The New York State Department of Financial Services (“DFS”) has issued its fifth BitLicense to date, continuing a marked effort to bring legitimacy and controls to the virtual currency (“VC”) industry, whose advantages in lowering costs and creating efficiencies have been marred with concerns of nefarious use.
Founded in 2012, Coinbase, Inc. operates as a digital currency exchange and is perched at the top of well-funded startups in the VC industry. Its BitLicense signifies an important milestone in the company’s nearly two-year, multi-state licensing strategy. In the same vein, the fact that a VC market-leader has sought after and is now approved to do business in New York is an equally important occasion for the BitLicense program itself.
Enacted in 2015, BitLicense represents the first comprehensive VC regulatory regime in the United States. BitLicense reflects a concerted effort to bring VCs into mainstream financial markets by addressing the myriad security and integrity issues inherent in the technology. Under the rules, certain providers of VC services operating in New York (in particular, those holding custody of customers’ funds and which exchange VCs for dollars and other fiat currencies) must apply for a specially-tailored DFS license. In order to maintain that license, a provider must fulfill various reporting requirements and comply with standards on anti-money laundering, cybersecurity and consumer protection.
To be sure, obtaining a BitLicense is expensive, onerous and drawn out; DFS has not been immune from reproach. In particular, those inside the VC community have lamented that the financial cost of BitLicense is so high that it effectively bars all but the most well-funded startups from obtaining a license. The critics are not without merit: Bitstamp, a Bitcoin exchange based in Slovenia, has reported that its BitLicense application cost approximately $100,000. Its application was submitted in August 2015 and, to date, remains pending.
That Coinbase applied for and subsequently received a BitLicense is significant in its own right. In particular, Coinbase was a loud voice in the industry opposed to the enactment of BitLicense, arguing that it fell short of its goal of balancing customer protection and rooting out illicit activity without stifling innovation. It is likely that Coinbase, in its efforts to cement its status as the go-to VC exchange company, recognized the importance of not just of doing business in New York, but of also doing its part to shake VC’s stigma as the unregulated “Wild West” of the financial services industry. In an unrelated development, and as we have blogged, Coinbase recently was the subject of a “John Doe” summons issued by the IRS for information regarding its account holders; although the summons seeks evidence of potential tax evasion by Coinbase clients, there has been no allegation that Coinbase itself has violated any laws.
Notably, Coinbase’s approval comes on the heels of Federal Reserve Chairwoman Janet Yellen’s remarks in January 2017 that Blockchain, the ledger technology that underpins Bitcoin and other VCs, “is a very important, new technology that could have implications for the way in which transactions are handled throughout the financial system.” Indeed, the technology has caught the attention of several Wall Street institutions looking to invest in and possibly adopt its technology; last year Goldman Sachs invested in Circle Internet Financial, a Bitcoin consumer services company and the first to receive a BitLicense.
In all, despite the slow-moving pace of BitLicense’s application processing, the approval of Coinbase lends credence to the confidence of many that both government- and industry-leaders are serious about bringing VCs into the fold of standardized regulations and controls.