New York regulator shuts down Bittrex’s bid for a BitLicense

By Brad Rosen, J.D.

The New York State Department of Financial Services (DFS) has denied the applications of Bittrex, Inc., to engage in a virtual currency business and money transmission activities in the state of New York due to its failure to meet DFS licensing requirements. Moreover, the letter dated April 10, 2019, from Daniel Sangeap, DFS Deputy Superintendent and Deputy Counsel, to Bittrex CEO Bill Shihara ordered the company to immediately cease and desist its operations in the state.

Bittrex’s customer base includes approximately 35,000 New York consumers and approximately 1.67 million users spread across numerous countries and 40 states, according to a DFS release.

Background and basis for license denial. The DFS deficiency letter noted that Bittrex has been engaged in virtual currency business activity in the state under the terms of a "safe harbor" while its license application was pending. That letter also stated DFS had worked steadily with Bittrex to address continued deficiencies and to assist Bittrex in developing appropriate controls and compliance programs. Since Bittrex’s application was pending, DFS had issued several deficiency letters.

As the basis for issuing its denial, DFS cited the following serious deficiencies on Bittrex’s part:

• deficiencies in Bittrex’s Bank Secrecy Act/anti-money laundering/Office of Foreign Assets Control (BSA/AML/OFAC) compliance program;
• deficient due diligence and control over Bittrex’s token and product launches; and
• deficiency in meeting the DFS capital requirement.

AML-related compliance program was inadequate. The DFS letter stated that Bittrex's BSA/AML/OFAC compliance program failed to meet the following requirements:

• inadequate or nonexistent internal policies, procedures and controls;
• lack of qualification or effectiveness of the compliance officer;
• lack of adequate training of employees;
• inadequate auditing and independent testing of the program; and
• inadequate customer due diligence, including a seriously flawed know-your-customer program.

Lack of adequate due diligence in launching tokens or products. While Bittrex had written policies for the review and launch of tokens and products on its exchange, during a DFS examination, the company was unable to demonstrate compliance with this policy. This was in part because partial files were provided to the examiners and actual compliance for certain files could not be established. In some cases, token applicants had refused to complete their applications. Nonetheless, the tokens were accepted for trading and allowed to trade.

Inadequate capital. The DFS letter stated, succinctly, that Bittrex has not indicated its agreement to comply with the Department’s capital requirement.

Order to cease all business operations. The DFS letter stated that effective April 11, 2019, Bittrex must cease operating in New York State and, within 60 days, wind down its business in New York, including transferring positions and transactions, and provide for the safe custody of assets involving New York residents, as appropriate.

The letter also requested that within 14 days, Bittrex provide the DFS with written confirmation that the company had ceased operations in New York State and had ceased doing business with New York State residents. Additionally, the letter asks that company provide a plan for how Bittrex plans to wind down its business with existing New York customers, as appropriate, within 60 days.

Historically, the state of New York has taken an aggressive regulatory stance to assure integrity of the virtual markets and to protect its residents. In September 2018, the New York Attorney General issued a highly critical report finding vulnerabilities across the largest virtual currency exchanges.