NYDFS Proposes Framework to Expedite Adoption and Listing of New Virtual Currency Coins | Practical Law

NYDFS Proposes Framework to Expedite Adoption and Listing of New Virtual Currency Coins | Practical Law

The New York State Department of Financial Services (NYDFS) issued proposed guidance designed to allow licensed virtual currency firms that have already received approval for coin listings to introduce new coins without additional permission.

NYDFS Proposes Framework to Expedite Adoption and Listing of New Virtual Currency Coins

by Practical Law Finance
Published on 12 Dec 2019 • USA (National/Federal)
The New York State Department of Financial Services (NYDFS) issued proposed guidance designed to allow licensed virtual currency firms that have already received approval for coin listings to introduce new coins without additional permission.
On December 11, 2019, the New York State Department of Financial Services (NYDFS) issued proposed guidance containing the following two new proposals aimed to allow licensed virtual currency (VC) firms that have already received approval for coin listings (BitLicense) to introduce new coins in an efficient and timely manner:
  • A model framework for the creation of company coin-listing policies. An existing licensee can use this model and tailor it to enable the licensee to self-certify the listing or adoption of new coins on an ongoing basis (see Model Framework for the Creation of Company Coin-Listing Policies.)
  • A NYDFS web page that would contain a list of all approved coins.
In 2015, NYDFS adopted a VC regulatory framework which makes it compulsory to obtain a BitLicense before engaging in the following activities in relation to VC in New York State:
  • Transmission.
  • Storing, holding and maintaining custody or control.
  • Buying, selling, performing exchange services, controlling, administering or issuing.
Since 2015, NYDFS has granted 24 BitLicenses.
VC licensees would still be required to keep NYDFS informed, no later than at the time of their next quarterly filing, of all coins used or offered in connection with their VC business activities.
NYDFS is requesting public comment on the proposals by January 27, 2020.

Model Framework for the Creation of Company Coin-Listing Policies

A VC licensee's coin-listing policy must be approved by NYDFS if the coins are to be offered as part of their VC business in NY. If a VC licensee's policy is approved by NYDFS, under the proposed guidance, the licensee would then be able to self-certify to NYDFS that its proposed adoption or listing of any new coins complies with the requirements of its NYDFS-approved coin-listing policy, and provide written notice of its intent to offer and use the new coins in accordance with such policy.
The proposed guidance offers a model framework for the creation of company coin-listing policies that are likely to receive NYDFS approval and advises that such policies should include governance, risk, and monitoring features, including, but not limited to:
  • Assurances from the VC licensee that:
    • a governing authority of the VC licensee approves the company coin-listing policy;
    • a governing authority of the VC licensee reviews and independently makes decisions to approve or disapprove each new coin;
    • there are no conflicts of interest regarding the review and decision-making process regarding the coins;
    • minutes of governing authority of the licensee exist and include the names of the participants and all documents reviewed by the participants in connection with each approval or disapproval of coins, such as reviews and signoffs by all stakeholders, such as the legal, compliance, cybersecurity, and operations teams of the licensee, and should include an assessment of all associated risks; and
    • the licensee will keep records of the application of the company coin-listing policy to each new coin.
  • Documentation of a full risk assessment of any new coin performed by the VC licensee as well as performance of an independent audit to assess and address the following risks:
    • risks associated with the creation or issuance, governance, usage, or design of any new coin through due diligence to ensure that any new coin is created or issued by a legitimate and reputable entity or entities for lawful and legitimate purposes;
    • operational risks associated with any new coins;
    • risks associated with any technology or systems enhancements or modification requirements necessary to ensure timely adoption or listing of any new coin;
    • cybersecurity risks or risks relating to theft;
    • market risks;
    • risks relating to code defects and breaches and other threats concerning any new coin and its supporting blockchain practices and protocols that apply to them;
    • risks relating to potential noncompliance with the requirements of the VC licensee's supervisory agreement with NYDFS as a result of the adoption of the new coins;
    • legal risks; and
    • regulatory risks.
  • Policies and procedures for monitoring the newly adopted or listed coin, to ensure that the licensee’s continued adoption or listing of the coin remains prudent, including:
    • periodic re-evaluation of the coin, including whether material changes have occurred, with a frequency and level of scrutiny tailored to the risk level of the particular coin;
    • adoption, documentation, and implementation of control measures to manage risks associated with the coin; and
    • a process for de-listing the coin.
For information on virtual currency regulation, see Virtual Currency and Digital Asset Regulatory Tracker.