What New York Virtual Currency Licensees Should Know About New York’s New Assessment Regulation
On April 17, the New York State Department of Financial Services (DFS) announced the adoption of a final regulation, 23 NYCRR Part 102, establishing the process for the assessment of licensed virtual currency businesses for the supervision and examination costs of the DFS.1 Generally, the DFS’ costs and expenses associated with supervision are charged to and paid by its regulated entities. This regulation will put virtual currency licensees on par with other DFS-regulated entities by defraying the DFS’ costs and expenses relating to its supervision of virtual currency licensees.
In 2015, the DFS adopted 23 NYCRR Part 200 (Part 200) under authority provided by the New York Financial Services Law (FSL). Part 200 requires persons engaged in “virtual currency business activity” to obtain a license, subject to certain exemptions, before engaging in such activity in New York. At the time that Part 200 was adopted, FSL Section 206 provided that the costs and expenses of the DFS would respectively be charged to and paid by the persons regulated pursuant to the New York Banking Law (NYBL) or the New York Insurance Law, with no provision made for the assessment of costs for persons regulated pursuant to the FSL. In April 2022, the New York State Legislature amended FSL Section 206 to require the DFS to assess the costs and expenses of regulating persons that engage in “virtual currency business activity” on such persons.
Under the new assessment regulation for virtual currency licensees, a licensee’s total annual assessment fee will be the sum of its “supervisory component” — the variable cost of regulating larger, more complex, entities — and its “regulatory component,” or the baseline cost of examining licensees.2 A virtual currency licensee’s “supervisory component” will be the sum of its “transaction value basis assessment” and its “custody basis assessment,” while its “regulatory component” will be the “total operating cost” less the “supervisory component,” then divided by the total number of licensees.3
The DFS will distribute its supervisory hours, which underlie a licensee’s supervisory component, by tiering the size of a licensee. The regulation classifies licensees as small, medium, and large depending on certain metrics as a proxy for the complexity of the business model of each licensee and uses that classification to assess the supervisory resources needed (5%, 15%, and 30% of total supervisory hours, respectively) for each tier.4 The DFS indicated that it will review the assigned tier ranges on an annual basis based on the preceding year’s business activity, the associated operating costs, and the reasonableness of the estimated time commitments for oversight for each tier.
Licensees will be billed five times per fiscal year, once per quarter of approximately 25% of the estimated annual amount and a final assessment or “true-up” at the end of the fiscal year.5 To the extent a person licensed to engage in “virtual currency business activities” holds multiple charters and/or licenses with the DFS, the person will be billed separately for each charter and license.6 Further information about when and how to pay assessments may be found in the FAQs.
While this regulation and 3 NYCRR Part 501, the regulation used to compute assessments for entities subject to the NYBL, both use an entity’s “supervisory component” and “regulatory component” to calculate assessments, the elements of each vary, creating a cost uncertainty for New York virtual currency licensees. We will continue to monitor and report on key enforcement and regulatory developments at the DFS and in the virtual currency industry. In the meantime, please reach out to any author of this Advisory or your regular Arnold & Porter contact with any questions about the issues discussed herein or the state of play at the DFS.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.