PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

Virtual Currency Licensee Assessments

I.D. No. DFS-03-23-00002-P

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action: Addition of Part 102 to Title 23 NYCRR.

Statutory authority: Financial Services Law, sections 102, 201, 202, 206, 301 and 302

Subject: Virtual Currency Licensee Assessments.

Purpose: To set forth the basis for allocating costs and expenses attributable to virtual currency businesses for FSL assessments.

Text of proposed rule: 23 NYCRR PART 102 VIRTUAL CURRENCY LICENSEE ASSESSMENTS

§ 102.1 Background.

In 2015, the Department of Financial Services (“Department”) adopted 23 NYCRR Part 200, which required persons engaged in virtual currency business activity, as defined in 23 NYCRR 200.2(q), to obtain a license, subject to certain exemptions, before engaging in such activity in New York. This licensing regime was created under the authority granted to the Department by the Financial Services Law (“FSL”).

Generally, the Department’s costs and expenses are charged to and paid by persons regulated by the Department. At the time that Part 200 was adopted, FSL section 206 provided that the costs and expenses of the Department would be respectively charged to and paid by the persons regulated by the Department pursuant to the Banking Law or the Insurance Law, with no provision made for the assessment of costs for persons regulated pursuant to the FSL. In 2022, the Laws of New York, Chapter 58, Part III, amended FSL Section 206 (a), as of June 30, 2022, to require the Department to assess the costs and expenses of regulating persons licensed pursuant to 23 NYCRR Part 200 (“Licensees”). FSL section 206 (a) now states: “[p]ersons regulated under [the FSL] that engage in ‘virtual currency business activity,’ as that term is defined by the department, shall be assessed by the superintendent for the operating expenses of the department that are solely attributable to regulating such persons….”

To effectuate the authority granted by the recent amendment of the FSL, this regulation sets forth the basis for allocating the Department’s costs and expenses among Licensees, and the process for making such assessments. This regulation only applies to Licensees, and the assessment only covers the costs and expenses associated with the Department’s oversight of each person’s virtual currency business activities. Accordingly, to the extent that a person is licensed to engage in virtual currency business activities under the FSL, and concurrently as a money transmitter pursuant to Article XIII-B of the Banking Law, such person will be billed separately for each license. To the extent that a person holds multiple licenses to engage in virtual currency business activities pursuant to 23 NYCRR Part 200, such person will be billed separately for each license. Persons who engage in virtual currency business activities as a limited purpose trust company or a banking organization will continue to be assessed under 23 NYCRR Part 101. To such an extent that a person holds both a limited purpose trust charter under the Banking Law and a license pursuant to 23 NYCRR Part 200, such person will be billed separately for each charter and license.

§ 102.2 Definitions. The following definitions apply in this Part:

(a) Hourly Rate means the average hourly salary and fringe benefit cost of the examiners and staff assigned to the supervision of Licensees plus a multiplier, as determined by the superintendent, representing a portion of the other operating overhead expenses of the Department.

(b) Custody Basis means the measurement tool used to assess 50% of the Supervisory Hours, as defined below, among Licensees. The Custody Basis is based on the total United States Dollar value of virtual currency held on behalf of customers by each Licensee averaged over the prior four quarter-end balances reported. Depending on the total virtual currency custody average, the Custody Basis for each Licensee will be categorized by size as small, medium, or large, resulting in an allocation, respectively, of 5%, 15%, and 30% of 50% of the Supervisory Hours.

(c) Custody Basis Assessment for an individual Licensee means the product of the Custody Basis Hours and the Hourly Rate.

(d) Custody Basis Hours means the Custody Basis share of either 5%, 15%, or 30% of the total Supervisory Hours, divided by the total number of Licensees that have the same Custody Basis share.

(e) Licensee means any person who is licensed pursuant to 23 NYCRR Part 200. The term Licensee shall only apply to the virtual currency business activities, as that term is defined in 23 NYCRR 200.2(q), of persons licensed pursuant to 23 NYCRR Part 200.

(f) Person means an individual, partnership, corporation, association, joint stock association, trust, or other entity, however organized. (g) Regulatory Component represents the cost of examining licensees. For an individual Licensee means the Total Operating Cost, as defined below, less the Supervisory Component divided by the total number of Licensees.

(h) Supervisory Component for an individual Licensee means the sum of its Transaction Volume Basis Assessment, as defined below, and its Custody Basis Assessment.

(i) Supervisory Hours means the total number of hours worked by staff attributable to the ongoing supervision of Licensees, including the monitoring of Licensees, the processing of license or material business changes, and responding to inquiries.

(j) Total Operating Cost means:

(1) the sum of the total operating expenses of the Department that are solely attributable to its oversight of Licensees; and

(2) the proportion deemed just and reasonable by the superintendent of the other operating overhead expenses of the Department which may be assessed against Licensees under FSL section 206(a).

(k) Transaction Basis Hours means the Transaction Volume Basis, as defined below, share of either 5%, 15%, or 30% of the total Supervisory Hours, divided by the total number of Licensees that have the same Transaction Volume Basis share.

(l) Transaction Volume Basis means the measurement tool used to allocate 50% of the Supervisory Hours among Licensees. The Transaction Volume Basis is based on the total number of virtual currency transactions by each Licensee in New York for the prior calendar year. Depending on the total number of virtual currency transactions, the Transaction Volume Basis for each Licensee will be categorized by size as small, medium, or large, resulting in an allocation, respectively, of 5%, 15%, and 30% of 50% of the Supervisory Hours.

(m) Transaction Volume Basis Assessment for an individual Licensee means the product of the Transaction Basis Hours and the Hourly Rate.

§ 102.3 Billing and Assessment Process.

The New York State fiscal year begins April 1 and ends March 31 of the following calendar year. Each Licensee subject to assessment pursuant to this Part is billed five times for a fiscal year: four quarterly assessments (each approximately 25 percent of the anticipated annual amount) based on the estimated budget to cover the Total Operating Cost at the time of the billing, and a final assessment (or true-up), based on the actual Total Operating Cost for the fiscal year. Any Licensee that is licensed for any part of a quarter shall be assessed for the full quarter. Such amounts shall be paid within 30 days of the date of such billing.

§ 102.4 Computation of Assessment.

The total annual assessment for a Licensee shall be the sum of its Supervisory Component and its Regulatory Component.

§ 102.5 Penalties/Enforcement Actions.

All Licensees shall be subject to all applicable penalties, including late fees and interest, provided for by the FSL, the State Finance Law or other applicable laws. Enforcement actions for nonpayment could include suspension, revocation, expiration or termination of a person’s license or such other actions as the superintendent may deem appropriate.

§ 102.6 Special Assessments.

When the superintendent shall determine that the expenses associated with a specific examination, investigation or review are best allocated solely to the individual Licensee or Licensees subject to such examination or investigation, rather than to all Licensees generally or any subgroup thereof, such expenses shall be billed separately as provided for in this subdivision. The time of each person associated with such examination or investigation shall be multiplied by the average costs of the examiners and specialists at their respective grade levels assigned to such examination or investigation, plus expenses for travel outside of New York, and the resulting amount shall be assessed separately to each such Licensee subject to such examination or investigation in such amounts as the superintendent shall deem appropriate. Alternatively, if another entity or person is selected to perform an examination, investigation or review of an individual Licensee or Licensees, the expenses associated with such examination, investigation and review shall be the amount of the contract for such services and such portion of the department’s administrative expenses associated with such contract as the superintendent shall deem appropriate. The resulting amount shall be assessed separately to each such Licensee subject to such examination, investigation or investigation in such amounts as the superintendent shall deem appropriate. Such special assessments shall be billed within 180 days after the calendar quarter within which such expenses were incurred. Such amounts shall be paid within 30 days of the date of such billing. In making a determination to make a special assessment and to allocate such assessment between one or more Licensees, the superintendent shall include such factors as she or he shall deem appropriate, including, but not limited to: the significance of the examination to the conduct of business by a given Licensee or group of Licensees; the potential seriousness of any violations of law or regulation identified by, or under review in, such examination or investigation; and the extent to which a Licensee attempted to cover up or failed to disclose the existence of such violations.

FSL Section 206(a) now requires the Superintendent to assess the costs and expenses of the Department that are attributable to its oversight of persons licensed to engage in virtual currency business activity pursuant to 23 NYCRR Part 200 (“licensees”) to such persons. The Laws of 2022, Chapter 58, Part III, effective June 30, 2022. FSL Section 301 sets forth the powers of the Superintendent under relevant law.

FSL Section 302 sets forth the power of the Superintendent to prescribe, withdraw or amend rules and regulations involving financial products and services, effectuating and interpreting the provisions of the

FSL, Banking Law, and Insurance Law, and governing the procedures to be followed in the practice of the Department.

2. Legislative Objectives: To require the Superintendent, consistent with the Department’s funding by the persons it regulates, to charge the costs and expenses of regulating licensees to such regulated entities.

3. Needs and Benefits: FSL Section 206(a) was amended to provide that persons regulated under the FSL that “engage in ‘virtual currency business activity,’ as that term is defined [in 23 NYCRR 200.2(q)], shall be assessed by the superintendent for the operating expenses of the Department that are solely attributable to regulating such persons in such proportions as the superintendent shall deem just and reasonable.” The Department is fully funded by assessments on the persons it regulates. Previously, FSL Section 206 only authorized and required the Department to assess those persons licensed under the Banking or Insurance Laws for the costs of the Department’s operations. In recognition of the virtual currency licensing system created under the authority granted to the Department by the FSL, the amendment to Section 206 incorporates the new licensing regime into the Department’s existing assessment authority.

To effectuate the mandate of the revised FSL Section 206, the regulation sets forth the proposed basis for allocating the Department’s costs and expenses among licensees in proportion to the costs of regulating each individual licensee. In developing the proposal, the Department reviewed the existing methodology used to assess other industries regulated by the Department and considered how to best apply existing frameworks to licensees.

The resulting proposal applies the general framework used to assess the costs of the Department under the Banking Law and tailors it to reflect the unique nature of virtual currency business activity and the diversity of business models licensed under 23 NYCRR Part 200. The proposed methodology seeks to allocate the Department’s costs and expenses among licensees based on the amount of work required to regulate licensees of varying sizes and complexity, with larger, more complex licensees being assessed a greater share of the Department’s costs and expenses in recognition of the additional resources required to effectively regulate and supervise them.

The proposed regulation uses two components to allocate the Department’s costs and expenses: a regulatory and supervisory component. The Regulatory Component, as defined in proposed section 102.2, captures the general costs of regulating persons engaged in virtual currency business activity, including the costs to perform ongoing monitoring of existing licensees, to process license and material change requests, and to respond to general inquiries. The supervisory component, as defined in section 102.2, will vary according to the size and complexity of each licensee. Accordingly, 50% of the supervisory component will be allocated based on the total number of virtual currency transactions by a licensee in the State of New York (defined in section 102.2 as “Transaction Volume Basis”) and the other 50% will be allocated based on a licensee’s total virtual currency held on behalf of customers(“Custody Basis”). Licensees with more significant numbers of transactions and larger assets under management will be assessed a greater percentage of the supervisory component.

Initially, the allocation of the Transaction Volume Basis will be computed as follows based on the volume of operations of each licensee:

(1) For each licensee that engages in 1 to 50,000 transactions per year, the Transaction Volume Basis allocation is 5%;

(2) For each licensee that engages in 50,001 to 4,000,000 transactions per year, the Transaction Volume Basis allocation is 15%; and

(3) For each licensee that engages in 4,000,001 transactions or more per year, the Transaction Volume Basis allocation is 30%.

Similarly, the Custody Basis will be computed as follows:

(1) For licensees that have average virtual currency customer assets valued up to up to $100,000,000, the Custody Basis assessment is 5%;

(2) For licensees that have average virtual currency customer assets valued from $100,000,001 to $1,000,000,000, the Custody Basis assessment is 15%; and

(3) For licensees that have average virtual currency customer assets of $1,000,000,001 or more, the Custody Basis assessment is 30%.

The allocation will then be divided equally among every licensee that falls into the size categories listed above.

The Department expects that the ranges that dictate entity size will be adjusted periodically as the industry continues to develop. Any changes in these assessment brackets will be communicated to licensees by electronic mail. The Department also anticipates posting notices concerning changes and its current assessment methodology on its website.

The regulatory component captures the fixed costs of periodic examinations and other shared services (such as cybersecurity and anti-money laundering) performed by the Department that are related to cryptocurrency companies. As these costs are expected to fluctuate less, the regulatory portion of the assessment will be a pro-rated, fixed cost for each licensee.

It is important to note that this regulation only applies to persons licensed pursuant to 23 NYCRR Part 200, and the assessment only covers the costs and expenses associated with the Department’s oversight of each licensee’s virtual currency business activities. Accordingly, to the extent that a licensee is also licensed as money transmitter pursuant to Article XIII-B of the Banking Law, such licensee will be billed separately, pursuant to the existing methodology for assessing money transmitters, for its money transmission activity. To the extent that a licensee holds multiple licenses to engage in virtual currency business activities pursuant to 23 NYCRR Part 200, such person will be billed separately for each license. Persons who engage in virtual currency business activities as a limited purpose trust company or a banking organization will continue to be assessed under the Banking Law. To such an extent that a person holds both a limited purpose trust charter under the Banking Law and a license pursuant to 23 NYCRR Part 200, such person will be billed separately for each charter and license.

4. Costs: In accordance with the mandate imposed by FSL Section 206, the proposed regulation increases costs for licensees, adding an assessment for the cost of regulation that does not currently exist. It is difficult to estimate exactly what the costs will be for a particular licensee due to the variable nature of the business and the fact that the contemplated assessment will vary depending on the size and complexity of each licensee. The Department has engaged with licensees to provide an overview of the proposed assessment methodology and how it would impact them.

5. Local Government Mandates: The proposed amendment does not impose any new programs, services, duties or responsibilities upon any county, city, town, village, school district, fire district or other special district.

6. Paperwork: There are no new record keeping or filing requirements that will be imposed on the industry as a result of the proposed regulation. The Department will calculate the assessments based on reporting that the industry is already required to provide to the Department. Of course, licensees will record payments made on their own accounting records in the normal course of business.

7. Duplication: The regulation does not duplicate, overlap or conflict with any other regulations.

8. Alternatives: A regulation is necessary to specify how the allocation of costs and expenses required by the recent amendment to FSL Section 206 will be made. In developing the proposed regulation, the Department weighed several alternative metrics to allocate the assessment. The assessment should account for the fact that more complex institutions generally require more time and effort to properly regulate. The Department posted a draft text of this regulation on its website for 10 days to solicit comment from small businesses that might be affected. The Department did not receive any written comments.

9. Federal Standards: Federal law does not govern the assessment of state-licensed persons engaged in virtual currency business activities.

10. Compliance Schedule: The proposed amendment will take effect upon publication of the Notice of Adoption in the State Register. Assessments pursuant to the adopted regulation will be billed for the second quarter of the next fiscal year that starts on April 1, 2023. Any unforeseen delays in the adoption of this regulation may delay billing to a later quarter. The Department is striving to provide licensees with informal billing estimates before the adoption of this regulation.

Regulatory Flexibility Analysis

1. Effect of Rule: The proposal does not have any impact on local governments. An amendment to Section 206 of the Financial Services Law requires the Superintendent of Financial Services (“Superintendent”) to assess the costs and expenses of the Department of Financial Services (the “Department”) that are attributable to its oversight of persons licensed to engage in virtual currency business activity pursuant to 23 NYCRR Part 200 (“licensees”). The Laws of 2022, Chapter 58, Part III, effective June 30, 2022. The proposed regulation establishes the methodology by which the Department will assess licensees. Thirty-one (31) companies presently regulated by the Department will become subject to assessments under Part 102. The Department believes thirteen (13) of these firms presently qualify as small businesses that employ less than 100 employees.

2. Compliance Requirements: The regulation does not change existing compliance requirements. Rather, the regulation establishes the methodology, in compliance with the requirement of FSL Section 206, by which the Department will assess its costs and expenses to Licensees in reasonable proportion to the costs and expenses of regulating them.

3. Professional Services: It is not anticipated that small businesses will require any professional services to comply with this amendment.

4. Compliance Costs: Companies subject to the new assessment will start making quarterly payments in 2023 after the State’s new fiscal year commences. The Department cannot estimate the annual cost of the assessments for specific firms or all firms collectively at this time. The proposed methodology in Part 102 requires computation of the Department’s labor costs and the aggregate transactional activity of the assessed firm when computing an assessment. Otherwise, licensees will not bear any additional compliance costs in terms of record keeping or reporting.

5. Economic and Technological Feasibility: No additional technological burden on regulated entities which are small businesses is expected. In accordance with the mandate imposed by FSL Section 206, the proposed regulation increases costs for licensees, adding an assessment for the cost of regulation that does not currently exist. It is difficult to estimate exactly what the costs will be for a particular licensee due to the variable nature of the business and the fact that the contemplated assessment will vary depending on the size and complexity of each licensee.

6. Minimizing Adverse Impact: The assessment methodology in Part 102 is designed to decease the burden on smaller and less complex Licensees. Larger and more complex businesses will pay comparatively higher assessments.

7. Small Business and Local Government Participation: This regulation does not impact local governments. The Department complied with SAPA Section 202-b (6) by posting the proposed rule on its website for informal outreach and notified all regulated companies subject to the proposed assessment that a draft rule had been posted.

The Department also will comply with SAPA section 202-b(6) by publishing its proposal in the State Register and posting the proposal on its website again.

Rural Area Flexibility Analysis

The Department of Financial Services (“Department”) finds that the rule will not have any adverse impact on rural areas or impose new substantial reporting, recordkeeping or other compliance requirements on public or private entities in rural areas in New York State. None of the existing regulated companies that will become subject to 23 NYCRR 102 are rural. The rule provides for assessments of firms chartered or licensed by the Department. The rule applies to all chartered or licensed companies active in the virtual currency business, whether they operate in rural or non-rural areas and should not impact them differently based on location. The rule does not impose any new reporting requirements on any regulated entity.

Job Impact Statement

In compliance with the mandate established by Section 206 of the Financial Services Law, the Superintendent of Financial Services (“Superintendent”) is required to assess the costs and expenses of the Department of Financial Services (the “Department”) that are attributable to its oversight of persons licensed to engage in virtual currency business activity pursuant to 23 NYCRR Part 200 (“licensees”) to such persons. The proposed regulation establishes the methodology by which the Department will assess licensees.

While the proposal will increase costs on licensees, subjecting them to assessments as all other persons regulated by the Department are, it is not expected to adversely impact jobs or employment opportunities in New York State. The proposal was developed while considering the current financial condition of licensees and projected changes in the industry