This week another major player was cleared to enter the crypto space in New York when Fidelity’s New York based crypto desk Fidelity Digital Assets received its Bitlicense. Let’s discuss what a Bitlicense is, who needs one and what Fidelity plans to do with theirs.
Bitlicenses represent the first comprehensive virtual currency regulatory regime in the United States. They are licenses that permit a business to engage in virtual currency business activity in New York. While they are issued at the state level, the regulation overseen by the New York Department of Financial Services (“NYDFS”) affects nearly all major virtual currency businesses (unless you were part of the great bitcoin exodus like Kraken).
NYDFS requires an entity to maintain a Bitlicense if it engages in virtual currency business activity that involves New York State or persons that reside, are located in, have a place of business in, or are conducting business in New York. The latter part of that is pretty easy to understand: if your virtual currency business involves New York, its people or its businesses, this is applicable to you. But what the hell is a virtual currency business activity?
The state defines virtual currency business activity as including any of the following:
- Virtual currency transmission (Bitpay),
- Storing, holding, or maintaining custody or control of virtual currency on behalf of others (Coinbase),
- Buying and selling virtual currency as a customer business (Square, Robinhood Crypto),
- Performing exchange services as a customer business (Coinbase), or
- Controlling, administering, or issuing a virtual currency (Ripple).
NYDFS uses the Nationwide Multistate Licensing System (“NMLS”) to handle the Bitlicense process. Applicants apply for and maintain a Bitlicense there. Consumers can also access the NMLS. So if you’re wondering whether a business you’re interacting with has a Bitlicense, you can check with the NMLS here. Once you navigate to a particular license, you can see which states the company is registered in and whom to address a complaint to in that state.
So what does the new subsidiary Fidelity Digital Assets plan to do with this thing? It appears that they’ve decided to take their custodial talents to crypto. Fidelity has been playing around in this space for a while. It appears they hope to approach crypto the same way they have the brokerage and advisory space: dominate custodial services and offer competitive trade execution services. They also hope to mature the overall ecosystem by offering more traditionally structured accounts and risk frameworks to attract institutional attention.
So is Fidelity out to gentrify crypto? It appears so.
The space is notorious for resisting this type of structure (see Kraken above) and for already having problems with coordinated manipulation by the few that currently dominate virtual currency markets. With an ongoing lack of comprehensive regulation at the federal level, I see the argument for bringing a little more structure. And full disclosure, I once worked at a startup that attempted to use blockchain technology to issue, transfer and redeem the bonds, and msbs to allow for the payment in virtual currencies. So I’m guilty of trying to use crypto in questionable ways myself.
But do we really want to turn crypto into the bond markets? Where institutional investors are able to arrange for the purchase of the highest yielding maturities and maintain ownership of the majority of outstanding debt for all the major issuers? I don’t. Not one Bit.