New York BitLicense Laws
Back in 2014, the superintendent of New York’s Department of Financial Services (NYDFS), Benjamin Lawsky, designed New York’s special license for cryptocurrency businesses. This special license, known as a New York BitLicense, attempts to regulate and better control the cryptocurrency industry. The license encourages compliance with both the terms and conditions of applicable regulations. It also helps prevent various forms of criminal activity. These include theft and tax evasion.
New York BitLicense Concerns
The purposes served by the New York BitLicense law are undoubtedly positive. Nonetheless, there are concerns about its costs and administrative efficiency. In this post, we will give a basic overview of BitLicense, including the types of businesses it applies to. We’ll then look at the types of activities which the BitLicense attempts to discourage. Then, we’ll summarize the complaints and issues it raises.
An Overview of the Rules
As mentioned, the New York BitLicense was conceived back in July of 2014 by Benjamin Lawsky. The law actually didn’t take effect, though, until 2015. A BitLicense is a requirement for any digital currency business which conducts business activities in the State of New York. The license is also mandatory for any cryptocurrency business which is a New York resident. This BitLicense regulatory requirement by the State of New York can be seen as part of the wider acceptance of cryptocurrency as a viable commodity. However, it is also a means to both better track this new commodity, and ensure that businesses don’t attempt to avoid any virtual currency related taxes.
Businesses Included in BitLicense
The State’s Department of Financial Services lists the types of cryptocurrency businesses which must register for a New York BitLicense. Basically, businesses that engage in virtual currency business activity must register for and receive a BitLicense. New York State defines cryptocurrency business activity as: (1) any business which receives cryptocurrency for transmission or transmitting cryptocurrency, unless this is done for a non-financial purpose, or involves only a small amount of cryptocurrency, (2) the holding of cryptocurrency on behalf of other people, (3) the buying and selling of cryptocurrency as a customer business, (4) performing cryptocurrency exchange services, or (5) the control or issuance of virtual currency.
Two Specific Exclusions
The NYSDFS also lists two types of businesses it specifically excludes from the New York BitLicense requirement. The first type is a business strictly engaged in the development, or dissemination, of software just by itself. The other type is a merchant or person who uses cryptocurrency simply for purchase of goods or services or for investment purposes. These two excluded entities are pretty intuitive. The BitLicense is meant to regulate organized cryptocurrency business activity. These latter two types of entities don’t fit the definition of such organized business activity.
Basic Purpose of BitLicense
Without regulations such as BitLicense, New York is concerned that various criminal activities can and will take place with virtual currencies. For one, New York is concerned about money laundering involving cryptocurrency. Further, it worries about tax evasion. Businesses which have the New York BitLicense will be less likely to successfully evade taxes on their cryptocurrency income. New York also worries about even more heinous criminal activity. These include the funding of terrorist activities, or instances of significant theft.
The QuadrigaCX Case
One prominent example of cryptocurrency related theft comes from the case of QuadrigaCX. The founder of QuadrigaCX, who is actually suspected of being a known criminal, apparently swindled dozens of users out of nearly $190 million in cryptocurrency assets. This type of fiasco would likely not have occurred if QuadrigaCX had registered for a BitLicense. Part of the BitLicense application process involves numerous questions. These relate to the owner’s personal history, business history, financial records, and so forth.
Complaints and Issues
Perhaps the biggest complaint about BitLicense is its cost. For one thing, a New York BitLicense is an expensive piece of paper. The application fee alone is quite substantial, $5,000. On top of that, an applicant needs to spend a lot to comply with the license’s various application demands.For a company to receive a BitLicense, it’s not uncommon for them to spend $100,000 just to apply for the license.
Time & Energy
On top of financial costs, a significant expenditure of time and energy is also necessary to complete the application. The application alone is 30 pages long. It requires the applicant to dig deep into the specifics of the business, financial records, personal information, and even its product, service or activity. All of this requires significant amounts of time and energy.
In a press announcement on July 23, 2019, the current New York State Department of Financial Services Supervisor, Linda A. Lacewell, announced the establishment of a new Research and Innovation Division. Lacewell stated that the Division will be responsible for both licensing and supervising virtual currencies. It will also be tasked with assessing new efforts to use technology to address financial exclusion, identify and protect consumer data rights, and encourage innovations in the financial services marketplace.
Contact MC&C for Further Information
At Mackay, Caswell & Callahan, P.C., we take pride in staying on the cutting-edge of the tax world. Today, this involves staying up-to-date with cryptocurrency related phenomena. A review of the New York BitLicense rules is just one piece of this puzzle. In the future, we may come back and discuss BitLicense in greater detail, as this is just a broad overview. If you need help applying for a BitLicense, we can help. Give one of our top New York City tax attorneys a call and we will assist you immediately.
Image credit: https://www.comparitech.com/