Trust Companies Cornering New York Bitcoin Market

With the BitLicense firmly in place, the remaining companies in New York state are charging ahead. Despite three years having been invested into the regulations development, companies are taking advantage of some key exclusions.

“The following Persons are exempt from the licensing requirements otherwise applicable under this Part: (1) Persons that are chartered under the New York Banking Law and are approved by the superintendent to engage in Virtual Currency Business Activity.”
— – BitLicense

itBit received it’s trust charter in May this year, which made the company the first Bitcoin Exchange to operate as a Trust Company in New York State.

“Through a trust company charter, granted by the New York State Department of Financial Services (NYDFS), itBit has established the itBit Trust Company, organized under New York State banking law. This makes itBit the only U.S.-chartered and supervised bitcoin exchange able to offer unique protection and security for customers in full compliance with New York and federal law.”
— – itBit

This does not enable them, however, to operate as a bank. As a Trust Company itBit acts as a custodian for it’s US customer assets, which currently consist of US dollars and Bitcoin. All reserves must be backed with capital reserves and itBit has a legal duty to act on behalf of their customers interests. The company explained that, “the trust charter application process is far more rigorous than that for obtaining the BitLicense or money transmitter licenses.”

The Winklevoss twins are chasing the same compliance and regulatory approval, for their exchange Gemini, on July 21 the twins filed for a trust application.

The Winklevoss twins have stated that they will also be securing a strong banking relationship with a New York State-chartered bank. “This means that your money will never leave the country. It also means that US dollars on Gemini will be eligible for FDIC insurance and held by a US-regulated bank. Your US dollars on Gemini will be as safe and secure as they are in your bank account today,” said Cameron Winklevoss.

The Winklevoss twins became well known for accusing Mark Zuckerberg, founder of Facebook Inc, of stealing their idea for a social network. Over the past few years the twins have become vocal proponents of Bitcoin, participating in various interviews with mass media outlets.

“Our interest in Bitcoin began in 2012. It was immediately obvious to us how awesome and powerful this technology was. People laughed, as they always do, when something is awesome, powerful and new, but that only helped to fuel our fire.”
— – Cameron Winklevoss

The Winklevoss twins explained that they found a home for their exchange Gemini within the developing regulatory ecosystem of New York. Both testified post-BitLicense, in a public hearing at the New York Department of Financial Services regarding cryptocurrencies. The hearings attracted the interest of almost 15,000 people in 117 different countries.

“It was clear to us that NYSDFS Superintendent Benjamin Lawsky and his staff understood the potential of this technology and were committed to building a regulatory framework that would both protect consumers and foster innovation in New York.”
— – Winklevoss

However, both itBit and Gemini opted to apply for a Trust Charter, excluding them from regulation under the BitLicense altogether.

itBit and Gemini are following in the footsteps of the Intercontinental Exchange (ICE), one of the most prominent exchanges in the world. ICE operates the ICE US Trust, and was formed in 2008, in response to the US financial crisis. Now called the ICE Clear Credit LLC, it is also based in New York, serving as a limited purpose bank. It is a clearing house for credit default swaps, and it’s founder, Jeffrey C. Sprecher, worked closely with the Federal Reserve to provide over the counter (OTC) derivatives services.

itBit recently announced it’s own OTC services, for investors interested in transactions over 100 bitcoin. The service is similar to the brokerage services offered by Binary Financial or Barry Silbert’s Genesis Trading.

The advantages to using an OTC trading desk is that participants can settle trades without offering the trade on the open market, which could affect the market price. According to itBit, this could become a preferred method for large trades due to the relatively low volume and high volatility of Bitcoin.

“Up until now, the OTC bitcoin trading market has been operating in parallel to existing exchanges. With the itBit Global OTC Agency Trading Desk, our customers will be able to access a regulated OTC market through their existing itBit exchange accounts, matching OTC buyers and sellers through itBit’s global network of clients across more than 100 countries.”
— – Bobby Cho, itBit director of trading

Beyond the Trust Charter and OTC trading, itBit are expanding beyond their exchange and introducing financial institutions to distributive ledgers. The company recently announced a product called BankChain, “a new clearing and settlement network that leverages blockchain technology to reimagine how financial institutions execute post-trade. The decentralized network is powered by itBit but fully governed by the member participants that join the platform.”

The BankChain announcement followed shortly after a secretive BankChain summit allegedly held in New York by itBit. It was invite only and targeted top financial institutions and Wall Street. The product has received a mixed reception in the community. Many Bitcoin proponents are disappointed that Bitcoin will not be used on the BankChain platform, while others believe the introduction to a decentralized immutable ledger is the first step towards widespread acceptance of this new technology.