This is another in a series of posts focused on the first state regulation of cryptocurrency businesses. Ostensibly, depending on one’s opinion, the New York BitLicense regulation of bitcoin (and digital currency businesses more generally) was enacted primarily to protect consumers. Despite being placed nearly at the end of the BitLicense regulation text (§200.19), consumer protection measures are among the most significant and intensive provisions applicable to digital currency businesses.
Purely as a new administrative task for any of these businesses that are consumer-facing, first note that a Licensee must obtain each customer’s acknowledgment that all consumer protection disclosures required by the Regulations have been received.
Secondly, when establishing a customer relationship (and prior to transacting), at least these categories of universal written disclosures about Virtual Currency must be made to each consumer:
All Material Risks
Virtual Currency is not legal tender backed by a government, and is not subject to FDIC insurance or Securities Investor Protection Corporation protections.
Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect use, transfer, exchange, and value.
Transactions may be irreversible and losses due to fraud may not be recoverable.
The time a transaction is recorded on the public ledger is not necessarily the time that the customer initiated the transaction.
Digital currency’s value may be derived from the continued willingness of market participants to use it, and total loss of value of a particular unit could occur should the market for that particular cryptocurrency disappear.
There is no assurance that vendors who accept a Virtual Currency as payment today will continue to do so in the future.
The volatility and unpredictability of the price of Virtual Currency relative to Fiat Currency may result in significant loss over a short period of time.
The nature of Virtual Currency may lead to an increased risk of fraud or cyber-attack, and any technological difficulties may prevent the access or use of a customer’s Virtual Currency.
any bond or trust account maintained for the benefit of customers may not be sufficient to cover all losses incurred.
All General Terms and Conditions
Customer liability for unauthorized Virtual Currency transactions; and rights and procedures to stop payment of a pre-authorized transfer;
Circumstances under which customer’s account information will be disclosed to third parties;
Customer right to receive: periodic account statements and valuations; transaction receipt; and prior notice of changes to the Licensee’s rules or policies; and
“Other disclosures customarily given” in connection with the opening of customer accounts (which may be read to include non-Virtual Currency accounts).
Thirdly, prior to each transaction, these minimum written disclosures must occur:
Terms and Conditions of the Transaction
Type, nature, and amount of the transaction;
Any fees, expenses, and charges to the customer, including applicable exchange rates;
Warning that the transaction may not be rescinded after execution, if applicable; and
“Other disclosures customarily given” in a like transaction.
Then, after any transaction, the customer must be given a receipt (the general form of which must be available for NYDFS inspection) containing:
Licensee name and contact information, including a telephone number to answer questions and register complaints;
type, value, date, and precise time of transaction;
exchange rate, if applicable;
statement of Licensee liability for non-delivery or delayed delivery;
statement of Licensee refund policy; and
any additional information required by NYDFS.
These requirements may, on first blush, appear cumbersome to digital currency entrepreneurs and their customers, some of whom are not inclined toward procedural conformity and the kinds of compliance tasks that complicate ordinary, pre-cryptocurrency finance. There is much to be said, however, for adherence to a set of guidelines that may very well help unsophisticated consumers understand the practicalities of transacting via these nascent technologies.