A day after the New York State Department of Financial Services (DFS) approved its 19th application for a license or authorization to conduct a virtual currency business in New York, it issued a denial of the application of Bittrex, Inc. (Bittrex) for a DFS BitLicense and a Money Transmitter License.

Bittrex had been operating a virtual currency business in New York for the past few years under a “safe harbor” provision in the DFS virtual currency regulations that allowed Bittrex to operate while the DFS processed the application, which was filed originally in 2015. The application for a money transmitter’s license had been filed in 2018.

The DFS was quite blunt in its denial:

Based on the Department’s extensive review of the information submitted and the Department’s review of Bittrex’s operations, the Department hereby denies the applications due to the applicant’s failure to demonstrate that it will conduct its business honestly, fairly, equitably, carefully and efficiently within the purposes and intent of the provisions of Title 23 NYCRR Part 200 [the virtual currency regulations] and Article 13-B of the New York Banking Law [the money transmitter law], in a manner commanding the confidence and trust of the community.

The denial letter goes on to set out the DFS’s primary reasons for the denial:

  • Inadequate anti-money laundering (AML) and economic sanctions compliance program: Under 23 NYCRR 200.15, a virtual currency licensee must have an anti-money laundering program that at a minimum includes (i) internal controls, policies and procedure designed to ensure compliance with all applicable AML laws and regulations, (ii) independent testing for compliance, (iii) designation of an AML compliance officer responsible for monitoring AML compliance, and (iv) AML training for personnel.

The DFS (i) criticized Bittrex’s internal policies, procedures and controls as inadequate; (ii) has concerns about the qualifications and effectiveness of the current AML compliance officer; (iii) noted the lack of an adequate AML training program for employees; (iv) described the inadequacies of the external audit that had been commissioned by Bittrex; and (v) considered Bittrex’s “Know your Customer” AML due diligence program to be “seriously deficient.”

  • Lack of adequate due diligence in launching tokens or products: The DFS noted that its examiners were unable to adequately assess Bittrex’s compliance with its“ Token Review Policy and Process U.S.” According to the DFS, examiners were only provided partial files and they were unable to demonstrate actual compliance in certain files, citing as an example customers with incomplete applications on file but the tokens were accepted for trading and the customers allowed to trade.
  • Inadequate capital: Under 23 NYCRR 200.8, licensees must maintain capital that the DFS, after an assessment of the specific risks applicable to a licensee, deems sufficient to “ensure the financial integrity of the licensee and its ongoing operations.” The assessment takes into account a number of factors, including the licensee’s finances, volume of business and products and services to be provided. The DFS stated that Bittrex “had not indicated its agreement” to comply with these capital requirements.

The DFS required that Bittrex stop operating in New York or doing business with customers in New York as of April 11, 2019. Failure to do so could lead to penalties and an enforcement action. Bittrex has until April 24, 2019, to provide to the DFS its plan to wind down its business with existing customers. It has 60 days to wind down or transfer transactions, positions and custody of assets.

Bittrex issued a statement after the decision, noting it was “saddened and disappointed” in the DFS decision, and disputed its findings, detailing what it termed “several factual inaccuracies” contained in the decision.

Our previous post on the final DFS virtual currency regulations can be found here. The DFS virtual currency website can be found here.

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