The New York Department of Financial Services (“NYDFS”) recently announced approval of significant new activities for FinTech-oriented businesses. Over the past week, NYDFS has granted the following approvals:
- Additional virtual currencies available for trading through Paxos Trust Company LLC (formerly known as itBit Trust Company), a NY-chartered trust company; and
- Approval of BitLicenses for Xapo, Inc. and Square, Inc. which would authorize them to offer custody and exchange services, respectively, for Bitcoin to residents of New York.
These announcements demonstrate the breadth of state regulation of virtual currency operations through expansion of exchange services to new emerging currencies and through custody and related services.
The approval for Paxos allows it to offer trading in Ether, Litecoin, Lumens and Bitcoin Cash. The Paxos approval demonstrates that NYDFS is sufficiently comfortable with its oversight to authorize trading in virtual currencies that are less liquid and established than Bitcoin. While Ether, Litecoin, and Bitcoin Cash are also well-known, Lumens is less so, and the approval makes Paxos the only exchange in New York to offer it. Lumens is a virtual currency used to pay transaction fees to send payments or remittances in fiat currency on a network called Stellar. Transactions are recorded on a blockchain and operate similarly to those conducted using Ripple, a widely-traded virtual currency available for purchase or sale through several state-regulated exchanges.
NYDFS also announced its approval of Xapo’s and Square’s applications for BitLicenses. Xapo will be authorized to offer a digital wallet and a vault service. Square’s hardware enables sellers to accept credit card and contactless payments. The approval for Square will authorize its Cash App to provide customers with access to a range of financial services, including a simple way to buy and sell Bitcoin.
Established in 2015, the BitLicense framework is a NY state regulatory regime that governs almost any virtual currency business activity in or involving New York. BitLicensees must meet rigorous compliance standards, including capital and liquidity requirements, ownership and change in control restrictions, recordkeeping and financial reporting, anti-money laundering controls, and cybersecurity protections, among other requirements. With these approvals, the NYDFS has now granted seven BitLicenses.
As background, Cleary Gottlieb has served as counsel to Paxos throughout its history, from its formation and licensing through development of the legal frameworks for its permissioned blockchain trading and settlement platform. The new announcement represents the second significant expansion of Paxos’ activities within the last month. Previously, the NYDFS authorized Paxos to operate a permissioned blockchain platform for the settlement of gold bullion.
If you have any questions regarding these developments please contact your Cleary Gottlieb FinTech contacts: Michael Krimminger, Colin Lloyd, or Pamela Marcogliese.