Outgoing NY Superintendent of Financial Services Benjamin Lawksy releases new rules for licensing virtual currency businesses

NEW YORK STATE

DEPARTMENT OF FINANCIAL SERVICES

NEW YORK CODES, RULES AND REGULATIONS

TITLE 23. DEPARTMENT OF FINANCIAL SERVICES

CHAPTER I. REGULATIONS OF THE SUPERINTENDENT OF FINANCIAL SERVICES

PART 200. VIRTUAL CURRENCIES

(ALL MATERIAL IS NEW)

Section 200.1 Introduction

Section 200.2 Definitions

Section 200.3 License

Section 200.4 Application

Section 200.5 Application fees

Section 200.6 Action by superintendent

Section 200.7 Compliance

Section 200.8 Capital requirements

Section 200.9 Custody and protection of customer assets

Section 200.10 Material change to business

Section 200.11 Change of control; mergers and acquisitions

Section 200.12 Books and records

Section 200.13 Examinations

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Section 200.14 Reports and financial disclosures

Section 200.15 Anti-money laundering program

Section 200.16 Cyber security program

Section 200.17 Business continuity and disaster recovery

Section 200.18 Advertising and marketing

Section 200.19 Consumer protection

Section 200.20 Complaints

Section 200.21 Transitional period

Section 200.22 Severability

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Section 200.1 Introduction

This Part contains regulations relating to the conduct of business involving Virtual Currency, as defined herein,

in accordance with the superintendent’s powers pursuant to the above-stated authority.

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Section 200.2 Definitions

For purposes of this Part only, the following definitions shall apply:

(a) Affiliate means any Person that directly or indirectly controls, is controlled by, or is under common

control with, another Person;

(b) Cyber Security Event means any act or attempt, successful or unsuccessful, to gain unauthorized access

to, disrupt, or misuse a Licensee’s electronic systems or information stored on such systems;

(c) Department means the New York State Department of Financial Services;

(d) Exchange Service means the conversion or exchange of Fiat Currency or other value into Virtual

Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion

or exchange of one form of Virtual Currency into another form of Virtual Currency;

(e) Fiat Currency means government-issued currency that is designated as legal tender in its country of

issuance through government decree, regulation, or law;

(f) Licensee means any Person duly licensed by the superintendent pursuant to this Part;

(g) New York means the State of New York;

(h) New York Resident means any Person that resides, is located, has a place of business, or is conducting

business in New York;

(i) Person means an individual, partnership, corporation, association, joint stock association, trust, or other

entity, however organized;

(j) Prepaid Card means an electronic payment device that: (i) is usable at a single merchant or an affiliated

group of merchants that share the same name, mark, or logo, or is usable at multiple, unaffiliated merchants or

service providers; (ii) is issued in and for a specified amount of Fiat Currency; (iii) can be reloaded in and for

only Fiat Currency, if at all; (iv) is issued and/or reloaded on a prepaid basis for the future purchase or delivery

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of goods or services; (v) is honored upon presentation; and (vi) can be redeemed in and for only Fiat Currency,

if at all;

(k) Principal Officer means an executive officer of an entity, including, but not limited to, the chief

executive, financial, operating, and compliance officers, president, general counsel, managing partner, general

partner, controlling partner, and trustee, as applicable;

(l) Principal Stockholder means any Person that directly or indirectly owns, controls, or holds with power

to vote ten percent or more of any class of outstanding capital stock or other equity interest of an entity or

possesses the power to direct or cause the direction of the management or policies of the entity;

(m) Principal Beneficiary means any Person entitled to ten percent or more of the benefits of a trust;

(n) Qualified Custodian means a bank, trust company, national bank, savings bank, savings and loan

association, federal savings association, credit union, or federal credit union in the State of New York, subject

to the prior approval of the superintendent. To the extent applicable, terms used in this definition shall have the

meaning ascribed by the Banking Law;

(o) Transmission means the transfer, by or through a third party, of Virtual Currency from a Person to a

Person, including the transfer from the account or storage repository of a Person to the account or storage

repository of a Person;

(p) Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of

digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i)

have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or

administrator; or (iii) may be created or obtained by computing or manufacturing effort. Virtual Currency shall

not be construed to include any of the following:

(1) digital units that (i) are used solely within online gaming platforms, (ii) have no market or

application outside of those gaming platforms, (iii) cannot be converted into, or redeemed for, Fiat Currency or

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Virtual Currency, and (iv) may or may not be redeemable for real-world goods, services, discounts, or

purchases.

(2) digital units that can be redeemed for goods, services, discounts, or purchases as part of a customer

affinity or rewards program with the issuer and/or other designated merchants or can be redeemed for digital

units in another customer affinity or rewards program, but cannot be converted into, or redeemed for, Fiat

Currency or Virtual Currency; or

(3) digital units used as part of Prepaid Cards;

(q) Virtual Currency Business Activity means the conduct of any one of the following types of activities

involving New York or a New York Resident:

(1) receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the

transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal

amount of Virtual Currency;

(2) storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

(3) buying and selling Virtual Currency as a customer business;

(4) performing Exchange Services as a customer business; or

(5) controlling, administering, or issuing a Virtual Currency.

The development and dissemination of software in and of itself does not constitute Virtual Currency Business

Activity.

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Section 200.3 License

(a) License required. No Person shall, without a license obtained from the superintendent as provided in

this Part, engage in any Virtual Currency Business Activity. Licensees are not authorized to exercise fiduciary

powers, as defined under Section 100 of the Banking Law.

(b) Unlicensed agents prohibited. Each Licensee is prohibited from conducting any Virtual Currency

Business Activity through an agent or agency arrangement when the agent is not a Licensee.

(c) Exemption from licensing requirements. The following Persons are exempt from the licensing

requirements otherwise applicable under this Part:

(1) Persons that are chartered under the New York Banking Law and are approved by the superintendent

to engage in Virtual Currency Business Activity; and

(2) merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or

services or for investment purposes.

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Section 200.4 Application

(a) Application for a license required under this Part shall be in writing, under oath, and in a form

prescribed by the superintendent, and shall contain the following:

(1) the exact name of the applicant, including any doing business as name, the form of organization, the

date of organization, and the jurisdiction where organized or incorporated;

(2) a list of all of the applicant’s Affiliates and an organization chart illustrating the relationship among

the applicant and such Affiliates;

(3) a list of, and detailed biographical information for, each individual applicant and each director,

Principal Officer, Principal Stockholder, and Principal Beneficiary of the applicant, as applicable, including

such individual’s name, physical and mailing addresses, and information and documentation regarding such

individual’s personal history, experience, and qualification, which shall be accompanied by a form of authority,

executed by such individual, to release information to the Department;

(4) a background report prepared by an independent investigatory agency acceptable to the

superintendent for each individual applicant, and each Principal Officer, Principal Stockholder, and Principal

Beneficiary of the applicant, as applicable;

(5) for each individual applicant; for each Principal Officer, Principal Stockholder, and Principal

Beneficiary of the applicant, as applicable; and for all individuals to be employed by the applicant who have

access to any customer funds, whether denominated in Fiat Currency or Virtual Currency: (i) a set of

completed fingerprints, or a receipt indicating the vendor (which vendor must be acceptable to the

superintendent) at which, and the date when, the fingerprints were taken, for submission to the State Division of

Criminal Justice Services and the Federal Bureau of Investigation; (ii) if applicable, such processing fees as

prescribed by the superintendent; and (iii) two portrait-style photographs of the individuals measuring not more

than two inches by two inches;

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(6) an organization chart of the applicant and its management structure, including its Principal Officers

or senior management, indicating lines of authority and the allocation of duties among its Principal Officers or

senior management;

(7) a current financial statement for the applicant and each Principal Officer, Principal Stockholder, and

Principal Beneficiary of the applicant, as applicable, and a projected balance sheet and income statement for the

following year of the applicant’s operation;

(8) a description of the proposed, current, and historical business of the applicant, including detail on the

products and services provided and to be provided, all associated website addresses, the jurisdictions in which

the applicant is engaged in business, the principal place of business, the primary market of operation, the

projected customer base, any specific marketing targets, and the physical address of any operation in New York;

(9) details of all banking arrangements;

(10) all written policies and procedures required by, or related to, the requirements of this Part;

(11) an affidavit describing any pending or threatened administrative, civil, or criminal action, litigation,

or proceeding before any governmental agency, court, or arbitration tribunal against the applicant or any of its

directors, Principal Officers, Principal Stockholders, and Principal Beneficiaries, as applicable, including the

names of the parties, the nature of the proceeding, and the current status of the proceeding;

(12) verification from the New York State Department of Taxation and Finance that the applicant is

compliant with all New York State tax obligations in a form acceptable to the superintendent;

(13) if applicable, a copy of any insurance policies maintained for the benefit of the applicant, its

directors or officers, or its customers;

(14) an explanation of the methodology used to calculate the value of Virtual Currency in Fiat Currency;

and

(15) such other additional information as the superintendent may require.

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(b) As part of such application, the applicant shall demonstrate that it will be compliant with all of the

requirements of this Part upon licensing.

(c) Notwithstanding Subsection (b) of this Section, the superintendent may in his or her sole discretion and

consistent with the purposes and intent of the Financial Services Law and this Part approve an application by

granting a conditional license.

(1) A conditional license may be issued to an applicant that does not satisfy all of the regulatory

requirements upon licensing.

(2) A Licensee that holds a conditional license may be subject to heightened review, whether in regard

to the scope and frequency of examination or otherwise.

(3) Unless the superintendent removes the conditional status of or renews a conditional license, said

license shall expire two years after its date of issuance.

  1. i) The superintendent may in his or her sole discretion and consistent with the purposes and intent

of the Financial Services Law and this Part:

(A) renew a conditional license for an additional length of time; or

(B) remove the conditional status from a conditional license.

(4) A conditional license may be suspended or revoked pursuant to Section 200.6 of this Part.

(5) A conditional license may impose any reasonable condition or conditions, as determined by the

superintendent in his or her sole discretion.

(6) The superintendent may remove any condition or conditions from a conditional license that has been

issued.

(7) In determining whether to issue a conditional license, renew or remove the conditional status of a

conditional license, or impose or remove any specific conditions on a conditional license, the superintendent

may consider any relevant factor or factors. Relevant factors may include but are not limited to:

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  1. i) the nature and scope of the applicant’s or Licensee’s business;
  2. ii) the anticipated volume of business to be transacted by the applicant or Licensee;

iii) the nature and scope of the risks that the applicant’s or Licensee’s business presents to

consumers, Virtual Currency markets, financial markets, and the general public;

  1. iv) the measures which the applicant or Licensee has taken to limit or mitigate the risks its business

presents;

  1. v) whether the applicant or Licensee is registered with FinCEN;
  2. vi) whether the applicant or Licensee is licensed, registered, or otherwise authorized by any

governmental or self-regulatory authority to engage in financial services or other business activities;

vii) the applicant’s or Licensee’s financial services or other business experience; and

viii) the Licensee’s history as a holder of a conditional license issued by the superintendent.

(d) The superintendent may permit that any application for a license under this Part, or any other submission

required by this Part, be made or executed by electronic means.

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Section 200.5 Application fees

As part of an application for licensing under this Part, each applicant must submit an initial application fee, in

the amount of five thousand dollars, to cover the cost of processing the application, reviewing application

materials, and investigating the financial condition and responsibility, financial and business experience, and

character and general fitness of the applicant. If the application is denied or withdrawn, such fee shall not be

refunded. Each Licensee may be required to pay fees to the Department to process additional applications

related to the license.

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Section 200.6 Action by superintendent

(a) Generally. Upon the filing of an application for licensing under this Part, payment of the required fee,

and demonstration by the applicant of its ability to comply with the provisions of this Part upon licensing, the

superintendent shall investigate the financial condition and responsibility, financial and business experience,

and character and general fitness of the applicant. If the superintendent finds these qualities are such as to

warrant the belief that the applicant’s business will be conducted honestly, fairly, equitably, carefully, and

efficiently within the purposes and intent of this Part, and in a manner commanding the confidence and trust of

the community, the superintendent shall advise the applicant in writing of his or her approval of the application,

and shall issue to the applicant a license to conduct Virtual Currency Business Activity, subject to the

provisions of this Part and such other conditions as the superintendent shall deem appropriate; or the

superintendent may deny the application.

(b) Approval or denial of application. The superintendent shall approve or deny every application for a

license hereunder within 90 days from the filing of an application deemed by the superintendent to be complete.

Such period of 90 days may be extended at the discretion of the superintendent for such additional reasonable

period of time as may be required to enable compliance with this Part. A license issued pursuant to this Part

shall remain in full force and effect until it is surrendered by the Licensee, is revoked or suspended, or expires

as provided in this Part.

(c) Suspension or revocation of license. The superintendent may suspend or revoke a license issued under

this Part on any ground on which the superintendent might refuse to issue an original license, for a violation of

any provision of this Part, for good cause shown, or for failure of the Licensee to pay a judgment, recovered in

any court, within or without this State, by a claimant or creditor in an action arising out of, or relating to, the

Licensee’s Virtual Currency Business Activity, within thirty days after the judgment becomes final or within

thirty days after expiration or termination of a stay of execution thereon; provided, however, that if execution on

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the judgment is stayed, by court order or operation of law or otherwise, then proceedings to suspend or revoke

the license (for failure of the Licensee to pay such judgment) may not be commenced by the superintendent

during the time of such stay, and for thirty days thereafter. “Good cause” shall exist when a Licensee has

defaulted or is likely to default in performing its obligations or financial engagements or engages in unlawful,

dishonest, wrongful, or inequitable conduct or practices that may cause harm to the public.

(d) Hearing. No license issued under this Part shall be revoked or suspended except after a hearing thereon.

The superintendent shall give a Licensee no less than ten days’ written notice of the time and place of such

hearing by registered or certified mail addressed to the principal place of business of such Licensee. Any order

of the superintendent suspending or revoking such license shall state the grounds upon which it is based and be

sent by registered or certified mail to the Licensee at its principal place of business as shown in the records of

the Department.

(e) Preliminary injunction. The superintendent may, when deemed by the superintendent to be in the public

interest, seek a preliminary injunction to restrain a Licensee from continuing to perform acts that violate any

provision of this Part, the Financial Services Law, Banking Law, or Insurance Law.

(f) Preservation of powers. Nothing in this Part shall be construed as limiting any power granted to the

superintendent under any other provision of the Financial Services Law, Banking Law, or Insurance Law,

including any power to investigate possible violations of law, rule, or regulation or to impose penalties or take

any other action against any Person for violation of such laws, rules, or regulations.

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Section 200.7 Compliance

(a) Generally. Each Licensee is required to comply with all applicable federal and state laws, rules, and

regulations.

(b) Compliance officer. Each Licensee shall designate a qualified individual or individuals responsible for

coordinating and monitoring compliance with this Part and all other applicable federal and state laws, rules, and

regulations.

(c) Compliance policy. Each Licensee shall maintain and enforce written compliance policies, including

policies with respect to anti-fraud, anti-money laundering, cyber security, privacy and information security, and

any other policy required under this Part, which must be reviewed and approved by the Licensee’s board of

directors or an equivalent governing body.

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Section 200.8 Capital requirements

(a) Each Licensee shall maintain at all times such capital in an amount and form as the superintendent

determines is sufficient to ensure the financial integrity of the Licensee and its ongoing operations based on an

assessment of the specific risks applicable to each Licensee. In determining the minimum amount of capital

that must be maintained by a Licensee, the superintendent may consider a variety of factors, including but not

limited to:

(1) the composition of the Licensee’s total assets, including the position, size, liquidity, risk exposure,

and price volatility of each type of asset;

(2) the composition of the Licensee’s total liabilities, including the size and repayment timing of each

type of liability;

(3) the actual and expected volume of the Licensee’s Virtual Currency Business Activity;

(4) whether the Licensee is already licensed or regulated by the superintendent under the Financial

Services Law, Banking Law, or Insurance Law, or otherwise subject to such laws as a provider of a financial

product or service, and whether the Licensee is in good standing in such capacity;

(5) the amount of leverage employed by the Licensee;

(6) the liquidity position of the Licensee;

(7) the financial protection that the Licensee provides for its customers through its trust account or bond;

(8) the types of entities to be serviced by the Licensee; and

(9) the types of products or services to be offered by the Licensee.

(b) Each Licensee shall hold capital required to be maintained in accordance with this Section in the form of

cash, virtual currency, or high-quality, highly liquid, investment-grade assets, in such proportions as are

acceptable to the superintendent.

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Section 200.9 Custody and protection of customer assets

(a) Each Licensee shall maintain a surety bond or trust account in United States dollars for the benefit of its

customers in such form and amount as is acceptable to the superintendent for the protection of the Licensee’s

customers. To the extent a Licensee maintains a trust account in accordance with this section, such trust

account must be maintained with a Qualified Custodian.

(b) To the extent a Licensee stores, holds, or maintains custody or control of Virtual Currency on behalf of

another Person, such Licensee shall hold Virtual Currency of the same type and amount as that which is owed

or obligated to such other Person.

(c) Each Licensee is prohibited from selling, transferring, assigning, lending, hypothecating, pledging, or

otherwise using or encumbering assets, including Virtual Currency, stored, held, or maintained by, or under the

custody or control of, such Licensee on behalf of another Person except for the sale, transfer, or assignment of

such assets at the direction of such other Person.

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Section 200.10 Material change to business

(a) Each Licensee must obtain the superintendent’s prior written approval for any plan or proposal to

introduce or offer a materially new product, service, or activity, or to make a material change to an existing

product, service, or activity, involving New York or New York Residents.

(b) A “materially new product, service, or activity” or a “material change” may occur where:

(1) the proposed new product, service, or activity, or the proposed change may raise a legal or

regulatory issue about the permissibility of the product, service, or activity;

(2) the proposed new product, service, or activity, or the proposed change may raise safety and

soundness or operational concerns; or

(3) a change is proposed to an existing product, service, or activity that may cause such product, service,

or activity to be materially different from that previously listed on the application for licensing by the

superintendent.

(c) The Licensee shall submit a written plan describing the proposed materially new product, service, or

activity, or the proposed material change, including a detailed description of the business operations,

compliance policies, and the impact on the overall business of the Licensee, as well as such other information as

requested by the superintendent.

(d) If a Licensee has any questions about the materiality of any proposed new product, service, or activity,

or of any proposed change, the Licensee may seek clarification from the Department prior to introducing or

offering that new product, service, or activity or making that change.

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Section 200.11 Change of control; mergers and acquisitions

(a) Change of Control. No action shall be taken, except with the prior written approval of the

superintendent, that may result in a change of control of a Licensee.

(1) Prior to any change of control, the Person seeking to acquire control of a Licensee shall submit a

written application to the superintendent in a form and substance acceptable to the superintendent, including but

not limited to detailed information about the applicant and all directors, Principal Officers, Principal

Stockholders, and Principal Beneficiaries of the applicant, as applicable.

(2) For purposes of this Section, the term “control” means the possession, directly or indirectly, of the

power to direct or cause the direction of the management and policies of a Licensee whether through the

ownership of stock of such Licensee, the stock of any Person that possesses such power, or otherwise. Control

shall be presumed to exist if a Person, directly or indirectly, owns, controls, or holds with power to vote ten

percent or more of the voting stock of a Licensee or of any Person that owns, controls, or holds with power to

vote ten percent or more of the voting stock of such Licensee. No Person shall be deemed to control another

Person solely by reason of his being an officer or director of such other Person.

(3) The superintendent may determine upon application that any Person does not or will not upon the

taking of some proposed action control another Person. Such determination shall be made within 30 days or

such further period as the superintendent may prescribe. The filing of an application pursuant to this Subsection

in good faith by any Person shall relieve the applicant from any obligation or liability imposed by this Section

with respect to the subject of the application until the superintendent has acted upon the application. The

superintendent may revoke or modify his or her determination, after notice and opportunity to be heard,

whenever in his or her judgment revocation or modification is consistent with this Part. The superintendent

may consider the following factors in making such a determination:

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  1. i) whether such Person’s purchase of common stock is made solely for investment purposes and

not to acquire control over the Licensee;

  1. ii) whether such Person could direct, or cause the direction of, the management or policies of the

Licensee;

iii) whether such Person could propose directors in opposition to nominees proposed by the

management or board of directors of the Licensee;

  1. iv) whether such Person could seek or accept representation on the board of directors of the

Licensee;

  1. v) whether such Person could solicit or participate in soliciting proxy votes with respect to any

matter presented to the shareholders of the Licensee; or

  1. vi) any other factor that indicates such Person would or would not exercise control of the Licensee.

(4) The superintendent shall approve or deny every application for a change of control of a Licensee

hereunder within 120 days from the filing of an application deemed by the superintendent to be complete. Such

period of 120 days may be extended by the superintendent, for good cause shown, for such additional

reasonable period of time as may be required to enable compliance with the requirements and conditions of this

Part.

(5) In determining whether to approve a proposed change of control, the superintendent shall, among

other factors, take into consideration the public interest and the needs and convenience of the public.

(b) Mergers and Acquisitions. No action shall be taken, except with the prior written approval of the

superintendent, that may result in a merger or acquisition of all or a substantial part of the assets of a Licensee.

(1) Prior to any such merger or acquisition, an application containing a written plan of merger or

acquisition shall be submitted to the superintendent by the entities that are to merge or by the acquiring entity,

as applicable. Such plan shall be in form and substance satisfactory to the superintendent, and shall specify

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each entity to be merged, the surviving entity, or the entity acquiring all or substantially all of the assets of the

Licensee, as applicable, and shall describe the terms and conditions of the merger or acquisition and the mode

of carrying it into effect.

(2) The superintendent shall approve or deny a proposed merger or a proposed acquisition of all or a

substantial part of the assets of a Licensee within 120 days after the filing of an application that contains a

written plan of merger or acquisition and is deemed by the superintendent to be complete. Such period of 120

days may be extended by the superintendent, for good cause shown, for such additional reasonable period of

time as may be required to enable compliance with the requirements and conditions of this Part.

(3) In determining whether to so approve a proposed merger or acquisition, the superintendent shall,

among other factors, take into consideration the public interest and the needs and convenience of the public.

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Section 200.12 Books and records

(a) Each Licensee shall, in connection with its Virtual Currency Business Activity, make, keep, and

preserve all of its books and records in their original form or native file format for a period of at least seven

years from the date of their creation and in a condition that will allow the superintendent to determine whether

the Licensee is complying with all applicable laws, rules, and regulations. The books and records maintained

by each Licensee shall, without limitation, include:

(1) for each transaction, the amount, date, and precise time of the transaction, any payment instructions,

the total amount of fees and charges received and paid to, by, or on behalf of the Licensee, and the names,

account numbers, and physical addresses of (i) the party or parties to the transaction that are customers or

accountholders of the Licensee; and (ii) to the extent practicable, any other parties to the transaction;

(2) a general ledger containing all asset, liability, ownership equity, income, and expense accounts;

(3) bank statements and bank reconciliation records;

(4) any statements or valuations sent or provided to customers and counterparties;

(5) records or minutes of meetings of the board of directors or an equivalent governing body;

(6) records demonstrating compliance with applicable state and federal anti-money laundering laws,

rules, and regulations, including customer identification and verification documents, records linking customers

to their respective accounts and balances, and a record of all compliance breaches;

(7) communications and documentation related to investigations of customer complaints and transaction

error resolution or concerning facts giving rise to possible violations of laws, rules, or regulations;

(8) all other records required to be maintained in accordance with this Part; and

(9) all other records as the superintendent may require.

(b) Each Licensee shall provide the Department, upon request, immediate access to all facilities, books,

records, documents, or other information maintained by the Licensee or its Affiliates, wherever located.

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(c) Records of non-completed, outstanding, or inactive Virtual Currency accounts or transactions shall be

maintained for at least five years after the time when any such Virtual Currency has been deemed, under the

Abandoned Property Law, to be abandoned property.

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Section 200.13 Examinations

(a) Each Licensee shall permit and assist the superintendent to examine the Licensee whenever in the

superintendent’s judgment such examination is necessary or advisable, but not less than once every two

calendar years, including, without limitation, to determine:

(1) the financial condition of the Licensee;

(2) the safety and soundness of the conduct of its business;

(3) the policies of its management;

(4) whether the Licensee has complied with the requirements of laws, rules, and regulations; and

(5) such other matters as the superintendent may determine, including, but not limited to, any activities

of the Licensee outside the State of New York if in the opinion of the superintendent such activities may affect

the Licensee’s Virtual Currency Business Activity.

(b) Each Licensee shall permit and assist the superintendent at any time to examine all of the Licensee’s

books, records, accounts, documents, and other information.

(c) Each Licensee shall permit and assist the superintendent to make such special investigations as the

superintendent shall deem necessary to determine whether a Licensee has violated any provision of the

applicable laws, rules, or regulations and to the extent necessary shall permit and assist the superintendent to

examine all relevant facilities, books, records, accounts, documents, and other information.

(d) For the purpose of determining the financial condition of the Licensee, its safety and soundness

practices, or whether it has complied with the requirements of laws, rules, and regulations, the Licensee shall

permit and assist the superintendent, when in the superintendent’s judgment it is necessary or advisable, to

examine an Affiliate of the Licensee.

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Section 200.14 Reports and financial disclosures

(a) Each Licensee shall submit to the superintendent quarterly financial statements within 45 days following

the close of the Licensee’s fiscal quarter in the form, and containing such information, as the superintendent

shall prescribe, including without limitation, the following information:

(1) a statement of the financial condition of the Licensee, including a balance sheet, income statement,

statement of comprehensive income, statement of change in ownership equity, cash flow statement, and

statement of net liquid assets;

(2) a statement demonstrating compliance with any financial requirements established under this Part;

(3) financial projections and strategic business plans;

(4) a list of all off-balance sheet items;

(5) a chart of accounts, including a description of each account; and

(6) a report of permissible investments by the Licensee as permitted under this Part.

(b) Each Licensee shall submit audited annual financial statements, together with an opinion and an

attestation by an independent certified public accountant regarding the effectiveness of the Licensee’s internal

control structure. All such annual financial statements shall include:

(1) a statement of management’s responsibilities for preparing the Licensee’s annual financial

statements, establishing and maintaining adequate internal controls and procedures for financial reporting, and

complying with all applicable laws, rules, and regulations;

(2) an assessment by management of the Licensee’s compliance with such applicable laws, rules, and

regulations during the fiscal year covered by the financial statements; and

(3) certification of the financial statements by an officer or director of the Licensee attesting to the truth

and correctness of those statements.

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(c) Each Licensee shall notify the superintendent in writing of any criminal action or insolvency proceeding

against the Licensee or any of its directors, Principal Stockholders, Principal Officers, and Principal

Beneficiaries, as applicable, immediately after the commencement of any such action or proceeding.

(d) Each Licensee shall notify the superintendent in writing of any proposed change to the methodology

used to calculate the value of Virtual Currency in Fiat Currency that was submitted to the Department in

accordance with Section 200.4 or this Subsection.

(e) Each Licensee shall submit a report to the superintendent immediately upon the discovery of any

violation or breach of law, rule, or regulation related to the conduct of activity licensed under this Part.

(f) Each Licensee shall make additional special reports to the superintendent, at such times and in such

form, as the superintendent may request.

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Section 200.15 Anti-money laundering program

(a) All values in United States dollars referenced in this Section must be calculated using the methodology

to determine the value of Virtual Currency in Fiat Currency that was provided to the Department under this

Part.

(b) Each Licensee shall conduct an initial risk assessment that will consider legal, compliance, financial,

and reputational risks associated with the Licensee’s activities, services, customers, counterparties, and

geographic location and shall establish, maintain, and enforce an anti-money laundering program based thereon.

The Licensee shall conduct additional assessments on an annual basis, or more frequently as risks change, and

shall modify its anti-money laundering program as appropriate to reflect any such changes.

(c) The anti-money laundering program shall, at a minimum:

(1) provide for a system of internal controls, policies, and procedures designed to ensure ongoing

compliance with all applicable anti-money laundering laws, rules, and regulations;

(2) provide for independent testing for compliance with, and the effectiveness of, the anti-money

laundering program to be conducted by qualified internal personnel of the Licensee, who are not responsible for

the design, installation, maintenance, or operation of the anti-money laundering program, or the policies and

procedures that guide its operation, or a qualified external party, at least annually, the findings of which shall be

summarized in a written report submitted to the superintendent;

(3) designate a qualified individual or individuals in compliance responsible for coordinating and

monitoring day-to-day compliance with the anti-money laundering program; and

(4) provide ongoing training for appropriate personnel to ensure they have a fulsome understanding of

anti-money laundering requirements and to enable them to identify transactions required to be reported and

maintain records required to be kept in accordance with this Part.

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(d) The anti-money laundering program shall include a written anti-money laundering policy reviewed and

approved by the Licensee’s board of directors or equivalent governing body.

(e) Each Licensee, as part of its anti-money laundering program, shall maintain records and make reports in

the manner set forth below.

(1) Records of Virtual Currency transactions. Each Licensee shall maintain the following information

for all Virtual Currency transactions involving the payment, receipt, exchange, conversion, purchase, sale,

transfer, or transmission of Virtual Currency:

  1. i) the identity and physical addresses of the party or parties to the transaction that are customers or

accountholders of the Licensee and, to the extent practicable, any other parties to the transaction;

  1. ii) the amount or value of the transaction, including in what denomination purchased, sold, or

transferred;

iii) the method of payment;

  1. iv) the date or dates on which the transaction was initiated and completed; and
  2. v) a description of the transaction.

(2) Reports on transactions. When a Licensee is involved in a Virtual Currency to Virtual Currency

transaction or series of Virtual Currency to Virtual Currency transactions that are not subject to currency

transaction reporting requirements under federal law, including transactions for the payment, receipt, exchange,

conversion, purchase, sale, transfer, or transmission of Virtual Currency, in an aggregate amount exceeding the

United States dollar value of $10,000 in one day, by one Person, the Licensee shall notify the Department, in a

manner prescribed by the superintendent, within 24 hours.

(3) Monitoring for suspicious activity. Each Licensee shall monitor for transactions that might signify

money laundering, tax evasion, or other illegal or criminal activity.

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(i) Each Licensee shall file Suspicious Activity Reports (“SARs”) in accordance with applicable

federal laws, rules, and regulations.

(ii) Each Licensee that is not subject to suspicious activity reporting requirements under federal law

shall file with the superintendent, in a form prescribed by the superintendent, reports of transactions that

indicate a possible violation of law or regulation within 30 days from the detection of the facts that constitute a

need for filing. Continuing suspicious activity shall be reviewed on an ongoing basis and a suspicious activity

report shall be filed within 120 days of the last filing describing continuing activity.

(f) No Licensee shall structure transactions, or assist in the structuring of transactions, to evade reporting

requirements under this Part.

(g) No Licensee shall engage in, facilitate, or knowingly allow the transfer or transmission of Virtual

Currency when such action will obfuscate or conceal the identity of an individual customer or counterparty.

Nothing in this Section, however, shall be construed to require a Licensee to make available to the general

public the fact or nature of the movement of Virtual Currency by individual customers or counterparties.

(h) Each Licensee shall also maintain, as part of its anti-money laundering program, a customer

identification program.

(1) Identification and verification of account holders. When opening an account for, or establishing a

service relationship with, a customer, each Licensee must, at a minimum, verify the customer’s identity, to the

extent reasonable and practicable, maintain records of the information used to verify such identity, including

name, physical address, and other identifying information, and check customers against the Specially

Designated Nationals (“SDNs”) list maintained by the Office of Foreign Asset Control (“OFAC”), a part of the

U.S. Treasury Department. Enhanced due diligence may be required based on additional factors, such as for

high risk customers, high-volume accounts, or accounts on which a suspicious activity report has been filed.

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(2) Enhanced due diligence for accounts involving foreign entities. Licensees that maintain accounts for

non-U.S. Persons and non-U.S. Licensees must establish enhanced due diligence policies, procedures, and

controls to detect money laundering, including assessing the risk presented by such accounts based on the

nature of the foreign business, the type and purpose of the activity, and the anti-money laundering and

supervisory regime of the foreign jurisdiction.

(3) Prohibition on accounts with foreign shell entities. Licensees are prohibited from maintaining

relationships of any type in connection with their Virtual Currency Business Activity with entities that do not

have a physical presence in any country.

(4) Identification required for large transactions. Each Licensee must require verification of the identity

of any accountholder initiating a transaction with a value greater than $3,000.

(i) Each Licensee shall demonstrate that it has risk-based policies, procedures, and practices to ensure, to

the maximum extent practicable, compliance with applicable regulations issued by OFAC.

(j) Each Licensee shall have in place appropriate policies and procedures to block or reject specific or

impermissible transactions that violate federal or state laws, rules, or regulations.

(k) The individual or individuals designated by the Licensee, pursuant to Paragraph 200.15(c)(3), shall be

responsible for day-to-day operations of the anti-money laundering program and shall, at a minimum:

(1) Monitor changes in anti-money laundering laws, including updated OFAC and SDN lists, and update

the program accordingly;

(2) Maintain all records required to be maintained under this Section;

(3) Review all filings required under this Section before submission;

(4) Escalate matters to the board of directors, senior management, or appropriate governing body and

seek outside counsel, as appropriate;

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(5) Provide periodic reporting, at least annually, to the board of directors, senior management, or

appropriate governing body; and

(6) Ensure compliance with relevant training requirements.

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Section 200.16 Cyber security program

(a) Generally. Each Licensee shall establish and maintain an effective cyber security program to ensure the

availability and functionality of the Licensee’s electronic systems and to protect those systems and any sensitive

data stored on those systems from unauthorized access, use, or tampering. The cyber security program shall be

designed to perform the following five core cyber security functions:

(1) identify internal and external cyber risks by, at a minimum, identifying the information stored on the

Licensee’s systems, the sensitivity of such information, and how and by whom such information may be

accessed;

(2) protect the Licensee’s electronic systems, and the information stored on those systems, from

unauthorized access, use, or other malicious acts through the use of defensive infrastructure and the

implementation of policies and procedures;

(3) detect systems intrusions, data breaches, unauthorized access to systems or information, malware,

and other Cyber Security Events;

(4) respond to detected Cyber Security Events to mitigate any negative effects; and

(5) recover from Cyber Security Events and restore normal operations and services.

(b) Policy. Each Licensee shall implement a written cyber security policy setting forth the Licensee’s

policies and procedures for the protection of its electronic systems and customer and counterparty data stored on

those systems, which shall be reviewed and approved by the Licensee’s board of directors or equivalent

governing body at least annually. The cyber security policy must address the following areas:

(1) information security;

(2) data governance and classification;

(3) access controls;

(4) business continuity and disaster recovery planning and resources;

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(5) capacity and performance planning;

(6) systems operations and availability concerns;

(7) systems and network security;

(8) systems and application development and quality assurance;

(9) physical security and environmental controls;

(10) customer data privacy;

(11) vendor and third-party service provider management;

(12) monitoring and implementing changes to core protocols not directly controlled by the Licensee, as

applicable; and

(13) incident response.

(c) Chief Information Security Officer. Each Licensee shall designate a qualified employee to serve as the

Licensee’s Chief Information Security Officer (“CISO”) responsible for overseeing and implementing the

Licensee’s cyber security program and enforcing its cyber security policy.

(d) Reporting. Each Licensee shall submit to the Department a report, prepared by the CISO and presented

to the Licensee’s board of directors or equivalent governing body, at least annually, assessing the availability,

functionality, and integrity of the Licensee’s electronic systems, identifying relevant cyber risks to the Licensee,

assessing the Licensee’s cyber security program, and proposing steps for the redress of any inadequacies

identified therein.

(e) Audit. Each Licensee’s cyber security program shall, at a minimum, include audit functions as set forth

below.

(1) Penetration testing. Each Licensee shall conduct penetration testing of its electronic systems, at least

annually, and vulnerability assessment of those systems, at least quarterly.

(2) Audit trail. Each Licensee shall maintain audit trail systems that:

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(i) track and maintain data that allows for the complete and accurate reconstruction of all financial

transactions and accounting;

(ii) protect the integrity of data stored and maintained as part of the audit trail from alteration or

tampering;

(iii) protect the integrity of hardware from alteration or tampering, including by limiting electronic

and physical access permissions to hardware and maintaining logs of physical access to hardware that allows for

event reconstruction;

(iv) log system events including, at minimum, access and alterations made to the audit trail systems

by the systems or by an authorized user, and all system administrator functions performed on the systems; and

(v) maintain records produced as part of the audit trail in accordance with the recordkeeping

requirements set forth in this Part.

(f) Application Security. Each Licensee’s cyber security program shall, at minimum, include written

procedures, guidelines, and standards reasonably designed to ensure the security of all applications utilized by

the Licensee. All such procedures, guidelines, and standards shall be reviewed, assessed, and updated by the

Licensee’s CISO at least annually.

(g) Personnel and Intelligence. Each Licensee shall:

(1) employ cyber security personnel adequate to manage the Licensee’s cyber security risks and to

perform the core cyber security functions specified in Paragraph 200.16(a)(1)-(5);

(2) provide and require cyber security personnel to attend regular cyber security update and training

sessions; and

(3) require key cyber security personnel to take steps to stay abreast of changing cyber security threats

and countermeasures.

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Section 200.17 Business continuity and disaster recovery

(a) Each Licensee shall establish and maintain a written business continuity and disaster recovery

(“BCDR”) plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the

event of an emergency or other disruption to the Licensee’s normal business activities. The BCDR plan, at

minimum, shall:

(1) identify documents, data, facilities, infrastructure, personnel, and competencies essential to the

continued operations of the Licensee’s business;

(2) identify the supervisory personnel responsible for implementing each aspect of the BCDR plan;

(3) include a plan to communicate with essential Persons in the event of an emergency or other

disruption to the operations of the Licensee, including employees, counterparties, regulatory authorities, data

and communication providers, disaster recovery specialists, and any other Persons essential to the recovery of

documentation and data and the resumption of operations;

(4) include procedures for the maintenance of back-up facilities, systems, and infrastructure as well as

alternative staffing and other resources to enable the timely recovery of data and documentation and to resume

operations as soon as reasonably possible following a disruption to normal business activities;

(5) include procedures for the back-up or copying, with sufficient frequency, of documents and data

essential to the operations of the Licensee and storing of the information off site; and

(6) identify third parties that are necessary to the continued operations of the Licensee’s business.

(b) Each Licensee shall distribute a copy of the BCDR plan, and any revisions thereto, to all relevant

employees and shall maintain copies of the BCDR plan at one or more accessible off-site locations.

(c) Each Licensee shall provide relevant training to all employees responsible for implementing the BCDR

plan regarding their roles and responsibilities.

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(d) Each Licensee shall promptly notify the superintendent of any emergency or other disruption to its

operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect

on the Licensee, its counterparties, or the market.

(e) The BCDR plan shall be tested at least annually by qualified, independent internal personnel or a

qualified third party, and revised accordingly.

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Section 200.18 Advertising and marketing

(a) Each Licensee engaged in Virtual Currency Business Activity shall not advertise its products, services,

or activities in New York or to New York Residents without including the name of the Licensee and the legend

that such Licensee is “Licensed to engage in Virtual Currency Business Activity by the New York State

Department of Financial Services.”

(b) Each Licensee shall maintain, for examination by the superintendent, all advertising and marketing

materials for a period of at least seven years from the date of their creation, including but not limited to print

media, internet media (including websites), radio and television advertising, road show materials, presentations,

and brochures. Each Licensee shall maintain hard copy, website captures of material changes to internet

advertising and marketing, and audio and video scripts of its advertising and marketing materials, as applicable.

(c) In all advertising and marketing materials, each Licensee shall comply with all disclosure requirements

under federal and state laws, rules, and regulations.

(d) In all advertising and marketing materials, each Licensee and any person or entity acting on its behalf,

shall not, directly or by implication, make any false, misleading, or deceptive representations or omissions.

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Section 200.19 Consumer protection

(a) Disclosure of material risks. As part of establishing a relationship with a customer, and prior to entering

into an initial transaction for, on behalf of, or with such customer, each Licensee shall disclose in clear,

conspicuous, and legible writing in the English language and in any other predominant language spoken by the

customers of the Licensee, all material risks associated with its products, services, and activities and Virtual

Currency generally, including at a minimum, the following:

(1) Virtual Currency is not legal tender, is not backed by the government, and accounts and value

balances are not subject to Federal Deposit Insurance Corporation or Securities Investor Protection Corporation

protections;

(2) legislative and regulatory changes or actions at the state, federal, or international level may adversely

affect the use, transfer, exchange, and value of Virtual Currency;

(3) transactions in Virtual Currency may be irreversible, and, accordingly, losses due to fraudulent or

accidental transactions may not be recoverable;

(4) some Virtual Currency transactions shall be deemed to be made when recorded on a public ledger,

which is not necessarily the date or time that the customer initiates the transaction;

(5) the value of Virtual Currency may be derived from the continued willingness of market participants

to exchange Fiat Currency for Virtual Currency, which may result in the potential for permanent and total loss

of value of a particular Virtual Currency should the market for that Virtual Currency disappear;

(6) there is no assurance that a Person who accepts a Virtual Currency as payment today will continue to

do so in the future;

(7) the volatility and unpredictability of the price of Virtual Currency relative to Fiat Currency may

result in significant loss over a short period of time;

(8) the nature of Virtual Currency may lead to an increased risk of fraud or cyber attack;

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(9) the nature of Virtual Currency means that any technological difficulties experienced by the Licensee

may prevent the access or use of a customer’s Virtual Currency; and

(10) any bond or trust account maintained by the Licensee for the benefit of its customers may not be

sufficient to cover all losses incurred by customers.

(b) Disclosure of general terms and conditions. When opening an account for a new customer, and prior to

entering into an initial transaction for, on behalf of, or with such customer, each Licensee shall disclose in clear,

conspicuous, and legible writing in the English language and in any other predominant language spoken by the

customers of the Licensee, all relevant terms and conditions associated with its products, services, and activities

and Virtual Currency generally, including at a minimum, the following, as applicable:

(1) the customer’s liability for unauthorized Virtual Currency transactions;

(2) the customer’s right to stop payment of a preauthorized Virtual Currency transfer and the procedure

to initiate such a stop-payment order;

(3) under what circumstances the Licensee will, absent a court or government order, disclose

information concerning the customer’s account to third parties;

(4) the customer’s right to receive periodic account statements and valuations from the Licensee;

(5) the customer’s right to receive a receipt, trade ticket, or other evidence of a transaction;

(6) the customer’s right to prior notice of a change in the Licensee’s rules or policies; and

(7) such other disclosures as are customarily given in connection with the opening of customer accounts.

(c) Disclosures of the terms of transactions. Prior to each transaction in Virtual Currency, for, on behalf of,

or with a customer, each Licensee shall furnish to each such customer a written disclosure in clear, conspicuous,

and legible writing in the English language and in any other predominant language spoken by the customers of

the Licensee, containing the terms and conditions of the transaction, which shall include, at a minimum, to the

extent applicable:

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(1) the amount of the transaction;

(2) any fees, expenses, and charges borne by the customer, including applicable exchange rates;

(3) the type and nature of the Virtual Currency transaction;

(4) a warning that once executed the transaction may not be undone, if applicable; and

(5) such other disclosures as are customarily given in connection with a transaction of this nature.

(d) Acknowledgement of disclosures. Each Licensee shall ensure that all disclosures required in this

Section are acknowledged as received by customers.

(e) Receipts. Upon completion of any transaction, each Licensee shall provide to a customer a receipt

containing the following information:

(1) the name and contact information of the Licensee, including a telephone number established by the

Licensee to answer questions and register complaints;

(2) the type, value, date, and precise time of the transaction;

(3) the fee charged;

(4) the exchange rate, if applicable;

(5) a statement of the liability of the Licensee for non-delivery or delayed delivery;

(6) a statement of the refund policy of the Licensee; and

(7) any additional information the superintendent may require.

(f) Each Licensee shall make available to the Department, upon request, the form of the receipts it is

required to provide to customers in accordance with Subsection 200.19(e).

(g) Prevention of fraud. Licensees are prohibited from engaging in fraudulent activity. Additionally, each

Licensee shall take reasonable steps to detect and prevent fraud, including by establishing and maintaining a

written anti-fraud policy. The anti-fraud policy shall, at a minimum, include:

(1) the identification and assessment of fraud-related risk areas;

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(2) procedures and controls to protect against identified risks;

(3) allocation of responsibility for monitoring risks; and

(4) procedures for the periodic evaluation and revision of the anti-fraud procedures, controls, and

monitoring mechanisms.

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Section 200.20 Complaints

(a) Each Licensee shall establish and maintain written policies and procedures to fairly and timely resolve

complaints.

(b) Each Licensee must provide, in a clear and conspicuous manner, on its website or websites, in all

physical locations, and in any other location as the superintendent may prescribe, the following disclosures:

(1) the Licensee’s mailing address, email address, and telephone number for the receipt of complaints;

(2) a statement that the complainant may also bring his or her complaint to the attention of the

Department;

(3) the Department’s mailing address, website, and telephone number; and

(4) such other information as the superintendent may require.

(c) Each Licensee shall report to the superintendent any change in the Licensee’s complaint policies or

procedures within seven days.

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Section 200.21 Transitional Period

A Person already engaged in Virtual Currency Business Activity must apply for a license in accordance with

this Part within 45 days of the effective date of this regulation. In doing so, such applicant shall be deemed in

compliance with the licensure requirements of this Part until it has been notified by the superintendent that its

application has been denied, in which case it shall immediately cease operating in this state and doing business

with New York State Residents. Any Person engaged in Virtual Currency Business Activity that fails to submit

an application for a license within 45 days of the effective date of this regulation shall be deemed to be

conducting unlicensed Virtual Currency Business Activity.

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Section 200.22 Severability

If any provision of this Part or the application thereof to any Person or circumstance is adjudged invalid by a

court of competent jurisdiction, such judgment shall not affect or impair the validity of the other provisions of

this Part or the application thereof to other Persons or circumstances.

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