Virtual Currency Businessman’s Legal Battle Against BitLicense Enforcement

Systems engineer Theo Chino is continuing his fight against a virtual currency regulation that was implemented by the New York Department of Financial Services (DFS), which requires a virtual currency business to obtain a “BitLicense” in order to operate within the state.  On August 7, 2015, Chino submitted a BitLicense application. While it was pending, he realized the significant costs to run his business and commenced the lawsuit. On January 4, 2016, Chino’s application was returned without further proceeding because the DFS said it was “unable to evaluate whether [Chino’s] current or planned business activity would be considered Virtual Currency Business Activity that requires licensing under the Regulation.” Because he did not have a BitLicense, Chino was subsequently forced to abandon his business.

As a preliminary issue, The DFS argues that Chino does not have standing to pursue this claim because his alleged injuries are too speculative and there is no “allegation that [Chino] is actually engaged in activity that would be covered by the Regulation.” Chino argues that he has sufficiently suffered irreparable harm because “it effectively forced him to close his Bitcoin processing business.” Whether or not Chino has sufficient standing will be the first step in determining the future of this case, as it is very unlikely to continue without first establishing justiciability. 

Chino is relying on the New York Civil Practice Law Article 78 to sue the state over an administrative agency’s determination. He argues that the DFS does not have the authority to define virtual currency, but rather that it falls under the state legislature’s jurisdiction. Chino claims that the “Department acted beyond the scope of its authority because the [DFS] is only authorized to regulate ‘financial products and services’, but Bitcoin lacks the characteristic of a financial product or service, and, in the absence of an explicit legislative authorization the Department is not authorized to regulate it.”

Further, the decision to deny his BitLicense application does not leave Chino with any further clarity as to what is required to successfully receive a BitLicense. The BitLicense application includes a lengthy list of requirements in addition to a $5,000 nonrefundable application fee.  The BitLicense requires each licensee to maintain capital in the amount and form determined by New York’s Superintendent of Banking as well as “a surety bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to the superintendent.” There is also no way to guarantee that a BitLicense will be issued, as the superintendent possesses significant discretion in approving applications based on whether they believe “the applicant’s business will be conducted honestly, fairly, equitably, carefully, and efficiently … and in a manner commanding the confidence and trust of the community.”  This subjective standard leaves virtual currency businesses with little recourse when their license applications are denied.

The DFS argues that it was tasked by the New York State Legislature to regulate and supervise financial services and products that include virtual currency, which is a “medium of exchange that may be used to buy or sell goods or services and can be used to store value.” The DFS states it has the authority to regulate various financial institutions, many of which involve virtual currencies:

“Notwithstanding virtual currency’s early use as a means of making peer-to-peer payments, a variety of third-party service providers have become an integral part of virtual currency activity and … such third-party services are directly analogous to established financial services that are regulated under the Banking Law and the Financial Services Law.”

A hearing on this matter will be set for May or June 2017.  Further information is posted on Chino’s website, which includes various documents and resources related to the case.