When the BitLicense was introduced in 2015, 15 crypto firms including international players like Hong Kong’s Bitfinex and Swiss company ShapeShift (which operates out of Denver) ceased operations in New York. In 2018, ShapeShift CEO Erik Voorhees called the regulation of crypto in New York “an absurdity."
But the firms that stuck around have a different story to tell.
The New York Department of Financial Services (NYDFS) has approved 25 entities to engage in virtual currency services over the last five years. Of those, four are based in or started operations outside the United States, including: BitFlyer, a San Francisco-based company founded in Japan; Bitstamp, based in Luxembourg; Hong Kong-based Xapo Holdings and the first crypto platform to receive a trust charter, ItBit, which was founded in Singapore and rebranded in 2016 to Paxos.
Bitstamp and Xapo were among the first nine firms to apply for the license along with the U.S.-based Bittrex and MonetaGo back in 2015. Bitstamp and Xapo eventually received accreditation. But last year, Seattle-based Bittrex was denied a license, while New York’s MonetaGo shut down its exchange, and refocused its efforts into developing blockchain technology.
Prior regulation
Tokyo-based BitFlyer was the first international entity to receive a NYDFS BitLicense. At the time of application, it was already regulated by Japan’s Financial Services Agency. BitFlyer’s U.S. Chief Compliance Officer David Zacks told CoinDesk via an email that the application process took almost a year to complete, but the fact that it was already regulated made the application and maintenance process easier for the company.
“We don’t know how many applications NYDFS has under review currently, but the requirements are strict and a lot of newer smaller entities don't have the capital or capability to meet those standards,” Zacks said.
One of the world’s largest crypto exchanges, Bitstamp, was granted a BitLicense in 2019, four years after submitting its application. Bitstamp’s Head of U.S. Operations Hunter Merghart wrote in an email that the application processing times can be heavily influenced by how responsive a company is with NYDFS in the information gathering phase, and like BitFlyer, it was already familiar with regulation.
“Bitstamp [had] been regulated by the CSSF in Luxembourg for a number of years which set us apart from a number of our competitors and we believe that this, among other factors, helped to show NYDFS how serious Bitstamp takes regulation,” Merghart said.
Merghart added that already being under regulation worked in Bitstamp’s advantage because it understood the types of questions and documentation that was required.
Xapo Holdings, which received its license in 2018, was already conducting operations in Europe at the time, and Xapo (Gibraltar) Limited was regulated by the Gibraltar Financial Services Commission.
Trust charters
Of the international entities, Paxos was the first to receive NYDFS accreditation. In May of 2015, it was approved as a trust charter, allowing the company to conduct business in New York as a banking entity organized under banking law. Paxos co-founder and CEO Chad Cascarilla told CoinDesk that it was the first trust charter in the U.S. that was allowed to operate in the crypto and blockchain space.
“We don't require a BitLicense to operate because our supervisor agreement for our trust charter authorizes us to be able to operate in crypto and a variety of other asset classes,” Cascarilla said.
Although Paxos’ application was approved in 2015, Cascarilla said it had been a three-year effort from the first discussions through to the final approval.
“I mean, to give you some sense, our application was 1,000 pages double-sided,” Cascarilla said.
Business in New York
In addition to a gruelling information gathering process, the BitLicense cost Bitstamp up to $100,000 in fees and time spent on the application. But according to Merghart, being able to service clients in New York has helped Bitstamp gain revenue and market share.
“Obtaining the Bitlicense has also helped build relationships and partnerships with other high quality companies that are entering crypto for the first time but feel more comfortable dealing with regulated entities,” Merghart added.
For BitFlyer too, the license to operate in New York was an opportunity that helped the company expand its global operations. According to Zacks, the firm was willing to make the investment to enter the U.S. market despite the high cost of entry.
“The U.S. is a large market, so it seems like a next step for exchanges who’ve grown internationally, feel confident with their offerings and prepared as an organization to comply with the local regulatory requirements,” Zacks said.