To List Or Not To List? NYDFS Seeks Comment On Proposed Rules Authorizing Bitlicensees To Self-Certify Cryptocurrency Listings
On December 11, 2019, the New York Department of Financial Services (“NYDFS”) published “Proposed Guidance Regarding Adoption or Listing of Virtual Currencies” (“Proposal”). The Proposal would establish a framework to allow “regulated virtual currency licensees” and entities exempt from licensure, such as trust companies, to offer or incorporate into their services cryptocurrencies that are:
pre-approved by NYDFS; or
certified by the licensee as being compliant with the licensee’s NYDFS-approved listing criteria.
The Proposal is intended to “enhance efficiency” and enable licensees to “offer and use new coins in a timely fashion”.
Under the Proposal, a licensee or an exempt entity may list or otherwise offer services for any cryptocurrency pre-approved by NYDFS, which are currently Bitcoin, Bitcoin Cash, Ether, Ether Classic, Litecoin, Ripple, Paxos Standard, and Gemini Dollar. Any of these cryptocurrencies may be offered without prior approval if they “have not been subject to any modification, division, or change after their listing on the DFS web-page.”
Licensees and exempt entities would also be authorized to develop a coin-listing or adoption policy and procedure tailored to their business model and risk profile. If NYDFS approves the policy and procedure, the entity could list or offer services for any cryptocurrency it certifies as meeting the standards of its policy without needing to seek prior approval from NYDFS, although the entity would need to provide NYDFS prior written notice before offering the cryptocurrency. Entities that do not have a pre-approved coin-listing policy would be required to obtain prior approval from NYDFS to list new cryptocurrencies. A self-certified cryptocurrency, however, is not immune from regulatory action. NYDFS reserves the right to object to the adoption of any specific cryptocurrency.
Among other requirements, a licensee’s policy must cover how the licensee will govern the listing process, how it will manage a listed cryptocurrency’s risk, and how it will monitor the listed cryptocurrencies to ensure listing is still “prudent.” A licensee must also review the risk associated with the “creation, or issuance, governance, usage or design of any new coin” as well as the operational risks and market risks (such as price manipulation and liquidity) associated with the asset.
The Proposal raises a number of questions. For instance, what is the criteria through which NYDFS has and will select pre-approved cryptocurrencies? What “modifications, divisions, or changes after their listing” would make a cryptocurrency ineligible for listing absent approval? Entities with a coin-listing policy would need to pay careful attention to the technological weaknesses of any particular asset, and the ability of its creators or ecosystem to patch problems quickly, among other considerations. The comment period is open until January 27, 2020.