On December 15, 2022, the New York Department of Financial Services (“NYDFS”) published an Industry Letter detailing the Department’s guidance regarding banking organizations that wish to engage in virtual currency-related activities. In addition to reminding banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions, investment companies, branches, and agencies of foreign banking organizations licensed by the NYDFS (together, “Banking Organizations”) of their preexisting obligation to seek approval from the NYDFS before engaging in new or significantly different virtual currency-related activity in New York or with a New York resident, the guidance describes the process and types of information that the NYDFS considers in connection with its approval process.
While a license is normally required to conduct virtual currency business activity, 23 NYCRR Part 200.3(c)(1) provides an exemption for any “persons that are chartered under the New York Banking Law and are approved by the superintendent to engage in virtual currency business activity.” Pursuant to the new NYDFS guidance, a Banking Organization should inform the NYDFS of its intention to engage in any new or significantly different virtual currency-related activity at least 90 days before the Banking Organization intends to commence the activity.
The guidance notes that “virtual currency-related activity” includes all “virtual currency business activity,” as well as the direct or indirect offering or performance of any other product, service, or activity involving virtual currency that may raise safety and soundness concerns for the Banking Organization or that may expose New York customers or other users of the product or service to risk of harm. 23 NYCRR § 200.2(q) defines “virtual currency business activity” to mean the conduct of any of the following activities involving New York or a New York resident:
- 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;
- Storing, holding, or maintaining custody or control of virtual currency on behalf of others;
- Buying and selling virtual currency as a customer business;
- Performing exchange services as a customer business; or
- Controlling, administering, or issuing a virtual currency.
In the Industry Letter, the NYDFS provided the following examples of activities it considers to be virtual currency-related activities:
[O]ffering digital wallet services to customers, whether the services are in fact provided by the Covered Institution or by a third party with which the Covered Institution has contracted; lending activities collateralized by virtual currency assets; activities in which a Covered Institution facilitates its own customers’ participation in virtual currency exchange or trading, including by carrying fiat currency on behalf of customers (e.g., in an omnibus account); services related to stablecoins, including providing stablecoin reserve services for stablecoin issuers; engaging in traditional banking activities involving virtual currency through the use of new technology that exposes the Covered Institution to different types of risk (e.g., underwriting a loan, debt product, or equity offering effected partially or entirely on a public blockchain).
A Banking Organization that has previously received approval to conduct virtual currency-related activity must seek a new approval from the NYDFS to offer a new virtual currency-related activity or make a significant change to an existing activity. For purposes of the guidance, a new or significantly different virtual currency-related activity includes a new virtual currency-related product or service or a proposed change to an existing virtual currency-related product or service that: (1) may raise a legal or regulatory issue about the permissibility of the product, service, or change; (2) may raise safety and soundness or operational concerns; or (3) may cause the product or service to be significantly different from that previously approved.
When a Banking Organization seeks approval from the NYDFS to engage in a new or significantly different virtual currency-related activity, the guidance mandates that sufficient information be provided that would allow the NYDFS to assess the scope of the Banking Organization’s proposal and any impact on the institution’s safety and soundness. Specifically, the following are provided as examples of information that would allow the NYDFS to properly assess a Banking Organization’s proposal:
- Business Plan: A written plan covering the proposed virtual currency-related activity, including any contemplated phases, the business rationale for the activity, the activity’s relationship with the institution’s strategic initiatives and enterprise-wide risk management framework, and alignment with the institution’s legal and compliance framework.
- Risk Management: The enterprise-wide risk-management framework used to identify, measure, monitor, and control all risks arising from, or related to, the proposed virtual currency-related activity, in line with the Banking Organization’s board-approved risk appetite.
- Corporate Governance and Oversight: A description of the corporate governance framework applicable to the proposed activity.
- Consumer Protection: An analysis of whether and to what extent the proposed virtual currency-related activity will have any impact on customers and other users, including where they interact with a third-party service provider engaged by the Banking Organization, rather than with the Banking Organization directly.
- Financials: An explanation of the expected impacts of the proposed activity on the Banking Organization’s capital and liquidity.
- Legal and Regulatory Analysis: An analysis of the permissibility of the proposed activity and key legal risks and mitigants.
To avoid unnecessary duplication, Banking Organizations may cross-reference or incorporate by reference any information response to each topic. The Industry Letter contains a Supplemental Checklist as an appendix, which is intended to assist preparation of a complete written submission. The NYDFS also indicates in the Industry Letter that the information it contains “is not intended to be exhaustive, and the Department may update it from time to time for any reason, including, for example, in response to new information, evolving markets, or additional experience.”