I.

Introduction
The New York State Department of Financial Services (DFS) is the department of
New York state responsible for regulating financial services and products that are
subject to New York banking, financial services, and insurance laws. 1 DFS has
been on the forefront of virtual currency regulation since Bitcoin gained its
popularity in 2015.2 In May 2015, DFS Superintendent, Ben Lawsky, unveiled the
first regulatory framework in the United States dedicated specifically to regulating
virtual currencies.3
This regulation, which is codified as New York Codes, Rules, and Regulations
(NYCRR) § 200 and titled “Virtual Currencies,” is a groundbreaking statute in the
effort to regulate virtual currencies. 4 This regulation aimed to protect consumers
from fraud, prevent money laundering, and increase cyber security requirements
for businesses whose practices involved with virtual currencies in the state of New
York. Based on these goals DFS has issued Bitlicenses, along with money-
transmitter licenses and trust charters to virtual currency companies that meet
different licensing criteria.5
A. DFS Virtual Currency Framework
In June 2015, the DFS became the first state banking regulator to establish a very
comprehensive regulatory framework for virtual currency called “BitLicense”.
DFS requires any operations involving virtual currency transactions, to obtain a
license from the state. Under New York law, any individual or company that
engages in “Virtual Currency Business Activity,” within the territorial boundaries,
or involving residents, of New York State by, for example, buying and selling
cryptocurrencies as a business or providing digital asset custodial or wallet storage

1
Mission and Policy, N.Y. State Dep’t of Fin. Servs., https://www.dfs.ny.gov/our_mission (last visited Nov. 16,
2020) (“To reform the regulation of financial services in New York to keep pace with the rapid and dynamic
evolution of these industries, to guard against financial crises and to protect consumers and markets from fraud.”).
2
Superintendent Benjamin M. Lawsky, Remarks at the BTS Emerging Payments Forum in Washington, D.C.:
NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms (June 3, 2015),
https://www.davispolk.com/files/speech-june-3-
2015_nydfs_announces_final_bitlicense_framework_regulating_digital_currency_firms.pdf
3
Id.
4
See N.Y. Comp. Codes R. & Regs. tit. 23, § 200.1 (2015) (“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.”)
5
See Press Release, DFS Takes Action to Deter Fraud and Manipulation in Virtual Currency Markets, N.Y. Dep’t
of Fin. Servs., (Feb. 7, 2018), https://www.dfs.ny.gov/about/press/pr1802071.htm; see also N.Y. Comp. Codes R. &
Regs. tit. 23, § 200.3(a) (2015) (“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 . . . .”).
services, is required to obtain a BitLicense or charter under the limited purpose
trust company provisions of the New York Banking Law.6
The Bitlicense is applied to companies involved in receiving or transmitting virtual
currency on behalf of consumers; securing control of virtual currency on behalf of
customers; performing retail conversion services, including the conversion or
exchange of fiat currency or other value into virtual currency; buying and selling
virtual currency as a customer but not for personal use; along with companies who
control, administer or issue virtual currency. 7 The Bitlicense requires disclosure of
company information, including partnerships and subsidiaries of the company,
financial statements, along with written policies and procedures for how the
company will prevent fraudulent activity and abide by proper cyber-security
requirements. 8 Although this regulation is very broad, it is a safeguard in an effort
to finally regulate what many has considered a self-regulating industry.9
As stated in §641(1) of the Banking Law,
No person shall engage in the business of selling or
issuing checks, or engage in the business of receiving
money for transmission or transmitting the same, without
a license therefor obtained from the superintendent as
provided in this article, nor shall any person engage in
such business as an agent, except as an agent of a
licensee or as agent of a payee.10
Prior to the creation of this virtual currency license, also known as the “Bitlicense,”
institutions followed different paths to seek approval from the DFS for their
crypto-related activities involving New York or New York residents. Some
institutions, like Paxos Trust Company, LLC (f/k/a itBit Trust Company, LLC) and
Gemini Trust Company, LLC, sought and received limited purpose trust charters.
Others submitted virtual currency applications for money transmitter licenses from
the DFS. Today, 25 institutions11 have either a virtual currency license, a limited
purpose trust charter, or a combination of a virtual currency license and a money
transmitter license.

6
23 NYCRR 200. See also 23 NYCRR Part 200.2(q).
7
Id. § 200.2(q).
8
Id. § 200.14.
9
Rob Wile, New York Just Released its Bitcoin License, and They’re Going to Change the Face of Digital
Currencies in the US, Busisness Insider (July 17, 2014), https://www.businessinsider.com/nydfs-bitlicense-draft-
2014-7; see also Lawsky, supra note 101
10
N.Y. Banking Law § 641(1).
11
Regulated Entities, Department of Finance Service: Virtual Currency (Oct. 26, 2020),
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities. DFS granted PayPal,
Inc., a conditional virtual currency license in October 2020 and a money transmitter license in Oct. 2013.
To the extent a business makes it through the licensing process and receives a
BitLicense, the BitLicense imposes significant operational burdens, requiring firms
to undergo periodic safety and soundness examinations, to ensure strict compliance
and supervisory policy and procedures in place, as well as comply with applicable
anti-money laundering laws and have a “know your customer” and cybersecurity
program in place, so consumers are protected and identify illegal activity.12
DFS believes putting in appropriate regulatory safeguards for virtual currencies
will build customer’s confidence that funds entrusted to virtual currency firms will
not get stuck in a digital blackhole and will be processed quickly; ensure any
illegal activities of the virtual currency firms serving as a money changer will be
met with serious criminal penalties; and a greater transparency and accountability
from both virtual currency companies and currencies themselves, to promote
sustained and long-term investments.
The industry has criticized BitLicense since it was proposed, stating that the
process of obtaining a bit license is too onerous. Since its enactment, New York is
the only state to require virtual currency firms to be licensed specifically for virtual
currency exchanges.13 As a result, businesses such as Bitfinex, Kraken, Poloniex
and Shapeshift have fled the state because of the costs and regulatory hurdles
associated with the BitLicense. 14 Bitfinex cited “. . . we hold our users' privacy in
very high regard, and seeing how we are an international exchange with a high
percentage of users coming from outside of NY, adhering to the bitlicense would
put these users' privacy at risk and it would compromise the privacy of our
employees (having to send finger prints to the NYDFS)”. 15 Nevertheless, over the
last five years the DFS has granted about two dozen BitLicenses while most of the
largest crypto-fiat exchanges have licensed one. 16
For those firms who remained in New York because they happen to live here like
Drone Energy and Travel by Token, there is a widespread sense of confusion as to
the scope of activities which fall under the purview of the regulations. As a result
of the confusion and uncertainty as to the reach of the licensing requirement, many
companies are left with three options: avoid doing business in New York entirely,

12
Id.
13
William B. Mack & India L. Sneed, New York State Department of Financial Services Proposes Framework for a
Conditional BitLicense, National Law Review, Vol. X, No. 191 (July 9, 2020),
https://www.natlawreview.com/article/new-york-state-department-financial-services-proposes-framework-
conditional
14
Luke Parker, Mass Exodus of Bitcoin Exchanges from New York State Triggered by BitLicense Deadline, Brave
New Coin (Aug. 9, 2015), https://bravenewcoin.com/insights/mass-exodus-of-bitcoin-exchanges-from-new-york-
state-triggered-by-bitlicense-deadline
15
Id.
16
William B. Mack & India L. Sneed, New York State Department of Financial Services Proposes Framework for a
Conditional BitLicense, supra.
attempt to structure a business around the law, or engage in potential or outright
non-compliance with the law. 17
Another main criticism was from a well known Bitcoin entrepreneur named Theo
Chino. In 2016, Chino filed a petition under Article 78 with the New York
Supreme Court challenging the DFS’s authority to use the Bitcoin community to
test its new banking regulations. Chino argued that under Article 78 of the State of
New York regulations must be preceded by a law enacted by the Legislature. 18 The
case was dismissed by the Honorable Carmen Victoria St. George for lack of
standing since “Article 78 is not the proper vehicle to challenge to the
constitutionality of a regulation.” 19
In 2017, DFS had transition to the Nationwide Multistate Licensing System and
Registry (NMLS) to manage its license application and ongoing regulation of non-
depository financial institutions doing business in New York.20 NMLS was created
by the Conference of the State Bank Supervisors (CSBS) to establish a secure,
web-based, nationwide licensing system that will allow companies to apply for
licenses in one or more states online.21 In addition to money-transmitter licenses,
DFS offers trust charters to applicable companies, 22 which are defined as limited
purpose trusts, refer to institutions chartered under the bank and trust company
provisions of the New York Banking Law but without the power to take deposits
or make loans. 23
B. DFS Cybersecurity Regulation
As of March 1, 2017, New York established a cybersecurity requirements for
financial services companies.24 Superintendent Vullo and DFS enacted this
17
Sarah Brennan, Contortions for Compliance: Life Under New York’s BitLicense, Coindesk (Jan. 22, 2018),
https://www.coindesk.com/contortions-compliance-life-new-yorks-bitlicense
18
Chino v. Dep’t of Fin. Servs., Index No. 101880/2015 (Sup. Ct. N.Y. Cnty. Oct. 16, 2015)
19
Decision, Order & Judgment, Chino v. Dep’t of Fin. Servs., Index No. 101880/2015, at 14 (Sup. Ct. N.Y. Cnty.
Jan. 14, 2018) [Chino subsequently filed an appeal to First Department which affirmed the order of the Supreme
Court. First Department cited that he failed to exhaust available administrative remedies and since he had identified
no injury-in-fact, he lacked standing to bring this action. Currently, Chino filed leave to appeal with the N.Y. Courts
of Appeal.].
20
Press Release, DFS Superintendent Vullo Announces Next Phase of Expanded Participation in State-Based NMLS
Platform Enhancing State Regulation of the Financial Services Industry N.Y. Dep’t of Fin. Servs. (Oct. 30, 2017),
https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1810011
21
State Regulatory Registry LLC, State Regulatory Registry LLC Nationwide Mortgage Licensing System 2008
Annual Report 2 (2009), https://www.csbs.org/system/files/2017-11/SRR-NMLS-Annual-Report090528a_0.pdf
22
See Information and Resources for Money Transmitters, N.Y. State Dep’t of Fin. Servs.,
https://www.dfs.ny.gov/apps_and_licensing/money_transmitters (last visited Nov. 16, 2020); see also Press Release,
DFS Continues to Foster Responsible Growth in New York’s Fintech Industry with New Virtual Currency Product
Approvals, N.Y. Dep’t of Fin. Servs. (Sept. 10, 2018), https://www.dfs.ny.gov/about/press/pr1809101.htm
23
Julia Kagan, Limited Purpose Trust Company, Investopedia, https://www.investopedia.com/terms/l/limited-
purpose-trust-company.asp (last updated Aug. 20, 2018).
24
23 NYCRR § 500.0 (“Given the seriousness of the issue and the risk to all regulated entities, certain regulatory
minimum standards are warranted, while not being overly prescriptive so that cybersecurity programs can match the
regulation to safeguard the regulated companies under the jurisdiction of New
York state from cybercriminals who aim to exploit technological vulnerabilities. 25
The primary goal of this regulation was to establish a regulatory minimum
standards in an effort to promote the protection of consumer information as well as
the information systems of DFS’s regulated entities. 26 Hopefully, with the
implementation of the Bitlicense along with advances in cybersecurity regulation,
there will be an environment where consumers can use virtual currency without
fear of fraud, theft, or market manipulation.27 Therefore, in order to operate within
the state of New York, DFS requires a stringent application process subject to
significant regulatory conditions. 28 Financial reporting, accounting, and
cybersecurity, among other requirements, are subject to examination and
inspection by DFS examiners as well as independent consultants.29 This application
process according to the DFS, will effectively discloses all information to ensure
consumer protection.30
Due to the criticisms and concerns, DFS launched a series of virtual currency
initiatives, designed to provide further guidance and resources for businesses
operating in, and potential new businesses, on June 24, 2020. 31 These initiatives
includes:
 A proposed framework for a Conditional BitLicense;
 A partnership with the State University of New York (SUNY)
concerning a virtual currency program;
 Final guidance regarding licensees’ ability to self-certify the use and
listing of new digital assets;
 Clarifications to questions regarding the BitLicense application
process; and
 A new Frequently Asked Questions page addressing who should get a
BitLicense and how.32

relevant risks and keep pace with technological advances. Accordingly, this regulation is designed to promote the
protection of customer information as well as the information technology systems of regulated entities.”).
25
Id.
26
Id.
27
See Press Release, DFS Takes Action to Deter Fraud and Manipulation in Virtual Currency Markets, N.Y. Dep’t
of Fin. Servs., supra note 5.
28
Press Release, DFS Continues to Foster Responsible Growth in New York’s Fintech Industry with New Virtual
Currency Product Approvals, supra note 22.
29
23 NYCRR § 200.13.
30
Press Release, DFS Continues to Foster Responsible Growth in New York’s Fintech Industry with New Virtual
Currency Product Approvals, supra note 22.
31
Press Release, DFS Superintendent Lacewell Launches Series of Virtual Currency Initiatives, Department of
Financial Service (June 24, 2020), https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202006241
32
See BitLicense FAQs, Dep’t of Financial Services (last accessed Nov. 12, 2020),
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/bitlicense_faqs.
 1. Conditional BitLicense Framework
To encourage more entities to operate under the BitLicense regime, DFS has
proposed a framework that allows new applicants to partner with BitLicensees to
secure a BitLicense that can be awarded outside of the regular application process
(a “Conditional BitLicense”).33 The framework can be used by entities such as
startups, emerging companies or established companies that are new to the virtual
currency space. 34
Obtaining a Conditional BitLicense is a five-step process under the proposed
framework:
 Applicants inform DFS of the intent to collaborate with a specific
BitLicensee and provide a copy of the draft agreement between the
applicant and the BitLicensee;
 Applicants submit information on the expected type of business and
the perceived risks, among other things;
 DFS begins its substantive review after all of the requested
documentation has been submitted;
 DFS and the applicant enter into a supervisory agreement defining the
scope of the applicant’s business, shared responsibilities with its
sponsor BitLicensee and NYDFS’ level of oversight; and
 DFS approves the application, a Conditional BitLicense is issued.
The proposed framework regarding the Conditional BitLicense is open to public
comment. Comments are due by August 10, 2020.35 DFS has yet to expressly grant
any such conditional licenses since the inception of the regulation. 36
2. SUNY Partnership
To help demonstrate the efficacy and nature of the proposed framework, DFS
also announced its new partnership with SUNY with an intent to launch a new
33
See Request for Comments on a Proposed Framework for a Conditional BitLicense, N.Y. Dep’t of Financial
Services (June 24, 2020),
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/gn/req_comments_prop_framework.
34
Gary De Waal, et al, New Empire State of Mind? Potential Easing of Restrictions for New York Virtual Currency
Business Licenses, National Law Review, Vol. X, No. 204 (July 22, 2020),
https://www.natlawreview.com/article/new-empire-state-mind-potential-easing-restrictions-new-york-virtual-
currency
35
DFS has requested comments on 11 specific questions on matters including, but not limited to, applicant
suitability, due diligence requirements and responsibility apportionment between applicants and BitLicensees.
Comments should be submitted by August 10, 2020.
36
At the time of implementation of its BitLicense regime, DFS apparently authorized various VC entities such as
Bittrex, Inc., already operating in New York to continue to conduct business in the New York market during the
pendency of their BitLicense application process under a safe-harbor regime. Bittrex Inc’s authority to operate in
New York as a VC Entity under such authority was abruptly terminated by DFS in April 2019:
https://www.dfs.ny.gov/system/files/documents/2019/04/dfs-bittrex-letter-41019.pdf.
SUNY-related virtual currency program called “SUNY BLOCK” . 37 DFS and
SUNY entered into a MOU 38 to boost the New York’s economy that was hit hard by
ongoing COVID-19 pandemic and expand the state’s virtual currency ecosystem to
new geographies and demographics. Under the “SUNY BLOCK” program, DFS
will issue a BitLicense to a SUNY-related entity, which will then help startups
and emerging companies run by students, alumni or local community members
secure their own Conditional BitLicenses. SUNY BLOCK illustrates what this
process could look like in practice for the many consortia and startups operating
in, or looking to operate in, the virtual currency space in New York.
3. Adopting and Listing New Virtual Currencies
DFS released its final guidance regarding adopting and listing new virtual
currencies.39 In their initial application to DFS for a BitLicense, applicants must list
the digital assets they would like to trade or store on their platform. However, the
BitLicense did not provide an avenue for BitLicensees to trade new digital assets
that were not listed on their initial applications. Given the evolvement of virtual
currencies available at any given time, this lack of avenue posed a problem for
BitLicensees who wanted to offer additional products and services while staying
within the letter of the law. DFS’s final guidance provides two possible avenues for
BitLicensees to offer new virtual currency coins, self-certification and
“Greenlisting.”
4. Self-Certification
A BitLicensee can list a virtual currency for trading by self-certifying that the coin
is consistent with the consumer protection standards of the BitLicense. 40 This self-
certification process has two basic steps. First, if a BitLicensee wants to self-certify
the use of new coins, it must create a detailed coin-listing policy and submit it to
DFS for review. If DFS approves the coin-listing policy, the BitLicensee may
follow that policy to self-certify the listing or adoption of new coins without further
approval from DFS. 41
5. Greenlisting
DFS has issued a “Greenlist” of virtual currencies as being safe for trading. The
Greenlist will be a record of pre-approved by the regulator for licensees to list and
37
Press Release, DFS Superintendent Lacewell Launches Series of Virtual Currency Initiatives, supra.
38
See Memorandum of Understanding,
https://www.dfs.ny.gov/system/files/documents/2020/06/mou_dfs_suny_20200618.pdf.
39
See Request for Comments on a Proposed Framework for a Conditional BitLicense, supra.
40
NYDFS states that “privacy coins,” namely, coins that conceal the identity of the user, or coins designed or
substantially used to avoid laws and regulations, cannot be self-certified under this policy. See Request for
Comments on a Proposed Framework for a Conditional BitLicense, supra.
41
The self-certification process also applies to entities that hold a charter under the limited purpose trust company
provisions of the New York Banking Law.
trade, including those listed through the self-certification process described above.
Once a new coin is approved by DFS, there is a six-month wa iting period before
the coin can be used for trading. 42 Once the waiting period has completed, all
other BitLicensees can use the coin for its approved purposes. If a BitLicensee
wants to use these coins during the waiting period, they can do so either through
self-certification or by obtaining direct approval from DFS. 43 DFS may also add
coins to the Greenlist that have been approved privately and in a centralized
manner. Currently, DFS has pre-approved the following coins for custody and
listing: Binance USD (BUSD), Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum
Classic (ETC), Ethereum (ETH), Gemini Dollar (GUSD), Litecoin (LTC), Pax
Gold (PAXG), Paxos Standard (PAX) and Ripple (XRP). 44
C. Clarifications to the BitLicense Application Process
Finally, DFS clarified its application process to improve applicants’ success rate in
obtaining a BitLicense and reduce the number of incomplete applications submitted.
DFS will only proceed with a substantive review of applications that have all of the
elements on the requirements checklist. 45 Once the substantive review begins, DFS
‘s intention is to limit the number of deficiency letters for a given application.
However, if the listed deficiencies involving a particular application have not been
fully addressed by the end of the response period for the third deficiency letter, DFS
may deny the application without further notice.
II. Securities and Exchange Commission
The Securities and Exchange Commission’s (SEC’s) recognizes the important role
that state financial services regulators play in protecting their citizens by regulating
the activities of banking and money services businesses within their states. Distinct
from these state regulatory regimes, however, are the important investor and
market protections provided by the federal and state securities laws. SEC and state
securities regulators work closely to ensure investor protection and securities
market integrity, to include the digital asset arena.
The SEC acknowledges that DFS has established a framework for regulating what
are called “virtual currency firms” and, pursuant to this framework, has issued
“BitLicenses” and trust charters that allow these firms to conduct certain activities
in New York with respect to what DFS refers to as “virtual currencies.” Under
42
See BitLicense FAQs, supra.
43
Id.
44
See Proposed Guidance Regarding Adoption or Listing of Virtual Currencies, N.Y. Dep’t of Fin. Servs. (Dec. 11,
2019),
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/pr_guidance_regarding_listing_of_vc.
45
The checklist can be found on the Nationwide Multistate Licensing System and Registry website,
https://mortgage.nationwidelicensingsystem.org/slr/PublishedStateDocuments/NY_Virtual_Currency_New_Applica
tion_Checklist.pdf.
these DFS “Proposed Guidance”, it urges DFS virtual currency “VC” licensees to
“conduct and document a full risk assessment of [digital assets] . . . including risks
related to compliance with all applicable laws, rules and regulatory guidances, such
as guidances issued by the [SEC] . . . .”46
The SEC has reviewed DFS’ s Proposed Guidance from DFS and, for the reasons
discussed below, would suggest that the final guidance should caution the
registered legal entities or market participants that reliance on the guidance or on
its issued license by DFS does not ensure that they are abiding to federal securities
laws when their activities involve digital assets that are securities.
A. Overview of the Applicability of Securities Laws
As the digital asset markets continue to evolve, market participants, including DFS
registered entities, should be aware that they may be conducting activities that are
encompassed within the federal securities laws and may fall within the jurisdiction
of the SEC. To ensure that registered entities or market participants are operating
within the federal security laws, they must assess whether federal securities laws
apply to any of the digital asset that they are transacting. The determination of
whether that digital asset falls under the federal securities law depends upon the
specific facts and circumstances of the transaction and requires a careful analysis 47
of the “economic reality”48 of the transaction and “what character the instrument is
given in commerce by the terms of the offer, the plan of distribution, and the
economic inducements held out to the prospect.”49
In its “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange
Act of 1934: The DAO” (the DAO Report), the SEC stated that, if a digital asset is
a security, all offers and sales of that digital asset security must be registered with
the SEC or must qualify for an exemption from the registration requirements. 50
Additionally, any entity or person engaging in the activities of an exchange must
register as a national securities exchange or operate pursuant to an exemption from
such registration. Further, an entity that issues or facilitates a trades of digital asset
securities in an initial offering or secondary trading may be considered as a
“broker” or “dealer” that requires them to be register with the SEC. A broker-
dealer must also become a member of a self-regulatory organization, typically
46
Proposed Guidance Regarding Adoption or Listing of Virtual Currencies, New York State Department of
Financial Services (Dec. 11, 2019)
47
See e.g., Id.
48
SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946). See also Tcherepnin v. Knight, 389 U.S. 332, 336
(1967) (“in searching for the meaning and scope of the word ‘security’ in the [Acts], form should be disregarded for
substance and the emphasis should be on economic reality”).
49
SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-53 (1943).
50
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange
Act Rel. No. 81207, Securities and Exchange Commission (July 25, 2017)
FINRA. These registration requirements of the federal securities laws are intended
to provide investors and the markets with transparency information and other
important protections from those fraudulent and manipulative acts and trading
practices.
In short, if a digital asset is a security under the federal securities laws, registered
legal entities or market participants must adhere to the well-established federal
securities law framework when dealing with that asset, regardless of the form in
which the asset is issued or trading. 51 Further, if a security is being offered or sold,
the anti-fraud protection of the U.S. securities laws apply. This is regardless of
other registrations or licenses an entity or person may obtain from a state agency.
B. Legal Entities Should Not Confuse Adherence to Industry
Standards or State Licensing Requirements as Compliance with
Securities Laws
SEC notes that the Proposed Guidance would incorporate a “model framework”
that appears to be the same to other industry-developed frameworks for evaluating
regulatory and other risks associated with trading or holding a particular digital
asset. These model frameworks may also designate particular digital assets for
inclusion on a “whitelist”, which requires the exchange to have its users linked to
their identity to their wallet, if they wish to withdraw cryptocurrency. Essentially,
Whitelist is the same procedure that banks require proper identity confirmation for
all accounts. However, these model frameworks or whitelists are industry-
developed and the SEC has not endorsed or approved the use of any such model
framework or whitelist in determining whether a particular digital asset is a
security.52 SEC knows that these model frameworks are being used by market
participants to assess the possibilities whether that entity is engaging in illegal
securities activities under the federal securities laws. However, SEC is concerned
that certain market participants are already engaged in or continue to engage in
illegal activity while trading digital assets that are considered as securities, based
on the entity or market participants’ risk assessment and their own business
considerations, rather than an accurate classification of the digital asset under the
federal securities laws.
According to SEC, registered legal entities or market participants should not rely
on a model framework, whitelist, or state license when evaluating compliance with
the federal securities laws. Further, investors using platforms or other
51
See Division of Investment Management, and Division of Trading and Markets, Statement on Digital Asset
Securities Issuance and Trading, Division of Corporation Finance (Nov. 16, 2018)
52
SEC Staff has published its own framework to assist market participants in determining whether a particular
digital asset is an investment contract and therefore a security. See Framework for Investment Contract Analysis of
Digital Assets, SEC Strategic Hub for Innovation & Fin. Tech. (Apr. 3, 2019).
intermediaries should not assume that entities licensed by DFS or any other state
are in compliance with the federal securities laws.
SEC encourages responsible innovation and the application of beneficial
technologies in the securities markets. However, SEC has considerable concerns
that many digital assets continue to be issued and traded in potential violation of
the federal securities laws, and that market participants involved in the issuance or
trading of such assets may be acting in violation of the federal securities laws. 53
The SEC continues to remain active in pursuing misconduct involving offerings
and trading of digital asset securities, which may include digital assets that virtual
currency firms determine to “list” or “adopt” pursuant to the Proposed Guidance. 54
As the DFS considers revisions to its virtual currency regulations, the SEC urges
the DFS to work in unison with federal and state securities regulators to ensure that
the federal and state commitment to investor protection and securities market
integrity are maintained.
III. The Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau of
the U.S. Department of the Treasury enacted by Congress as part of the National
Bank Act (previously referred to as the National Currency Act) of 1863. 55 The
primary function of OCC is to charters, regulates, and supervises all national banks
and federal savings associations.56 In 2003, the OCC adopted a rule amending 12
C.F.R. § 5.20(e)(1), stating that a national bank may be a special purpose bank that
limits activities to fiduciary duties or to any other activities within the business of
banking.57
In 2015, Comptroller Thomas J. Curry announced an initiative to improve the
OCC’s ability to identify trends in the FinTech Sector. 58 The OCC alluded that it
was considering issuing Special Purpose National Bank (SPNB) charters to
FinTech companies based on a proposed rule that addressed “receiverships for
national banks that are not insured by the FDIC.” 59 Currently, the are very few, if
any, virtual currency companies insured by the FDIC. DFS objected to the
proposal in a formal letter sent to the OCC and pointed out potential risks these
53
See Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, Div. of Corp. Fin. (Mar. 7,
2018).
54
See www.sec.gov/spotlight/cybersecurity-enforcement-actions.
55
History: 150 Years of the OCC, Office of Comptroller Currency, https://www.occ.treas.gov/about/what-we-
do/history/index-history.html (last visited Nov. 16, 2020).
56
About the OCC, Office of Comptroller Currency, https://www.occ.treas.gov/about/what-we-do/mission/index-
about.html (last visited Nov. 16, 2020).
57
Vullo v. Office of the Comptroller of the Currency, No. 17-civ.-3574 (NRB), 2017 WL 6512245, at *1 (S.D.N.Y.
Dec. 12, 2017).
58
Id.
59
Id. at *2.
charters could cause the consumers of New York. 60 Comptroller Curry responded
that “[w]e will be issuing charters to fintech companies engaged in the business of
banking because it is good for consumers, businesses, and the federal banking
system.”61 However, this response only provided vague details about the
application criteria or process to the proposed charters.62
A. Vullo v. Office of the Comptroller of the Currency I
On May 12th, 2017, Superintendent Vullo filed suit on behalf of DFS and CSBS
against the OCC for the proposed issuance of SPNB charters to FinTech
companies (Vullo I). 63 “DFS identified four purported injuries directly attributable
to the ‘Fintech Charter Decision.’”64 DFS claimed:
1) New York-licensed money transmitters may escape New
York’s regulatory requirements, stripping their customers
of the protections of New York State law; 2) marketplace
lenders with special-purpose charters may give loans at
higher interest rates than permitted under New York’s
interest rate caps and anti-usury laws; 3) entities that
acquire fintech charters may become exempt from existing
federal standards of safety and soundness, liquidity and
capitalization; and 4) DFS’s operating expenses are funded
assessments levied against New York State-licensed
financial institutions, and every firm that receives an OCC
charter in place of a New York license deprives DFS of
resources. 65
Unfortunately for DFS, the claims were dismissed without prejudice for lack of
subject matter jurisdiction.66 The court stated that DFS would not suffer any
hardship from delay because any injuries it might receive are “contingent on
future” actions of the OCC.67
B. Vullo v. Office of the Comptroller of the Currency II
On July 31, 2018, the OCC announced that it will begin accepting national bank
charter applications from FinTech companies and that it will issue a policy
60
Vullo, 2017 WL 6512245, at *2.
61
Id.
62
Id. at *3.
63
Id.
64
Id. at 7.
65
Id. (citations omitted).
66
Id.at *10.
67
See id. at *9 (“It is well settled law in this Circuit that the mere possibility of future injury does not constitute
hardship.”).
statement and a licensing manual supplement to further explain the criteria for
obtaining a charter.68 OCC announced that it was “[p]roviding a path for fintech
companies to become national banks can make the federal banking system stronger
by promoting economic growth and opportunity, modernization and innovation,
and competition.” 69
On September 14, 2018, Superintendent Vullo filed a new complaint in the U.S.
District Court for the Southern District of New York moving to invalidate the
decision by the OCC to offer special purpose national bank charters to FinTech
companies as a violation of the Tenth Amendment.70 In the complaint, DFS
alleges: (1) that the issuance of SPNB Charters would exceed OCC’s regulatory
authority as established by the National Bank Act (NBA); (2) that 12 C.F.R. §
5.20(e)(1) is “null and void” because it does not comport with the NBA; and (3)
that the OCC’s issuance of FinTech charters would violate the Tenth Amendment
of the Constitution by removing institutions that receive such charters from state
regulators.71
Superintendent Vullo alleges:
The Fintech Charter Decision is lawless, ill-conceived,
and destabilizing of financial markets that are properly
and most effectively regulated by New York State. It also
puts New York financial consumers — and often the most
vulnerable ones — at great risk of exploitation by
federally-chartered entities improperly insulated from
New York law. The OCC’s reckless folly should be
stopped. 72
The United States Code authorizes the OCC to charter national banking
associations by granting them “all such incidental powers as shall be necessary to
carry on the business of banking.”73 In the case of Oulton v. Savings Institution, 84
U.S. 109 (1877), the Supreme Court stated, “‘[s]trictly speaking the term bank
implies a place for the deposit of money, as that is the most obvious purpose of
such an institution,’ underscoring that ‘[o]riginally the business of banking

68
Press Release, OCC Begins Accepting National Bank Charter Applications From Financial Technology
Companies, Off. of the Comptroller of the Currency (July 31, 2018), https://www.occ.treas.gov/news-
issuances/newsreleases/2018/nr-occ-2018-74.html.
69
Id.
70
Vullo v. Office of the Comptroller of the Currency, No. 18-cv-08377 (S.D.N.Y. Sept. 14, 2018); Jon Hill, NY Bank
Regulator Sues OCC Again Over Fintech Charter, LAW360 (Sept. 14, 2018),
https://www.law360.com/articles/1083151.
71
Compl. ¶¶ 56-58; 60-62 and 64-68.
72
Id. ¶ 2.
73
12 U.S.C. § 24.
consisted only in receiving deposits.’”74 In a letter to Judge Victor Marrero filed
November 19, 2018, the OCC claims DFS has advanced substantially the same
arguments as discussed in Vullo v. OCC and intends to move to dismiss the
complaint on the same grounds as in Vullo I.75 The OCC’s letter OCC alleges: (1)
“DFS continues to lack standing to bring its claims because it has not ‘suffered an
injury in fact’”; (2) OCC’s interpretation of the term, “business of banking” in the
NBA is reasonable; (3) “any challenge to §5.20(e)(1) is time-barred by the statute
of limitations applicable to civil actions against federal agencies[;]” and (4) the
issuance of FinTech charters pursuant §5.20(e)(1) would not violate the Tenth
Amendment because the Supremacy Clause and the NBA entrust banking
regulation to the federal government.76
On November 27, 2018, DFS responded to the OCC’s letter to Judge Marrero
stating that OCC’s action exceeds the agency’s statutory authority 77153 DFS
claims that “the OCC has declared that national ‘banks’ holding FinTech charters
will not (and cannot) accept deposits[,]” violating one of the most fundamental
premises of federal banking law.78 Further, this idea is based on the longstanding
precedent that the operations of federally chartered banks have been confined
solely to the “business of banking” whereas the states have the authority to license
non-depository companies.79 DFS’s letter provides a notion that: (1) based on
evidence of OCC’s past actions provided in the complaint, the action is ripe for
judicial determination; and (2) the OCC lacks legal authority to issue a special
purpose national bank charter to an entity that does not take deposits. 80 In addition,
DFS argues that, based on precedent, the “business of banking” has been tied to the
receipt of deposits, and in addition, every time the OCC has sought to regulate
non-depository institutions it has received special authorization from Congress to
do so.81
At the heart of this action are the consumers of New York. New York is a global
financial center and, as a result, DFS is a global financial regulator. 82 Currently,
there are 229 state and international banks licensed by New York, along with 600

74
Oulton, 84 U.S. at 118.
75
Letter from Geoffrey S. Berman, U.S. Att’y for SDNY, to the Honorable Victor Marrero, Vullo v. Office of the
Comptroller of the Currency, No. 18-cv-08377, Dkt. No. 13 (S.D.N.Y. Nov. 16, 2018).
76
Id.
77
Letter from Matthew L. Levine, Exec. Deputy Superintendent for Enf’t, N.Y. Dep’t of Fin. Servs., to the
Honorable Victor Marrero, Vullo v. Office of the Comptroller of the Currency, No. 18-cv-08377, Dkt. No. 15
(S.D.N.Y. Nov. 16, 2018).
78
Id.
79
Id.
80
Id.
81
Id. at 3.
82
Compl. ¶¶ 2, 4.
non-bank financial service firms and 1,400 insurance companies. 83 OCC’s attempt
to administer FinTech charters will compromise New York’s ability to protect its
financial markets and consumers, according to DFS.84 DFS further states that based
on the manual issued by the OCC, entities will be eligible for federal FinTech
charters by merely “[r]eceiving deposits, paying checks, or lending money.”85162
Under the potential FinTech charter, New York-licensed money transmitters could
qualify for an OCC special purpose charter thereby escaping New York’s
regulatory requirements. 86 Further, in its FinTech charger, “a fintech company
with a special purpose national charter that does not take deposits . . . is not insured
by the Federal Deposit Corporation.”87 It is relatively clear that there are issues
with the OCC’s decision to introduce the proposed FinTech charter. 88 The fact that
the OCC declared that FinTech charters will not accept deposits fundamentally
opposes the authority granted to them by Congress. 89 DFS has established arguably
the safest place for consumers to operate in the history of virtual currency
regulation.90 To give entities the ability to circumvent New York state regulation
would leave consumers at risk to the very illicit activity that DFS has attempted to
prevent.
IV. Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network (FinCEN) is an agency in the U.S.
Department of Treasury that “provide[s] a government-wide, multisource
intelligence and analytical network to support the detection, investigation, and
prosecution of . . . money laundering and other financial crimes.” 91 “FinCEN works
in partnership with the financial community to deter and detect money laundering”
as well as provide intelligence and analytical support to law enforcement in the
pursuit of illicit financial activity.92 On March 18, 2013, FinCEN issued “guidance
to clarify the applicability of the regulations implementing the Bank Secrecy Act
(BSA) to persons creating, obtaining, distributing, exchanging, accepting, or
transmitting virtual currencies.”93 The BSA “requires U.S. financial institutions to
83
Id. ¶¶ 4-5.
84
Id.
85
Id. ¶ 9.
86
Id. ¶ 16.
87
Id.
88
Compl. ¶ 2.
89
Id. ¶¶ 2-3.
90
Press Release, DFS Continues to Foster Responsible Growth in New York’s Fintech Industry with New Virtual
Currency Product Approvals, supra note 22.
91
About: Financial Crimes Enforcement Network, U.S. Dep’t Treasury,
https://www.treasury.gov/about/history/Pages/fincen.aspx (last visited Nov. 16, 2020).
92
Id.
93
Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, Dep’t
of the Treasury, Fin. Crimes Enforcement Network, FIN-2013-G001 (2013) [hereinafter FINCEN’S Regulations],
assist U.S. government agencies to detect and prevent money laundering.” 94
Further, the act requires financial institutions to keep records of cash purchases of
negotiable instruments, file reports of cash transactions, in addition to reporting
“suspicious activity that might signify money laundering, tax evasion, or other
criminal activities.”95 FinCEN defines virtual currencies as “a medium of exchange
that operates like a currency in some environments, but does not have all the
attributes of real currency,” referencing the fact that virtual currency does not have
legal tender status in any jurisdiction in the United States. 96
In 2011, FinCEN published a Final Rule amending definitions and regulations
relating to money services businesses (MSBs).97 MSB is defined in the Final Rule
as:
A person wherever located doing business, whether or
not on a regular basis or as an organized or licensed
business concern, wholly or in substantial part within the
United States, in one or more of the capacities listed in
paragraphs (ff)(1) through (ff)(7) of this section. This
includes but is not limited to maintenance of any agent,
agency, branch, or office within the United States.98
FinCEN states that “a money transmitter does not differentiate between real
currencies and . . . virtual currencies” and that “[a]ccepting and transmitting
anything of value that substitutes for currency makes a person a money
transmitter.”99 The notion of FinCEN’s 2013 guidance was to set out rules for all
transactions involving money transmission of virtual currencies. 100 FinCEN works
concurrently with the SEC and CFTC in order to protect against the illicit finance
and fraud surrounding ICOs. 101 FinCEN’s obligations calls for virtual currency
money transmitters to: (1) register with FinCEN as a money services business; (2)
implement an Anti-Money Laundering (AML) program designed “to prevent the
MSB from being used to facilitate money laundering and terrorist finance;” and (3)

https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincensregulations-persons-
administering
94
FinCEN’s Mandate from Congress, U Dep’t of the Treasury, Fin. Crimes Enforcement Network,
https://www.fincen.gov/resources/statutes-regulations (last visited Nov. 16, 2020).
95
Id.
96
FINCEN’S Regulations, supra note 93.
97
Id.
98
Bank Secrecy Act Regulations, 76 Fed. Reg. 43585, 43596 (July 21, 2011).
99
FINCEN’S Regulations, supra note 93.
100
Kenneth A. Blanco, Director, Fin. Crimes Enf’t Network, Address at the Chicago-Kent College of Law Block
Tech (Legal) Conference (Aug. 9, 2018), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-
kennethblanco-delivered-2018-chicago-kent-block.
101
Id.
establish recordkeeping and reporting measures.102 Based on these regulations,
FinCEN’s goal is to provide an environment safe from fraud, corruption, and
extortion.103
V. Conclusion
New York State’s move to propose BitLicense regulations for virtual currencies

could prove to be the tipping point in the broader population’s acceptance or

adoption of virtual currencies. By creating a new and separate licensing

framework, New York's BitLicense regime does not need to classify virtual

currencies as either a form of currency or security in order to make it subject to

existing regulations. For other devoted users of virtual currency today, this

proposal could “spoil” the many forms of virtual currencies because it will be

another regulated products will have many problems that government-created and

government-managed “legal tender” have, in other words, another regulation that

could leave virtual currencies vulnerable to manipulation for monetary policy and

other “political” purposes.

The proposed regulation raises the stakes for anyone interested in the future of

virtual currencies and puts at the forefront that the notion of regulating virtual

currencies that will pit against the other efforts to regulate virtual currencies. The

BitLicense proposal definitely puts the state regulators at source for consumer

protection, regulation of payments providers, and new payments media, despites

the many years in which federal laws preempted many state initiatives.
102
Id.
103
See id.
The provisions that relate to customer identification, transaction reporting, and

disclosures, as well as the one-to-one liquidity ratio, have already drawn significant

numbers of negative comments in the comment period that was to have ended on

September 5, 2014.104 The comment period has already been extended to October

21, 2014.105 Beyond that, it is anyone’s guess as to what will happen next in the

regulation of virtual currencies in the United States and whether this particular set

of regulations will result in promoting virtual currencies with a sphere of

respectability to encourage broader usage.

104
See Press Release, supra note 9 (explaining the BitLicense proposal and its original public comment period);
Matt Odell, Industry Responses to BitLicense Guidelines, COINPRICES (Aug. 13, 2014), https://www.coinprices.io/
articles/news/industry-response-to-bitlicense-guidelines (last visited Sept. 22, 2014) (providing over a dozen
critical responses to the proposal).
105
See How to Submit Comments on Proposed Virtual Currency Regulatory Framework, N.Y. DEP’T FIN. SERVICES,
http://www.dfs.ny.gov/legal/vcrf_ submit_comments.htm (last visited Sept. 22, 2014) (“A number of groups and
individuals have also requested additional time to study the proposal given that it is the first of its kind and could
potentially serve as a model for other jurisdictions. As such, . . . [c]omments will now be due October 21, 2014.”).