On October 10, 2017, New York State Supreme Court Justice Carmen Victoria St. George heard oral arguments from the attorneys for Theo Chino and the New York Department of Financial Services (NYDFS) concerning the NYDFS’s motion to dismiss Chino’s challenge to its BitLicense regulations, and Chino’s request for limited discovery.
Chino’s amended complaint, which was filed in May 2017, claimed, among other things, that the NYDFS exceeded its authority because virtual currency is not a financial product or service, that the regulations imposed arbitrary and capricious requirements, and that the state regulation was preempted by the Dodd-Frank Act. The NYDFS filed its motion to dismiss in June 2017, arguing that (1) Chino lacked standing to challenge the regulation; (2) the regulation was within the agency’s authority; and (3) Chino failed to demonstrate the regulation was unreasonable. In August 2017, Chino filed a motion for limited discovery and to hold the NYDFS’s motion to dismiss in abeyance.
At the recent hearing, Chino’s attorney, Pierre Ciric, argued that Chino had standing because he had business relationships with bodegas to provide bitcoin payment processing for customers who use bitcoin to pay for phone cards sold by the bodegas, believed he was subject to the BitLicense regulations as he controlled bitcoin keys used for the payment processing, and closed his business because of the enormous compliance costs imposed by the regulations. Additionally, Ciric reiterated Chino’s position that the NYDFS exceeded its authority because virtual currency was not a financial product, and thus, the agency does not have the power to regulate it. Ciric also challenged the regulations as unreasonable because they impose enormous compliance costs on businesses, exceed the requirements imposed on other financial institutions and money transmitters, and could regulate blockchain technology companies that are not engaging in financial transactions, such as those that place digital art on a blockchain.
Jonathan Conley argued on behalf of the NYDFS that Chino lacked standing to challenge the BitLicense regulations because he did not discontinue his business due to any action by the NYDFS, but instead due to his “understanding of how the regulation might have impacted his business in the future.” Conley also argued that the state legislature gave the NYDFS broad authority, and the Dodd-Frank Act preserved, rather than preempted, state consumer protection laws.
The Court posed tough questions to both parties. Ciric adamantly stated that bitcoin was “absolutely not” a financial product, to which the Court asked several times, “How is that not value?” The Court also questioned the state’s standing argument, asking Conley “How is him not shutting down this businesses a direct response to a challenge to the regulation itself?”
As to Chino’s request for limited discovery, Ciric explained that an expert’s testimony on the economic nature of bitcoin (whether it is a financial product) is necessary because it is a critical threshold issue. Conley, however, argued that Chino’s challenge was a question of law for which the Court could fully and fairly review.
After listening to the parties’ arguments, the Court stated that it will review all of the submitted materials and issue a decision at the next appearance in the case, which is scheduled for January 11, 2018, at 2:15 p.m. for a decision.