NYDFS Issues Updated Guidance on Listing and Delisting of Virtual Currencies

Practical Law Legal Update w-040-8258 (Approx. 7 pages)

NYDFS Issues Updated Guidance on Listing and Delisting of Virtual Currencies

by Practical Law Finance

Virtual Currency Listing and Delisting Guidance

On September 18, 2023, NYDFS issued an industry letter providing updated guidance to VCEs on policies related to the listing and delisting of virtual currencies (VC), referred to in the updated guidance as digital coins or simply "coins." The updated guidance, which took immediate effect, provides a framework for VCEs to create and seek NYDFS approval of a firm-specific policy for the listing of new coins and requirements for VCE coin-delisting policies, which apply regardless of whether a VCE maintains a coin-listing policy for self-certification purposes (see Practice Note, NYDFS Virtual Currency BitLicense Framework: Overview: NYDFS Self-Certification Coin-Listing Framework and Legal Update, NYDFS Proposes Framework to Expedite Adoption and Listing of New Virtual Currency Coins).

Coin Listing

The updated guidance directs VCEs to draft coin-listing policies that address, at a minimum, governance, risk assessment, and monitoring.

Governance. The VCE must ensure that:
- its board of directors or equivalent governing authority approves the coin listing, reviews and determines whether to re-approve the coin-listing policy at least annually, reviews and makes decisions to approve or disapprove each new coin, and is independent from those responsible for making the initial recommendations whether to list or delist a coin;
- any conflicts of interest in connection with the review and decision-making process have been assessed, addressed, and disclosed to the public;
- it keeps records consistent with applicable recordkeeping requirements and makes them readily available for NYDFS review at all times;
- it informs NYDFS immediately in writing if, at any time after NYDFS approves its coin-listing policy, the VCE's coin-listing policy ceases to comply with the requirements of the updated guidance; and
- it does not make material changes or revisions to its coin-listing policy without the prior written approval of NYDFS.
Risk assessment. The VCE must perform a comprehensive risk assessment designed to ensure that any coin and the uses for which it is being considered comply with NYDFS VC regulation and with the safety and soundness of the VCE. The risks to be assessed include:
- technical design and technology;
- operational;
- cybersecurity;
- market and liquidity;
- illicit finance;
- legal;
- reputational; and
- regulatory.
Monitoring. The VCE must have policies and procedures in place to monitor the coin to ensure that its continued listing remains consistent with safety and soundness considerations, protection of customers and the public, and all requirements of the updated guidance.

Coin Delisting

VCEs must maintain a separate policy in the event the VCE ceases support for a coin (coin-delisting), regardless of whether the VCE has a NYDFS-approved coin-listing policy. All VCEs must submit a coin-delisting policy to NYDFS for approval by January 31, 2024. Delisting policies must be tailored to the VC business activity the VCE has been approved by NYDFS to conduct and must be submitted to NYDFS for approval. VCEs must meet with NYDFS by December 8, 2023, to discuss their draft coin-delisting policy.

The determination to delist a coin should occur only if the VCE concludes that the coin’s delisting is consistent with the updated guidance, NYDFS VC regulation, and the safety and soundness of the VCE. Coin-delisting policies must include procedures that comprehensively address the steps involved in removing support for a coin and must be tailored to the VCE’s:

Specific business model.
Operations.
Customers and counterparties.
Geographies of operations.
Service providers.
Use, purpose, and specific features of coins being considered.

According to the updated guidance, coin-delisting policies should, at a minimum, address governance, process, and execution considerations.

Governance. The impact that delisting a coin may have on consumers and others requires VCEs to have appropriate oversight and management to govern a delisting process.
Process. Coin-delisting policies must:
- detail the process that underpins a delisting event;
- establish thresholds on criteria that may prompt a delisting;
- incorporate the VCE's ongoing monitoring procedures;
- be reviewed and updated periodically; and
- include the types of events that may cause requiring delisting, such as new findings resulting from re-evaluation or ongoing monitoring of a listed coin, changes in the legal or regulatory environment, or receiving a directive from NYDFS to delist a coin. The VCE must establish roles and responsibilities in connection with each type of event.
Execution. Once the decision to delist a coin is reached, a VCE must communicate with its customers regarding the delisting in advance of acting to cease support of the coin. VCEs must provide customers with at least 30 days prior written notice of:
- the specific coin or coins that are being delisted;
- the rationale supporting the decision to delist;
- the timing of the delisting; and
- the steps that impacted customers may take to sell or transfer the affected coin or coins.
The elements related to executing a delisting event that must be addressed in a coin-delisting policy include:
- Advance notice. VCE customers must be provided with at least 30 days prior written notice of any coin delisting using commercially reasonable methods, unless the VCE is directed otherwise by NYDFS.
- Customer support. Following the communication of a coin-delisting decision, a VCE must provide customer support to answer questions and assist customers with selling the impacted coin or otherwise transferring it off the VCE's platform.
- Documentation. VCEs must document all key details of any coin-delisting decision.
- Ongoing monitoring. VCEs must dedicate resources to monitoring the safety and soundness of a delisting, including the necessary expertise to detect issues with the financial health of the business, cybersecurity vulnerabilities, illicit finance risk, or any technological or other challenges that would affect the customer experience.
- Impact analysis. VCEs must consider the impact a delisting decision might have on the VCE’s internal business operations, counterparties, and third-party service providers.

Framework for Greenlisted Coins

On September 18, 2023, NYDFS issued an industry letter providing a general framework for Greenlisted coins. The Greenlist records all coins approved for VCEs, whether directly by NYDFS or using self-certification under the NYDFS self-certification coin-listing framework, as well as their approved uses. The Greenlist is separate from any individual VCE’s coin-listing policies and resulting self-certifications.

According to the framework, VCEs that list coins on the Greenlist must:

Provide advance notification to NYDFS prior to beginning support.
Have in place a NYDFS-approved coin-delisting policy.

NYDFS will consider adding a coin to the Greenlist if:

The coin or coin issuer has a demonstrated, historic record consistent with safety and soundness and the protection of customers.
The coin is a stablecoin approved by NYDFS for issuance in New York by a VCE.

NYDFS may in its sole discretion:

Add or remove any coin to the Greenlist.
Refrain from placing any coin on the Greenlist.
Discontinue the Greenlist process entirely.
Prohibit or otherwise limit a coin’s use before or after a VCE begins using a coin.
Require that any VCE delist, halt, or otherwise limit activity of any coin.

NYDFS Issues Updated Guidance on Listing and Delisting of Virtual Currencies | Practical Law