New York has updated state digital currency regulations, requiring cryptocurrency firms to adhere to rules similar to more mature financial industries such as banking and insurance, a move that also comes with higher costs.
Adrienne Harris, New York’s Superintendent of Financial Services, on Monday announced companies holding a NYDFS-issued BitLicense will be subject to rules modeled after banking supervision.
This means companies will need to meet higher standards for capitalization, cybersecurity protection and anti-money-laundering protocols. The regulation also governs how companies will be assessed for costs of their supervision in line with banks and insurance companies.
New York competes with other cities, such as Miami, to draw cryptocurrency companies.The new fees could create pressure for new firms trying to enter the New York crypto market, according to Roy Carrasquillo, managing shareholder of the Carrasquillo Law Group, and a specialist in fintech law.
In the short-term, newer cryptocurrency companies may look elsewhere. “It is going to get more expensive, and crypto companies tend to look for less regulated jurisdictions,” Carrasquillo said.
A BitLicense application costs $5,000, according to the Capital Fund Law Group, adding the total cost of the license is based on the firm’s size. There are currently about two dozen firms that have a Bitlicense, including Ripple, Coinbase and Block. Under the new rule, firms with a Bitlicense will billed quarterly, with a final assessment at the end of each fiscal year—a figure that will likely be larger.
One of the concerns that the adoption of this rule will bring is the further chilling effect it will have on smaller applicants, said John Lore, a managing partner with the Capital Fund Law Group.
“The BitLicense application process is already costly, extremely difficult to obtain, and fraught with uncertainty,” Lore said, adding very few successful applicants appear to have been awarded licenses. “The passing of supervisory costs to BitLicense holders with little guidance on how those costs will develop will likely continue to discourage cost-sensitive BitLicense entrants.”
The NYDFS did not provide comment for this article. In a release, Harris said the regulation provides the department with additional tools and resources to regulate the virtual currency industry now and in the future as innovators create new products and use cases for digital assets.
The calculator for the new fees for crypto firms is scheduled to be released later this spring. New York state regulatory fees for other financial institutions are often in the hundreds of thousands of dollars.
New York’s cryptocurrency license dates to 2015, when state regulators issued money transmitter rules for bitcoin exchanges and other companies that adopted digital assets. The rules at the time were considered strict, though less draconian than countries that banned cryptocurrency altogether, such as China.
The NYDFS proposed the new rules in December, noting the higher fees would allow it to recruit more staff to supervise cryptocurrency companies. Cryptocurrency firms in general have been under greater regulatory scrutiny over the past year due to market fluctuations and the FTX collapse.
The impact for companies will be “significant,” Carraquillo, said, though the overall impact on fintech regulation in New York will not be a great, given there are not a lot of firms with existing BitLicenses.
“And over the long term crypto companies will still be drawn to New York given its status as a financial hub,” Carraquillo said.