New York regulators said that Bittrex Inc., one of the largest crypto exchanges in the U.S., must stop operating in the state on April 11 over concerns about its anti-money laundering and sanctions compliance and other deficiencies.
It’s the first time the Department of Financial Services has denied a license to a virtual currency exchange for substantive reasons. The agency has issued licenses to 19 virtual currency companies since 2015, including two under new acting Superintendent Linda Lacewell.
Along with its concerns that Bittrex would be unable to meet requirements to protect against illicit funds flowing through its system, the DFS said in an April 10 statement that it denied Bittrex’s application for a BitLicense as well as a more traditional money transmitter license because of the company’s inability to meet capital requirements and “deficient due diligence” on token and product launches.
“Based on the Department’s extensive review of the information submitted and the Department’s recent review of Bittrex’s operation, the Department hereby denies the applications due to the applicant’s failure to demonstrate that it will conduct its business honestly, fairly, equitably, carefully and efficiently,” the DFS said in a letter.
The company won’t be able to appeal the decision, but could reapply for a license in the future, a spokesman for the agency said. Bittrex has 60 days to wind down its business in New York, including transferring positions and transactions and accounting for safe custody of New York customers’ assets, the DFS said.
Bittrex said it fully disputes the DFS’s findings on its anti-money laundering and know-your-customer practices. The company said it had worked transparently and “diligently” with the agency to address questions since it first applied for a license in 2015.
“We do not challenge that Bittrex is on a journey to improving and maturing our compliance function. Less than 2 years ago, we were a company of only four people,” the company said in a statement.
The crypto exchange said negotiations over the final stages of the licensing reached an impasse in January, when the DFS presented Bittrex with a supervisory agreement.
Bittrex said it wasn’t willing to sign the agreement, which would have required agency sign off for changes in control, listing of new digital currencies including those offered by other New York-licensed exchanges, and imposed capital requirements the company called “unrealistic.”
Bittrex, which counts former U.S. Department of Homeland Security and Justice Department officials in its top ranks, has around 1.67 million users across 40 states and multiple countries. That includes around 35,000 in New York, the DFS said.
In December 2017, two of the companies senior executives, John Roth, chief compliance and ethics officer and former DHS inspector general and Kiran Raj, chief strategy officer and former DHS deputy general counsel, wrote that blockchain technology could aid national security, but that the U.S.'s patchwork of state and federal regulations was driving innovative companies offshore.
“Everyone in this industry can do better. That includes the company we decided to join,” the two wrote in a Wall Street Journal op-ed, in part in response to criticism of the company.
“But as blockchain technology evolves and grows, we urge U.S. regulators to move carefully and judiciously to avoid driving more innovation outside the U.S. and harming the legitimate industry players,” they said.
The DFS’s cease-and-desist order may drive Bittrex’s New York customers off of U.S.-based exchanges and onto offshore trading platforms, the company’s CEO Bill Shihara told Bloomberg Law.
“If the intention was to protect consumers, they failed that test,” Shihara said.
Bittrex, which also operates an international exchange headquartered in Malta, loses money in the U.S. and New York in particular, he said. That’s largely due to the cost of additional compliance work and regulatory oversight, he said.
“We were willing to absorb those costs because we believed that that was the right thing to do” to grow the blockchain ecosystem, Shihara said.
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