The New York Department of Financial Services (NYDFS) has rejected the application of Seattle-based cryptocurrency exchange Bittrex for a BitLicense Wednesday.
“Throughout Bittrex’s application process, the Department worked steadily with Bittrex to address continued deficiencies and to assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector.”
Since the exchange first filed an application, the regulator has “issued several deficiency letters,” addressing Bittrex’s anti-money laundering procedures, its coin listing process, and Office of Foreign Assets Control compliance. According to Sangeap, however, several concerns remained unaddressed.
The letter notes that “Bittrex’s current policies and procedures are either non-existent or inadequate,” questioning the “level of authority and effectiveness of the Compliance Officer,” suggesting it may have an insufficient training program for staff and raising several other problems.
Bittrex chief compliance officer John Roth was a member of the 9-11 Commission and a former Inspector General of the Department of Homeland Security. Per Bittrex CEO Bill Shihara, Roth developed the compliance program of the exchange.
In a statement, Bittrex claimed that it has already started solving many of these concerns.
According to Sangeap’s letter, Bittrex’s OFAC screening process may be unable to identify misspelled names, its monitoring process is manual instead of automated, and the exchange’s “active customer file” showed Bittrex processed “several transactions involving customers from OFAC sanctioned countries.”
Roth said that while several Iranian residents had traded on the exchange in 2017 because of “an unintentional gap” in its compliance procedures, these accounts have been suspended in October of that year.
“We disabled the accounts … and immediately reported, then reported it in more detail in January 2018,” he noted. “No one from an OFAC sanctioned country has traded since October 2017.”
The NYDFS revealed that some Bittrex accounts are identified by “clearly false names” such as “abc-abc,” “Give me my money,” “Donald Duck,” and “Elvis Presley,” as well as “obscene terms and phrases.”
Bittrex said in a statement that NYDFS’ sample was from 2017, and the exchange has already implemented stricter customer identification procedures, going so far as disabling accounts that do not satisfy its “enhanced verification standard.”
Per Roth, “none of the accounts [with bogus names] were active accounts,” saying:
“They couldn’t trade, they couldn’t withdraw money, they couldn’t engage in any economic activity because they weren’t enhanced verified … That doesn’t get mentioned in the letter anywhere, that those folks never traded.”
A section of the letter, titled “lack of adequate due diligence in launching tokens or products,” notes that NYDFS examiners were “unable to assess compliance” with the token review policy of the exchange when investigating a random sample of 15 digital currencies.
“This was due to the fact that partial files were provided to the examiners, and moreover, actual compliance in certain files could not be established,” Sangeap stated. Some tokens were listed even though some applicants refused to complete the required paperwork—“and in one case … there was no application on file at all.”
The exchange offers over 200 digital currencies to its clients, including through a recently launched OTC trading desk.
Bittrex mentioned in its statement on Wednesday that NYDFS presented a supervisory agreement to the exchange that would have permitted it to offer just ten digital currencies. Roth said the list included Ether, Ethereum Classic, Litecoin, Bitcoin, Bitcoin Cash, Bitcoin Cash SV, XRP, Dogecoin, Stellar Lumens, and Cardano.
“This would have prohibited Bittrex from listing coins that are offered to New York residents by other BitLicensees,” the statement noted. “NYDFS reserved the right to order 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 able to offer the tokens.”
Shihara said NYDFS “also wanted the right to control what tokens we trade with any of our U.S. customers.”
Bittrex is given 14 days to confirm to the NY regulator that the exchange has stopped business operations in the state and make a plan to wind down existing business with its residents, Sangeap’s letter indicates.
It will have 60 days in total to transfer all assets it custodies for the residents of New York as well as transfer any transactions or positions.
According to an NYDFS spokesperson, there is no appeals process for the rejection, but Bittrex may reapply for a BitLicense.
“[It’s] difficult to say if we’ll reapply for the BitLicense,” Shihara said, but if the regulator will update its regulatory framework to match how rapidly the technology evolves, he is hoping to bring Bittrex back to New York.
For now, Roth stated, Bittrex is developing internal controls to prevent New York residents from utilizing the exchange. “We don’t know what those are yet but we’ll have to do something,” he noted.