BitLicense oversight criticized in New York comptroller’s report

The Office of the New York Comptroller has revealed its concerns over the management of the digital asset license scheme, BitLicense, in a report published earlier this month.

The New York State Comptroller Thomas DiNapoli voiced his concerns over the New York Department of Financial Services’ (NYDFS) management of BitLicense, in a 57-page report issued on January 2.

The report aimed to determine whether the DFS—New York State’s financial regulator—provides adequate oversight of the application, supervision, and examination process for the state’s digital asset license regime (BitLicense) to ensure compliance with New York regulations.

In the report, the Comptroller said he only had a “limited assurance” that the DFS adequately performs its oversight responsibilities, with his primary concerns relating to a lack of thoroughness regarding a range of security checks of potential BitLicensees.

Specifically, key findings included:

• Two of eight sampled BitLicense applicants did not fully complete the “fingerprinting process” that DFS uses to assess the backgrounds of applicants’ major shareholders and officers;
• A lack of evidence of sufficiently verifying applicant tax obligations;
• A lag between the submission of anti-money laundering risk assessments and the granting of licenses, creating the possibility that the information provided could be outdated by the time the license is approved (one application approval was noted to have come four years after it was submitted);
• The DFS did not ensure that licensees submitted all required financial reports used to assess the safety and soundness of their operations, including those related to maintaining a minimum net worth to protect against unexpected losses;
• BitLicensees were not in compliance with all DFS cybersecurity regulations; and
• An average three-year gap was found between licensee financial condition examinations, which are supposed to be every other year.

The Comptroller recommended the DFS take appropriate steps to address these issues, particularly in relation to improving the analysis of application information and the safety and soundness of licensee examinations. DiNapoli also recommended establishing formal procedures “for the examination follow-up process.”

The DFS was shown a draft of the report in August and given the opportunity to provide a response, which was included in the final report.

The DFS admitted there were areas for improvement whilst maintaining that it has instituted “a comprehensive, nation-leading virtual currency regulatory regime.” Measures that it said it had already committed to implementing included adopting a template to track follow-ups on examination findings.

BitLicense history

Digital asset firms operating in New York have been required to apply for a BitLicense through the DFS since 2015.

In 2019, the DFS proposed changes to the regime to toughen up the process for listing coins in the state, saying, “This is an important first step in our review of our virtual currency regime and is designed to make it easier for those who have obtained a New York license to periodically add new coins to their existing products.”

Obtaining a license in 2019 incurred legal fees in the order of $100,000, and it was generally considered difficult to operate a digital currency money-transmitting service in New York, with only 18 companies having received one at the time, including Robinhood, Square, and Tagomi.

However, by 2020, the DFS appeared to have listened to industry critiques and somewhat softened its approach. It began granting conditional BitLicenses and partnership opportunities and updated its policies that applied to companies already in possession of a BitLicense, including making it easier for digital currency exchanges with a BitLicense to list new tokens. As long as the DFS has already approved a coin or token on at least three other platforms, a license holder can now self-certify a coin or token and decide whether or not they would like to list that digital asset themselves.

As of January 2024, the list of licensees has risen to 32 regulated entities, which includes BitPay, Circle, Coinbase (NASDAQ: COIN), Gemini, Paxos, and PayPal (NASDAQ: PYPL), but the NY Comptroller’s report may be the beginning of a re-tightening of the application process and oversight.

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