The NYDFS rejected Seattle-based cryptocurrency exchange Bittrex’s BitLicense application, and the resulting rejection letter serves as a blueprint for anyone looking to do crypto business in the Empire State.
For securities lawyer Jason Seibert, who has served on several landmark crypto cases, the crux of Bittrex’s rejection letter is on Page 4 in Paragraph D. He says it offers the 10,000-foot view of what it takes to operate a crypto exchange.
“…Bittrex has failed to demonstrate responsibility, financial and business experience, or the character and fitness to warrant the belief that its business will be conducted honestly, fairly, equitably and carefully,” reads the NYDFS rejection letter of Bittrex, which requested that the exchange provide within two weeks of the rejection written confirmation that it had stopped operating in New York State and doing business with its residents.
What’s clear is that anyone looking to operate as an exchange in New York State must abide by the Five Pillars of KYC and AML:
internal controls;
the designation of a Bank Secrecy Act (BSA)/AML officer;
a BSA/AML training program;
independent testing to test programs;
and a risk-based, customer due-diligence procedure
“For instance, you have to be able to know if there’s somebody that’s on a sanctions list or an OFAC list,” explains Mr. Seibert, referencing the Office of Foreign Assets Control. “So, it becomes an issue if an exchange doesn’t even know who their customers are due to the ability for users to create a false name or an alias account.”
Seibert points out that no one is going to win points with the regulator when they allow Elvis Presley to trade, as was the case with Bittrex.
“An exchange must see some form of ID, some sort of registration, some sort of link between an actual person and an account,” explains Seibert. “You can run an actual ID against a database like OFAC to make sure that it isn’t a sanctioned Russian who’s not supposed to be doing business in the United States or someone laundering money through a cryptocurrency exchange because they’ve created a false account. That’s the issue with these anonymous accounts.
When you’re looking to be a government regulated entity, you have to follow all the rules. You can’t allow anonymity anymore.”
But, anonymity is the lifeblood of cryptocurrency. And that goal to be able to do things anonymously, to have your money, spend your money, trade your money, and do anything you want without the government knowing, doesn’t fly with regulators.
“The goal for a lot of people in this space is to be able to do things anonymously,” says Seibert. “So, when certain people started finding out that you were going to have to have a verified account with your real name like Poloniex did, a lot of people close their accounts. They go someplace where they can be anonymous.” A lot of exchanges, in addition, were not designed to have AML and KYC control.
“They didn’t know the policy, didn’t do the training, and quite frankly, I don’t think they really wanted to do that because it was contrary to whatever their internal beliefs were,” said Seibert. “In their minds, they’re not there to be the world’s police, and to prevent illegal transactions, money laundering and sanctioned money from traveling internationally. An exchange cannot list tokens without the required due diligence to know if they were security or not, what was being offered, and who was offering them.”
Seibert evokes the Petro cryptocurrency from Venezuela, for instance. “Absolutely sanctioned,” he says. “Nobody in the United States is allowed to buy it or should be allowed to buy it because it’s viewed as getting around sanctions on human rights violations. You’re not supposed to buy Venezuelan oil.”
So, for any exchange, listing the Petro token would be a violation. Same goes for an unknown token with unknown issuers and uses.
“You could start avoiding sanctions by having this anonymous token created that certain parties may be trading back and forth in order to launder money,” explains Seibert.
What’s more, all employees at an exchange must be trained on AML and KYC policies and procedures. In the case of Bittrex, NYDFS said people were not trained and policies and procedures were inadequate. Bittrex said their framework had been approved by outside counsel, but it’s unclear who the outside counsel was and if their compliance framework ran the prescribed way.
“You can have a fully approved and creative plan and you put it on your desk, but then not execute it,” says Seibert. “If they did have an approved framework by competent outside counsel, then how is it that DFS found that their compliance was insufficient?”
full story: https://cryptographicasset.com/a-few-things-you-should-know-about-getting-a-bitlicense/
