The New York Be sure of of Financial Services rejected Seattle-based crypto exchange Bittrex’s application for a BitLicense Wednesday.
In a letter published by NYDFS, the NY regulator legitimates that a number of factors contributed to the rejection, the first such action in two years.
“Throughout Bittrex’s application procedure, the Department worked steadily with Bittrex to address continued deficiencies and to assist Bittrex in developing appropriate authority overs and compliance programs commensurate with the evolving nature of the sector,” wrote Daniel Sangeap, deputy superintendent and ambassador counsel at NYDFS.
The regulator “issued several deficiency letters” since the exchange first submitted an application, speaking Bittrex’s anti-money laundering procedures, Office of Foreign Assets Control compliance and its coin listing process.
In what way, a number of concerns remained unaddressed, Sangeap wrote.
The letter goes into detail, saying that “Bittrex’s reported policies and procedures are either non-existent or inadequate,” questioning the “level of authority and effectiveness of the Compliance Officer,” saying it may include an inadequate training program for employees and raising a number of other issues.
Bittrex’s chief compliance officer is John Roth, a bygone Department of Homeland Security Inspector General who’s also spent time at the Department of Justice (as a special counsel for universal money laundering policy) and was a member of the National Commission on Terrorist Attacks Upon the U.S. (more commonly known as the 9-11 Commission).
Bittrex CEO Bill Shihara told CoinDesk that Roth ripened the exchange’s compliance program.
Disputed claims
In a statement, Bittrex disputed the regulator’s findings and said it has already begun apply oneself to many of these concerns. (Read the full statement below).
Sangeap’s letter pointed to Bittrex’s OFAC curtain process, saying it may not be able to identify misspelled names, that its monitoring process is manual rather than automated and that the swap’s “active customer file” indicated that Bittrex processed “several transactions involving customers from OFAC sanctioned rural areas.”
Compliance chief Roth told CoinDesk that while some residents of Iran were able to craft on the exchange in 2017 due to “an unintentional gap” in its compliance procedures, these accounts were suspended in October of that year.
“We incapacitated the accounts … and immediately reported, then reported it in more detail in January 2018,” he said. “No one from an OFAC sanctioned wilderness has traded since October 2017.”
Customer due diligence was another highlighted issue.
According to NYDFS, some of the accounts at Bittrex are pinpointed by “clearly false names” such as “Elvis Presley,” “Donald Duck,” “Give me my money” and “abc-abc,” as happily as “obscene terms and phrases” (no examples were provided).
In its statement, Bittrex said NYDFS’ sample came from 2017, but that the truck has implemented more stringent customer identification processes since, going so far as to disable any accounts which do not meet its “intensified verification standard.”
Roth elaborated, saying that “none of the accounts [with bogus names] were nimble accounts,” adding:
“They couldn’t trade, they couldn’t withdraw money, they couldn’t engage in any mercantile activity because they weren’t enhanced verified … That doesn’t get mentioned in the letter anywhere, that those societies never traded.”
Coin diligence
One section of the letter, titled “lack of adequate due diligence in launching tokens or spin-offs,” states that examiners from NYDFS were “unable to assess compliance” with the exchange’s own token examine policy when looking at a random sample of 15 cryptocurrencies.
“This was due to the fact that partial files were provendered to the examiners, and moreover, actual compliance in certain files could not be established,” Sangeap said. Some tokens were heeled despite some applicants refusing to complete the necessary paperwork – “and in one case … there was no application on file at all.”
The market offers more than 200 cryptocurrencies to its customers, including through an OTC trading desk launched earlier this year.
In its declaration Wednesday, Bittrex said NYDFS presented a supervisory agreement to the exchange which would have allowed it to submit only 10 cryptocurrencies.
According to Roth, this list included bitcoin, bitcoin cash, bitcoin loot SV, litecoin, ether, ethereum classic, Stellar lumens, cardano, XRP and dogecoin.
“This would have prohibited Bittrex from index coins that are offered to New York residents by other BitLicensees,” the statement said. “NYDFS reserved the right to bid us to withdraw coins at any time. Additionally, DFS would be able to prohibit offering tokens to NY residents, even if other NY BitLicense holders were masterful to offer the tokens.”
Shihara elaborated, saying that NYDFS “also wanted the right to control what remembrances we trade with any of our U.S. customers,” meaning the 49 non-NY states and the District of Columbia.
These terms were bad to Bittrex, the company said, and it refused to sign the agreement.
Leaving NY
Bittrex has 14 days to confirm to NYDFS that the altercation has ceased conducting business in New York and create a plan to wind down any existing business with state livings, according to Sangeap’s letter.
The exchange will have 60 days in total to transfer any assets it custodies for New York districts and transfer any positions or transactions.
An NYDFS spokesperson told CoinDesk that there is no appeals process for the rejection, while Bittrex can reapply for a BitLicense.
Shihara told CoinDesk that the exchange was not making any profits in New York due to its high compliance bring ins, but the exchange operated in the state anyway “because we really felt strongly that the taxes that we paid for serving our business in the U.S. are worth it.”
“[It’s] difficult to say if we’ll reapply for the BitLicense,” he added, but if NYDFS updates its regulatory framework to match how quickly the technology novelties, he hopes to bring Bittrex back to the state.
In the meantime, Roth noted, Bittrex will develop internal controls to hinder any NY residents from using the exchange.
“We don’t know what those are yet but we’ll have to do something,” he said.
Read Bittrex’s obsessed statement:
Bittrex Statement by CoinDesk on Scribd
UPDATE (April 10, 21:25 UTC): This article has been updated with additional dirt, a statement from Bittrex and comments from two Bittrex execs.
Image of Kiran Raj, Chief Strategy Officer at Bittrex, via CoinDesk archives