Kansas Bank Commissioner Issues Virtual Currency Guidance

On June 6, the Kansas Office of State Bank Commissioner (OSBC) issued guidance on the regulatory treatment of virtual currencies under the Kansas Money Transmitter Act (KMTA). The guidance focuses on money transmission activities involving decentralized cryptocurrencies, such as Bitcoin. The guidance states that cryptocurrencies in their current form are not covered by the KMTA because they do not fall within the definition of “money”—no cryptocurrency is currently authorized or adopted by any governmental entity as part of its currency—or “monetary value”—there is no recognized standard of value or set value for a single unit of a cryptocurrency. The guidance explains that since the KMTA does not apply to transmission of decentralized cryptocurrencies, an entity engaged solely in the transmission of such currency is not required to obtain a money transmitter license. The guidance adds that, if transmission of virtual currency includes the involvement of sovereign currency in a transaction, it may be considered money transmission depending on how the transaction is organized. The guidance provides several examples of common types of transactions involving cryptocurrency and whether the KMTA applies to each, and outlines for cryptocurrency businesses that conduct money transmission, and entities engaged in money transmission, actions necessary to comply with state law, including licensing.

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Minnesota Appellate Court Holds Email Signature Not Necessarily Evidence Of Intent To Sign Attachments

On June 2, the Minnesota Court of Appeals held that under the Uniform Electronic Transaction Act (UETA), an electronic signature in an email message does not necessarily evidence intent to electronically sign an attached document, and that whether the sender has electronically signed the attachment is dependent on certain facts and circumstances. SN4, LLC v. Anchor Bank, No. A13-1566, 2014 WL 2441343 (Minn. Ct. App., Jun. 2, 2014). A multifamily real estate purchaser sued a bank after negotiations between the parties over the sale of two properties held by the bank fell through. The purchaser claimed that the bank breached its contract by refusing to sell at a price the purchaser claims was established through a series of emails between the parties. The trial court rejected the buyers’ argument that the bank electronically subscribed to the agreement under the UETA and held that the purported agreement did not satisfy the statute of frauds because only the buyers subscribed to it. The appeals court affirmed, holding that under UETA each transaction must be examined to determine whether the parties agreed to conduct the transaction by electronic means. Here, the court held, there was no express or implied agreement between the parties that the bank would electronically sign the agreement. Further, the court held that even assuming the parties agreed to conduct the transaction electronically, the bank did not electronically sign the agreement. The court explained that “whether a sender has electronically signed an attached document depends on the circumstances, including whether the attached document itself contains the sender’s electronic signature and whether the attached document is intended to be a draft or final version.” In this case, the purported agreement the buyers sought to enforce was attached to an electronically signed email, but the signature lines in the attached agreement lacked the bank’s handwritten or electronic signature. The court added that the subject email and subsequent emails indicated that neither party considered the agreement to be final.

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Utah Federal Court Dismisses Putative Class’s “True Lender” Claims Against Online Merchant

On May 23, the U.S. District Court for the District of Utah dismissed a putative class action filed against an ecommerce merchant for allegedly operating a financing program that violated various California laws, including the state’s usury law. Sawyer v. Bill Me Later, Inc., No. 11-988, 2014 WL 2159044 (D. Utah May 23, 2014). The court explained that the customer chose to finance his online purchase and was required to sign a contract: (i) identifying a Utah-chartered bank as the lender and as the owner of the account; (ii) specifying that the customer was accepting the loan in Utah, credit was being extended from Utah, and an annual interest rate of 19.99% would apply to outstanding loan amounts; and (iii) disclosing a schedule for late fees. The bank funded the transaction by paying the merchant on the customer’s behalf and held the receivables for at least two days before selling them to the merchant. The customer sued after he failed to pay for the purchase within 30 days and the merchant applied the disclosed interest rate and assessed a late fee, which the customer claimed together exceeded the usury cap in California, where the purchase was made. The court rejected the customer’s claim that the merchant, rather than the bank, was the “true lender” or the real party in interest. The court determined that “the lending framework more closely resembles credit card programs than the circular payday loan structures” described by the customer. The court concluded that loans serviced through contracts with third parties such as the merchant in this case are included within the definition of “any loan” under Section 27 of the Federal Deposit Insurance Act and as such are expressly preempted by federal statute.

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CSBS Hosts Emerging Payments Hearing

On May 16, the Conference of State Bank Supervisors Emerging Payments Task Force held a public hearing to examine the changing payments landscape and opportunities and risks presented by current and emerging technologies. The Legacy Payment Systems panel focused on continued efforts to improve efficiency and speed while simultaneously “preserving consumer confidence and system stability.” The Retail Payments Innovations panelists described innovative electronic and mobile payment systems and suggested that further innovation would be best supported by existing regulatory framework, which offers sufficient consumer protections. Finally, the Virtual Currencies panel urged state and federal regulators to “provide clear and consistent regulatory expectations and guidance without restricting innovation.” The event was the most recent of a number held by federal and state policymakers to address the proliferation of emerging financial technologies used to move money and transfer funds, which range from enhancements of traditional ACH or credit and debit methods of payment to virtual currencies that disrupt the traditional model. The CSBS is expected to use public hearings like this one to develop a proposed regulatory framework for state agencies.

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Senate Banking Committee Leaders Seek Regulators’ Views On Virtual Currencies

On May 19, the Senate Banking Committee’s chairman and ranking member, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID), sent a letter to the leaders of the Treasury Department, the SEC, the CFTC, the OCC, the FDIC, and the Federal Reserve Board regarding recent developments in the use of virtual currencies and their interaction with the global payment system. The Senators ask the regulators a series of questions related to the role of virtual currencies in the U.S. banking system, payment system, and trading markets, and the current role of federal regulators in developing local, national, and international enforcement policies related to virtual currencies. The Senators also seek the agencies’ expectations on virtual currency firms’ BSA compliance, and ask whether an enhanced regulatory framework for virtual currencies is needed.

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Nevada Federal District Court Stays Discovery Based On Lack Of Jurisdiction Over Foreign Website Operator

On May 15, the U.S. District Court for the District of Nevada granted a motion to stay discovery pending adjudication of the motion to dismiss on the grounds that it likely lacked personal and specific jurisdiction over the foreign operator of a passive website that conducted no act in Nevada other than the use of an allegedly infringing trademark, notwithstanding the website’s marketing claims of a significant U.S. presence. Best Odds Corp. v. iBus Media Ltd., No. 13-2008, slip op. (D. Nev. May 15, 2014). The court’s “peek” at the defendant’s pending motion to dismiss arguments led to the conclusion that it lacked personal jurisdiction over defendant despite plaintiff’s allegation, among others, that the defendant’s media kit stated that its website has a “significant U.S. presence” because that statement did not “approximate physical presence.” The court further concluded that it lacked specific jurisdiction, holding that the foreign operator’s site was passive and the operator did not purposefully direct its activities at the forum state or consummate a transaction within the forum state. The court rejected the plaintiff’s argument that the website was not passive because it allowed users to access third party travel websites to make reservations in the United States.

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Connecticut Banking Regulator Issues Virtual Currency Warning

On May 12, the Connecticut Department of Banking issued a consumer advisory about risks associated with virtual currencies. The advisory provides background information and highlights benefits of virtual currency, but cautions that: (i) virtual currency is subject to minimal regulation and is susceptible to cyberattacks; (ii) virtual currency accounts are not backed by the FDIC; (iii) investments tied to virtual currency are volatile; (iv) investors in virtual currency reply upon “unregulated companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions;” and (v) investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties to protect from cyberattacks.

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Maryland Adds Training, Disclosure Requirements For Money Transmitters

On May 5, Maryland Governor Martin O’Malley signed HB 723, which requires state licensed money transmitters to (i) provide on transmittal forms a clear, concise, and conspicuous fraud warning that includes a toll-free telephone number for individuals to call to report fraud or suspected fraud; (ii) provide annual training to agents related to financial abuse and financial exploitation of elders; and (iii) allow an individual to voluntarily be disqualified from sending or receiving money transmissions in the state for a specified period of time. The changes, which take effect October 1, 2014, do not apply to a licensee or an agent that engages (i) in selling or issuing stored value devices, traveler’s checks, or money orders, or providing bill payer services, as long as the licensee or agent does not engage in any other business regulated under the money transmission law; or (ii) in the business of money transmission solely through the Internet.

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FEC Allows Small Bitcoin Political Contributions

On May 8, the FEC unanimously approved an advisory opinion permitting political committees to accept bitcoin contributions of $100 or less, and allowing political committees to buy and sell bitcoins as an investment. Each contributor would have to provide his or her name, physical address, occupation, and employer; affirm that he or she owns the bitcoins that he or she will contribute; and affirm that he or she is not a foreign national.  The virtual currency would be treated as an in-kind contribution; i.e., it would have to be converted to dollars before spending. The opinion does not address whether committees may take larger bitcoin contributions. The FEC remains deadlocked on whether committees may use bitcoin contributions to acquire goods and services.

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Transportation Regulator Proposes Allowing Electronic Records And Signatures

Recently, the Department of Transportation’s Federal Motor Carrier Safety Administration published a proposed rule to allow the use of electronic records and signatures to satisfy the agency’s regulatory requirements. The rule would permit the use of electronic methods to sign, certify, generate, exchange, or maintain records so long as the documents accurately reflect the information in the record and can be used for their intended purpose. The proposal seeks to implement the Government Paperwork Elimination Act (GPEA) and the Electronic Signatures in Global and National Commerce Act (E–SIGN), and would apply only to documents that the agency’s regulations obligate entities or individuals to retain—it would not apply to forms or other documents that must be submitted directly to the agency. Comments on the proposal are due by June 27, 2014.

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FinCEN Issues Five Rulings On Application Of BSA Regulations To Certain Activities

On April 29, FinCEN issued five rulings in response to companies who sought clarification regarding whether their company is a money service business under the BSA. In FIN-2014-R006, FinCEN determined that a company that operates an online real-time deposit, settlement, and payment services platform for banks, businesses, and consumers is considered a money transmitter, not a provider of prepaid access, and should be registered as a money services business under BSA regulations. In two other rulings—FIN-2014-R004 and FIN-2014-R005— FinCEN clarified the exemption from the money transmitter definition for persons that accept and transmit funds “only integral to the sale of goods or the provision of services, other than money transmission services.” FinCEN determined that the escrow services at issue in FIN-2014-R004 and the transaction management services at issue in FIN-2014-R005 fit within that exemption because the acceptance and transmission of funds in these cases is not a separate and discrete service in addition to the underlying service, but instead is a necessary and integral part of the service itself. Therefore, these companies are not considered to be money transmitters subject to registration. FinCEN determined in FIN-2014-R007 that a company that rents computer systems used to mine virtual currencies is not a money transmitter. Finally, in FIN-2014-R008, FinCEN determined that although the company, which uses armored cars to facilitate the exchange of coins and cash, does not qualify for the “armored car” exemption in the money transmitter definition, it is still not considered a money transmitter. FinCEN stated that the transportation of currency and/or coin of certain denominations from the company’s vault to the customer’s location and the return transportation of currency and/or coin in the exact amount of the change provided to the company’s own vault does not constitute the acceptance of value from one person and the transportation of such value to another person or location.

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FDIC White Paper Assesses Use Of Mobile Financial Services To Reach Underserved

On April 24, the FDIC hosted a meeting of its Advisory Committee on Economic Conclusion, during which FDIC staff presented a white paper on the potential for mobile financial services (MFS) to reach unbanked and underbanked consumers. The Committee meeting also covered an update on the FDIC’s safe accounts project, and included panels on youth financial literacy and consumer demand for small dollar credit. The white paper concludes that, in the short run, “MFS is best positioned to have an economic inclusion impact through its ability to meet day‐to‐day financial services needs of underbanked consumers as well as consumers at risk of account closure,” while also helping “the underserved gain access to the banking system and grow their financial capability.” The white paper encourages banks, service providers, and regulators to (i) integrate MFS into broader economic inclusion strategies; (ii) integrate MFS with other delivery channels and incorporate one-on-one interactions; (iii) “fine-tune” risk management strategies to match MFS expansion and underbanked strategies; (iv) improve convenience and speed of MFS through infrastructure enhancements; (v) enable additional mobile functionalities; (vi) develop case studies to demonstrate profitable implementation of MFS for economic inclusion; and (vii) bridge MFS with traditional payment services.

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State Regulators Circulate Model Consumer Guidance On Virtual Currency

On April 23, the CSBS’s Emerging Payment Task Force, together with the North American Securities Administrators Association, released “Model State Consumer and Investor Guidance on Virtual Currency.” The model guidance provides basic background information on virtual currency, and tips for consumers considering buying, selling, transacting with, or investing in a virtual currency.

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Michigan Federal Court Addresses Personal Jurisdiction Based On Online Sales Through Hyperlinked Third-Party Website

On April 15, the U.S. District Court for the Western District of Michigan exercised personal jurisdiction in a trademark infringement suit after determining that an out-of-state company’s website was sufficiently interactive such that the exercise of personal jurisdiction comports with Due Process. Mor-Dall Enters. v. Dark Horse Distillery, LLC, No. 1:13-cv-915, (W.D. Mich. Apr. 15, 2014). In assessing personal jurisdiction, the court relied on the sliding scale framework established in Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997) to assess whether a website has minimum contacts with a forum state. The court determined that the company’s website, which does not allow customers to make purchases directly but rather links customers to a third-party vendor to complete a sale, is interactive and demonstrates that the company “clearly does business over the internet.” Because the website solicits customers from across the country, including Michigan, the company purposefully availed itself of the privilege of acting in Michigan, the court explained. In so holding, the court declined to follow a Northern District of Iowa decision that a company’s website’s use of a hyperlink to a third-party vendor does not give rise to personal jurisdiction over that company. Instead, the court relied on a Sixth Circuit copyright infringement case which held that a record label whose website directed customers to Amazon.com to make purchases availed itself of the privilege of acting in the forum state. The court further held that the cause of action arises in Michigan, and that the exercise of personal jurisdiction is reasonable given the quality and quantity of contacts. The court denied the defendant’s motion to dismiss.

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Florida District Court Holds Property Buyer’s Emails With Online Auction Company Are Not An Enforceable Contract

On April 7, the U.S. District Court for the Middle District of Florida dismissed a property buyer’s breach of contract and specific performance claims based on emails from an online auction company, holding that the emails alone did not create an enforceable real estate sales contract. Rouse v. Nationstar Mortg., LLC, No. 14-497, 2014 WL 1365420 (M.D. Fla. Apr. 7, 2014). The buyer, who won an online auction to purchase a property, sued the seller after the seller determined it did not wish to proceed with the sale. The buyer alleged breach of contract and sought specific performance, arguing that an email he received from the online auction company confirming his winning bid for the property and a subsequent email from the auction company indicating that the seller agreed to the terms of the purchase agreement memorialize all of the essential terms of the sale. The court held that even if the auction company’s emails satisfy the writing requirement of the statute of frauds as proper electronically signed documents, the confirmation email specifically stated that the seller’s acceptance of the bid and the purchase of the property was contingent not only on the seller’s approval of the purchase, but also on the execution of the purchase agreement by the winning bidder. Because the purchaser offered no evidence that he executed the purchase agreement, the court dismissed without prejudice the buyer’s breach of contract and specific performance claims. The court dismissed with prejudice the buyer’s equitable estoppel claim, but declined to dismiss the buyer’s unjust enrichment claim to recoup costs associated with repairs the buyer made to the property between the time of the auction and the seller’s decision not to proceed with the sale. The court held that the latter claim is dependent upon the seller’s actual knowledge of the repairs, which cannot be determined at this stage.

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