in multiple or all states can take years.
Section 200.4 allows the superintendent to grant a conditional license to an applicant unprepared for its new obligations. In granting a conditional license, the superintendent may consider such factors as the nature and scope of the applicant’s business, the volume of anticipated business, and the potential risks and measures taken to mitigate those risks by the applicant. Conditional Licensees will be held to a heightened standard of scrutiny and possibly additional requirements.
However, this conditional license does not function exactly as a two-year on-ramp for low funded startups as initially advertised. First, there is no guarantee that any particular business will qualify for the conditional license as it is entirely in the discretion of the superintendent. Second, there is no guarantee of a two-year window in which to become compliant. The superintendent can revoke a conditional license at any time. A conditional license merely expires at the end of two years if no action is taken. Nonetheless, it may help some future applicants.
Overall, the BitLicense places a lot of control with the superintendent to exercise discretion, which may be very frustrating for future applicants and Licensees. However, the provisions of the proposal are largely targeted toward very legitimate concerns.
Above all, the BitLicense proposal is important in removing regulatory risk. Despite its drawbacks, it should allow future entrepreneurs to operate safely and attract the investment needed to continue building digital currency infrastructure. The only question is whether the next state to regulate will do so in a more business-friendly manner and draw digital currency activities to their jurisdiction.