On December 15, 2022, the New York Department of Financial Services (“NYDFS”) issued guidance clarifying that all New York banking organizations are required to obtain prior agency approval for virtual currency-related activity (“2022 Guidance”).1 The 2022 Guidance is similar to prior notice guidance issued by the federal banking regulators but establishes highly prescriptive information requirements for submissions. Additionally, it greatly expands prior NYDFS guidance regarding when prior approval is required for a banking activity.
The 2022 Guidance is immediately effective for all New York banking organizations, which includes banks and trust companies that are chartered under New York banking law, as well as US branches and agencies of non-US banking organizations that are licensed under New York banking law. In this Legal Update, we provide background on the authorized activities of New York banking organizations and describe the 2022 Guidance.
Under New York banking law, banking organizations may engage in authorized activities. Authorized activities include those that are expressly mentioned in New York banking law (e.g., power to “receive deposits of moneys”) as well as those that are incidental to the business of banking.2 Some authorities are self-executing, meaning that a banking organization may engage in the activity without the involvement of NYDFS. Other authorities require approval from or notice to NYDFS prior to engaging in the activity.3
In 2006, NYDFS released guidance stating that it would require banking organizations to provide prior notice or obtain prior approval for certain new “covered activities.”4 Covered activities were defined as situations where:
- The product or products being offered might raise a legal issue about the permissibility (i.e., power) of banking organizations to offer or trade the product; and
- The offering of the product or products by the banking organization in question could raise safety and soundness concerns.
NYDFS indicated that covered activities included commodity- and equity-linked derivative products and certain complex product or loan structures. However, it noted that these were not the only covered products, and, therefore, banking organizations and bank examiners should work to identify situations where prior notice or approval would be appropriate.
The 2006 guidance indicated that a banking organization could seek prior approval by providing “a brief written summary of the products involved and the business proposal.” NYDFS could follow up by requesting a more formal submission, which would include a business and legal analysis.
NYDFS has interpreted the 2006 guidance on a few occasions. For example, in 2010, it indicated that a banking organization should obtain prior approval for covered activities even if the banking organization will engage in those covered activities only in an agency capacity (vs. a principal capacity).5
The 2022 Guidance focuses on virtual currency-related activity by a New York banking organization. Virtual currency-related activity is broadly defined as any activity that may trigger licensure under New York’s BitLicense regulation as well as practically any other product, service, or activity involving virtual currency (which is itself broadly defined as any type of digital unit that is used as a medium of exchange or a form of digitally stored value). In particular, virtual currency-related activity includes:
- Offering digital wallet services to customers, whether the services are in fact provided by the banking organization (i.e., principal capacity) or by a third party with which the banking organization has contracted (i.e., agency capacity);
- Lending activities collateralized by virtual currency assets;
- Activities in which a banking organization 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; and
- Engaging in traditional banking activities involving virtual currency through the use of new technology that exposes the banking organization 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 is defined as a New York organization (e.g., chartered under New York banking law) that is a bank, trust company, private bank, savings bank, safe deposit company, savings and loan association, credit union, investment company, or branch or agency of a non-US bank. Notably, this definition would not include national banks doing business in New York or money transmitters/BitLicense holders that are licensed under New York banking law.6 However, it includes New York banking organizations that are exempt from the BitLicense requirements (i.e., a New York banking organization must provide notice to engage in a virtual currency-related activity under the 2022 Guidance even if the organization is exempt from BitLicense licensure).
The 2022 Guidance requires a banking organization to obtain approval from NYDFS prior to commencing any new or significantly different virtual currency-related activity, including an activity performed by or through a third-party service provider. Prior approval for a banking organization to engage in one type of virtual currency-related activity does not constitute general consent for that organization to engage in other types of virtual currency-related activity nor does it authorize other banking organizations to undertake that same activity.
A banking organization must submit a request for prior approval at least 90 days before it intends to commence an activity. The 2022 Guidance indicates that NYDFS will confirm whether approval of the proposed activity is required and, if so, identify the materials necessary to initiate the review and establish an expected timeline.
A request generally will consist of the following items, which the 2022 Guidance describes in detail:
- A comprehensive business plan;
- Enterprise-wide risk management framework;
- Corporate governance and oversight framework;
- Analysis of consumer protection impact;
- Financial information, including expected impact on capital and liquidity; and
- Analysis of the application of all relevant laws and regulations, including permissibility.
A federally regulated banking organization may provide a copy of any submission it has made to a federal banking regulator to reduce duplication but must tie the federal submission to the items required in the 2022 Guidance. This is noteworthy because it indicates that a federally regulated banking organization will be required to obtain approval or non-objection from NYDFS and its federal regulator. A banking organization also is encouraged to include any other pertinent information even if it is not expressly mentioned in the 2022 Guidance.
The 2022 Guidance is highly prescriptive and contemplates an extended timeline for NYDFS review of virtual currency-related activities. Additionally, the 2022 Guidance is retroactive, meaning that a banking organization currently engaged in virtual currency-related activity should contact its NYDFS point of contact to discuss further. These attributes are broader in many respects than the analogous federal notice expectations. Therefore, we expect that the 2022 Guidance may slow the adoption of new virtual currency-related activities by New York banking organizations.
The 2022 Guidance broadly defines virtual currency-related activities as including traditional banking activities that are conducted using public blockchain technology as well as providing traditional banking products to virtual currency service providers. This is a dramatic expansion of the 2006 guidance, which expressly noted that NYDFS “does NOT require prior review of all, or even most, new products of banking organizations.” New York banking organizations may need to carefully assess existing customer relationships to identify those that necessitate prior approval.
Finally, the fact that a banking organization will need to obtain additional approval for new or significantly changed virtual currency-related activities may impede innovation by organizations that are used to rapidly iterating new products and relationships. This is particularly true for banking organizations that routinely enter into relationships with virtual currency service providers.
1 NYDFS, Superintendent Adrienne A. Harris Releases Virtual Currency Guidance for Banking Organizations (Dec. 15, 2022), https://dfs.ny.gov/reports_and_publications/press_releases/pr202212151.
6 The 2022 Guidance does not indicate that it is applicable to representative offices of non-US banks. However, it is unlikely that a representative office would engage in virtual currency-related activity.