With the rise in popularity of digital currencies, fund managers and large-scale investors have to keep up with current and upcoming state and federal regulations. Compliance with these regulations is often mandatory and essential to every investor, trader, and brokerage seeking long-term operability and profitability. Compliance with government regulations can help traders present gains using their crypto trading strategies and popular profit techniques.
Investors and firms operating in New York now have to contend with a new regulation that requires a great deal of investment in terms of monetary and human resources to comply with. This new regulation is the BitLicense, first instituted in 2015. The BitLicense policy requires all fund managers and virtual currency businesses to obtain a BitLicense before operating in New York.
In this article, we will explore the New York BitLicense, whether you need one, and the process for obtaining one.
What Is The BitLicense?
BitLicense is a cryptocurrency regulation first instituted in New York in 2015. It refers to a business license of virtual currency activities issued for companies or individuals that engage in Virtual Currency Business Activity by the New York State Department of Financial Services (NYSDFS).
Challenges and hurdles of the BitLicense
The first issuance of BitLicense in 2015 met with a hostile reception from certain quarters due to the cost-prohibitive and cumbersome requirements. Many believed the regulatory requirement subjected cryptocurrency startups to more burdensome regulations than standard financial establishments. Many in the blockchain space vehemently oppose BitLicense, arguing that the regulation disincentivizes new businesses from establishing their operations within the state unless these managers have the funds and patience to comply with the license requirement.
The BitLicense, despite the immense pushback, was implemented in June 2020.
This time, it has a less cumbersome framework so prospective licensees can acquire the structures, personnel, capital, and systems required to comply with the requirements. Although this iteration of BitLicense lowered the hurdles required in getting the license, it is still a rigorous
process for prospective licensees.
Current estimates show that an applicant willing to brace the rigorous and expensive process may have to cough out north of $100,000. This estimate will increase as the firm calculates all the related requirements, such as legal costs, compliance rules, and application fees.
Due to the cost-prohibitive nature of acquiring BitLicense, many cryptocurrency startups have left their operational base out of New York state and found refuge in jurisdictions that offer friendlier regulatory policies to startups.
Who needs a BitLicense
The BitLicense is a must-have for fund managers to meet any of these two criteria. If your firm meets any of these two criteria, it would be best to get legal counsel on whether your firm would need a BitLicense to stay in compliance with state laws.
BitLicense is required for firms whose main investment advisory activities are done in New York
Most of the fund management firm’s investment advisory activity is conducted in New York. These include daily operations, investor communications, investment and trading, and managerial decisions.
Note that your company might be based in another state and still be required to get a BitLicense. This is because your business is regulated by the state’s rules in which you conduct most of your investment advisory services. So even if your business was formed in another state, as long as you are a resident of New York or your principal place of business resides in New York, you are not exempt from BitLicense requirements.
BitLicense is required for firms whose client base includes New York residents
If your fund accepts new york residents, your company may be required to get a BitLicense. This rule applies regardless of whether you or your business is outside New York. Even in cases where the majority or all of your investment advisory services are conducted outside of New York, you will still be subject to New York’s BitLicense requirements if you accept investors into your fund who are New York residents.
It has been argued that firms that only buy and sell cryptocurrencies should not be subject to New York’s BitLicense since the custodian will hold the private key. However, that exemption only applies to assets that the custodian manages. If your fund manages the investment in any way, it must get licensed.
How to obtain a BitLicense: requirements and application process
Due to the back and forth between fund managers and the regulatory bodies, the process of obtaining a BitLicense may change in future. As such, you should seek legal counsel when your fun is about to apply for a license. Here are key areas to pay attention to
Application Documents: You need to get the application fee from the state (costs $5,000) and process it with an extensive documentation process that qualified legal counsel should carry out.
Capital Requirements: There is no clear information on the minimum capital requirements, as this fluctuates based on several factors, such as the licensee’s assets and liabilities, the anticipated volume of virtual currency activity, the amount of leverage employed, and so on.
Marketing Requirements: Prospective licenses must also comply with advertising and marketing requirements and the established SEC regulations. A legal counsel will help you navigate these waters.
BitLicense is one of the current regulatory requirements for fund managers in New York. It may seem like a big hurdle, but compliance is necessary for firms operating within New York and catering to New York residents. Keep legal counsel to understand the requirements and get legal assistance in the application and submission process.