One of the biggest regulatory barriers facing cryptocurrency and fintech companies is inconsistency across regimes. In September 2021, the Conference of State Bank Supervisors (“CSBS”) attempted to remove one of these barriers, the lack of uniformity in money transmission regulation, with its Money Transmission Modernization Act (the “CSBS Act”).
Money transmitters are currently regulated separately under state and federal law. The federal government, forty-nine states, Washington D.C., and many U.S. territories have their own laws and regulations requiring licensure and governing how these transmitters can act. Each regime requires a license to operate in the jurisdiction, and the regimes may vary significantly from each other.
For example, while most states have similar “money transmission” definitions, there is wide variance in what states exempt from that definition. One typical example is the “agent of the payee” exemption, which provides that persons who transmit money for the payment of goods and services under certain conditions need not register as money transmitters. About half of the states, including states such as Washington and Kentucky, have some form of the “agent of the payee” exception while others, such as Arizona and Florida, do not. Further, among those that do have such an exemption, the conditions to qualify for the exemption still vary, forcing anyone seeking to rely on the exemption to qualify under every condition of the collective laws.
Another key disparity regards virtual currencies. FinCEN regulates virtual currencies if such currencies constitute “value that substitute for currency,” and New York has created an entire regime for virtual currency businesses, the BitLicense and related regulations. Meanwhile, states like Pennsylvania and Illinois have specific guidance that explicitly distinguishes between virtual and physical currencies, providing, in essence, that a virtual currency transmitter will only be covered by these states’ money transmitter laws if it would separately qualify as a money transmitter of traditional currency. (Notably, Illinois discusses only decentralized digital currencies.) These disparities make it difficult to determine where businesses need to register for licenses and, even once licensed, create challenges in navigating multiple similar yet distinct regulatory regimes.
The CSBS Act would help alleviate some of this regulatory burden by creating a uniform money transmitter law to be adopted by every state. The law would create uniform exemptions to money transmission, including an “agent of the payee” exemption (Section 3.01(b)), and would include virtual currency in the scope of the law but under a separate dedicated section (Article XIII). Although the law would not require licenses of other states to be recognized, it aims to enable and encourage cooperation between states, including through multistate licensing processes that enable companies to apply to multiple states through one parallel process (such as the Nationwide Multistate Licensing System & Registry discussed below).
Of course, these benefits depend on the CSBS Act being adopted by all or at least most of the states, which is by no means guaranteed. In the last such attempt, the Uniform Money Services Act that the National Conference of Commissioners on Uniform State Laws released in 2000 (and amended in 2004) was adopted by very few states. The field has changed dramatically since that time, though, so the path is by no means paved. With the Office of the Comptroller of the Currency’s special purpose national bank charter (referred to as the “fintech charter”) potentially threatening preemption of state money transmission laws, there may be more incentive now to create a simplified state alternative. Further, most states have adopted use of the Nationwide Multistate Licensing System & Registry (“NMLS”) to coordinate the application process, which has simplified applications across regimes significantly (though NMLS only helps coordinate licensing, not the underlying licensing requirements). In terms of the industry, there is a vocal desire for more uniformity, but many have also already surmounted the regulatory hurdle and received the necessary licenses, so there may be less of an impetus from established players to move this forward.
Whether or not the CSBS Act solves the uniformity issue, its release is an important reminder that regulators are aware of the burden the lack of uniformity has caused, and gives hope that a solution will eventually be found.
For more details on money transmission regulation, see our recent post: The State of Money Transmission Regulation and Digital Assets in 2022.
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