As the market has grown, financial centers around the world have competed aggressively to attract new business. While some have relied on light-touch regulation, the appeal of New York's BitLicense was that it offered a clear legal framework.
However, the slow licensing process and strict requirements are driving some companies away.
An application costs $5,000 to file, and once completed, can run 500 pages - including everything from compliance manuals to executives' fingerprints, lawyers said. Regulators then drill deeper, asking for details of business models, organizational charts or ownership information.
BitLicense forces companies to "extract personal, private information" from users, creating a target for hackers, Erik Voorhees, chief executive of Switzerland-based virtual currency firm ShapeShift.io, said in an interview, explaining the company's decision not to do business in New York.
GoCoin CEO Steve Beauregard told Reuters securing a New York license was not worth the effort: "It's too overreaching and burdensome, especially for the smaller companies," he said.
Marco Santori, who heads the digital currency practice of law firm Pillsbury Winthrop Shaw Pittman LLP, said at least 15 firms were shunning New York. He has advised clients to focus on states like California, where, he believes, regulators are unlikely to take aim at digital currency companies any time soon. State lawmakers there recently withdrew a second proposal to regulate digital currency companies.
Other states are developing rules and awarding licenses at a faster clip.
Washington State, for example, has issued seven licenses to virtual currency companies since 2013 under its longstanding law for money transfer businesses. North Carolina has licensed two. A uniform virtual currency law that any state can opt into is also in the works, and there has been talk of a possible federal charter.
Internationally, some countries, like Japan, have moved to regulate aspects of digital currency trading, while others, like Bolivia, have banned it. Still others have sought to adapt tax policies and existing laws on money laundering and other illicit activity to the new market. The BitLicense, however, remains a unique approach.
In September, Deloitte ranked New York City number 3 as a financial-technology destination more broadly, behind London and Singapore.
People familiar with the BitLicense process say the delay in appointing Lawsky's successor sapped some of the momentum.
The new superintendent, Maria Vullo, who took over in June 2016, told Reuters in an interview DFS is striving to clear the application backlog. The reviews had to be thorough, though, because of the risks involved, she said.
New York introduced its BitLicense after the collapse of Mt. Gox, a Tokyo-based exchange that lost an estimated $560 million worth of customers' bitcoins.
"It's not a video game," she said. "It involves real money and taking deposits."
Jerry Brito, executive director of Coin Center, a digital currency research and advocacy group in Washington, said the BitLicense's roll-out did not live up to its promise. Still, New York's leverage as a world financial center would make it hard for companies that want to grow to shun this market, he said.
"I think it's going to be rare that companies say, 'We're not going to do business in New York."'