If you wanted to learn about the five pillars of an effective Anti-Money Laundering (AML) program — i.e., internal controls; the designation of a Bank Secrecy Act (BSA)/AML officer; a BSA/AML training program; independent testing to test programs; and a risk-based, customer due-diligence procedure — then read the New York Department of Financial Services’ (NYDFS) rejection letter of Seattle-based Bittrex’s application for a BitLicense.
“Based on the above, Bittrex failed to demonstrate responsibility, financial and business experience for the character and fitness to warrant the belief that its business will be conducted honestly, fairly equitably and carefully within the purpose and the intent of the law,” reads the conclusion of NYDFS’ response to Bittrex’s application. That, according to long-time crypto lawyer Jason Seibert of Seibert Law, is quite the indictment.
“From a legal standpoint, this is, you know, like a professional wrestler coming off of the top rope with an atomic drop,” he said. “I mean, it’s just ouch.” NYDFS ordered Bittrex to cease all operations immediately in the state.
“Right off the bat, the NYDFS is worried about money laundering,” Seibert said. “They’re worried about Bittrex doing business with sanctioned parties.”
Bittrex’s due diligence shortcomings led to some interesting customers with the names of “Give Me My Money,” “Elvis Presley,” “Donald Duck,” and other false names, including obscene terms and phrases. The exchange takes issue here.
“There were less than a dozen of these names in total and none of these accounts were active or could make a trade or financial transaction on Bittrex,” Bittrex said in its reply statement. “The fact that these accounts were unable to trade demonstrates the effectiveness of our diligence process, rather than a deficiency as NYDFS alleges.”
NYDFS wrote that Bittrex’s procedures for listing new tokens were too lax. In some cases, according to the regulator, the token applicant refused to complete their applications, and in one case in which there was no application at all.
“By allowing a token to be listed without that type of background information, yes, Bittrex had potentially aided and abetted a sanctioned individual or country in laundering money through that exchange,” Seibert said. “That’s the concern.”
Bittrex maintains that it is committed to a regulated environment that promotes consumer protection and innovation of blockchain technology.
“We have worked with other federal and state regulators without issue,” Bill Shihara, founder and CEO of Bittrex, told Cointelegraph. “We welcomed the NYDFS auditing team and educated them in good faith, but strongly dispute many of their findings.”
Bittrex wanted it to be known that it supports its chief compliance and ethics officer, John Roth. “He has over 40 years of experience across law enforcement prosecuting money laundering crimes, the DOJ, the 9/11 commission and then Inspector General of the DHS before coming to Bittrex,” Shihara said. The NYDFS letter states that Bittrex does not have a strong compliance presence.
“That is simply not true,” Shihara said. “Our compliance program is expertly run and well-staffed.”
Seibert highlights Paragraph A in the rejection letter, “Inadequate BSA, AML and OFAC [Office of Foreign Assets Control] Compliance.” In this paragraph, the NYDFS notes that Bittrex failed to have the necessary internal policies for dealing with the transmission of money as a business.
According to NYDFS, Bittrex didn’t have an adequate program. “Now, it’s not saying that they didn’t have a program, it’s just saying that it was completely deficient,” Seibert clarified.
He adds: “There’s a duty to basically ask, ‘Who is selling the token and who is behind it?’”
This might include an investigation into the identity of the people offering the token. “Who the players are, whether they’re on some sort of sanctions list or not,” Seibert said. Shihara was surprised by the tone of the letter and its allegations. “Three months ago in January, NYDFS presented to us a supervisory agreement that, if agreed to, would have resulted in the issuance of a BitLicense and a Money Transmission License,” he told Cointelegraph.
“The same regulatory agency that just wrote us the riot act for our compliance procedures was willing to grant us a license if we agreed to a set of terms we felt were at odds with our business model,” he said.
Bittrex says NYDFS wanted to restrict the number of coins the exchange could offer New York residents to 10. NYDFS also would restrict the process by which Bittrex could offer new coins.
“NYDFS reserved the right to order us to withdraw coins at any time,” the exchange wrote in its reply. “Additionally, DFS would be able to prohibit offering tokens to NY residents, even if other NY BitLicense holders were able to offer the tokens.”
NYDFS also required its approval if Bittrex were to acquire any other entity, and did not accept Bittrex’s offer of a bond to cover the entire capitalization of all New York customers in addition to the $1 million bond NYDFS requires for all licensees.
So, why did the exchange reply?
“Frankly, the allegations, lack of context and factual inaccuracies in their letter left us no choice,” Shihara said. “Particularly when it comes to their statements on our internal policies, procedures and controls and our customer due diligence.”
Seibert contends this might not be the best course of action. He offered an alternative:
“It was an extremely educational experience working with DFS through this review. We appreciate the process, and we’re undergoing extensive internal training and modifications of our processes to get up to speed as quickly as possible to remedy the issues that DFS highlighted.”
What is next for Bittrex in New York?
The NYDFS denial of Bittrex’s application for a BitLicense, which is the colloquial term used for a business license of virtual currency activities in New York, required the exchange to suspend operations in the state immediately. The exchange did so last Thursday.
“For Bittrex, we will continue to provide our customers with a safe, secure, and innovative platform as we always have and work with regulators as transparently as possible,” Mr. Shihara told Cointelegraph. “Hopefully, at some point, the regulatory climate in New York will improve and there will be an opportunity where we feel comfortable reapplying.”
The Bittrex founder, to be sure, is concerned by what this means for New York residents who want to participate in the blockchain ecosystem.
“Their only course of action is to trade on platforms that are offshore or only giving them access to a very small part of this innovative technology,” Shihara said. Cointelegraph reached out to NYDFS for comment.
“Unfortunately we do not have staff available, any comment from DFS is included in the denial letter,” the Department replied.