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.
FinCEN Rules Regulations on Money Services Businesses Do Not Apply to ISOs and Exempt Payment Processors
On August 27, FinCEN issued FIN-2014-R009, an administrative ruling clarifying that Independent Sales Organizations (“ISOs”) and exempt payment processors are not money transmitters subject to Bank Secrecy Act (“BSA”) regulations applicable to Money Services Businesses (“MSBs”). Under BSA MSB regulations, the term “money transmitter” applies to any person that provides money transmission services or otherwise engages in the transfer of funds. The term “money transmission services” includes the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. Applying these standards, FinCEN determined that BSA MSB regulations do not apply to an ISO, so long as it: (i) merely solicits merchants to offer them the credit and debit card processing services of two counterparties; and (ii) does not take possession or control of merchant funds at any point. However, FinCEN concluded that BSA MSB regulations will apply to a payment processor unless the payment processor qualifies for the payment processor exemption established by 31 CFR § 1010.100(ff)(5)(ii)(B) and clarified by FIN-2013-R002. Under this exemption, BSA MSB regulations do not apply to a payment processor, so long as it: (i) facilitates the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only BSA-regulated financial institutions; (iii) provides its services pursuant to a formal agreement; and (iv) the agreement itself is at a minimum with the seller or creditor that provides the goods or services and receives the funds. For a copy of the ruling, please see: Application of Money Services Business Regulations to a Company Acting as an Independent Sales Organization and Payment Processor.
On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.
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.
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.
On April 24, FinCEN released an assessment of civil money penalty against a Florida money services business (MSB) and its owner for failing to comply with the Bank Secrecy Act’s program, reporting, and recordkeeping requirements. FinCEN determined that since at least 2008, the MSB, which operated as both an independent check casher and as a foreign currency exchange dealer, willfully violated the BSA by failing to register with FinCEN and failing to develop and implement an effective AML program. Specifically, FinCEN found that the MSB lacked adequate AML programs to verify the identities of persons conducting transactions, to monitor for suspicious activities, to identify currency transactions exceeding $10,000, and to ensure that the MSB filed the required currency transaction reports (CTRs) in a timely manner. According to FinCEN, the MSB also failed to implement internal controls sufficient for creating and retaining adequate BSA records related to currency exchange, and its owner and compliance officer failed to conduct a BSA/AML risk assessment. As a result of the compliance deficiencies, FinCEN determined the MSB failed to file, or failed to timely file CTRs on $4.5 million worth of transactions. The MSB and its owner admitted to these determinations and agreed to pay a $10,000 penalty.
On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…
On April 3, the Texas Department of Banking issued a supervisory memorandum on the regulatory treatment of virtual currencies under the Texas Money Services Act. The memorandum states that money transmission licensing determinations regarding transactions with decentralized virtual currencies such as Bitcoin, referred to by the Banking Department as cryptocurrencies, turn on whether cryptocurrencies should be considered “money or monetary value” under the Money Services Act. The memorandum concludes that cryptocurrencies currently cannot be considered “money or monetary value” because they are not currencies as that word is defined in the Money Services Act, and a unit of cryptocurrency is not a claim under the Act. However, when a cryptocurrency transaction includes sovereign currency, it may constitute money transmission depending on how the sovereign currency is handled. The memorandum provides examples of common types of transactions involving cryptocurrencies and whether they would constitute money transmission subject to state licensing requirements. For example, the Department states that exchanging cryptocurrency for sovereign currency through a third party exchanger is generally money transmission, and that exchange of cryptocurrency for sovereign currency through an automated machine is usually but not always money transmission. The Department advises that cryptocurrency businesses conducting money transmission must comply with state licensing requirements. The Department further advises that (i) a money transmitter that conducts virtual currency transactions is subject to a $500,000 minimum net worth requirement; (ii) a license holder may not include virtual currency assets in calculations for its permissible investments; and (iii) license applicants who handle virtual currencies in the course of their money transmission activities must submit a current third party security audit of their relevant computer systems.
On March 26, the California Department of Business Oversight issued a request for comments on proposed changes to regulations impacting money transmitters. The Department is required to amend outdated regulations that correspond to the repealed Payment Instruments Law, and establish new regulations to implement the Money Transmission Act. Specifically, the regulations under consideration include amendments to definitions, exemptions from the Money Transmission Act, license application requirements, administrative standards and procedures relating to an application for a license, tangible shareholders’ equity, consumer disclosures, and eligible securities. Comments on the proposal are due by April 26, 2014.
Recently, the state of Washington enacted SB 6134, which amends numerous provisions related to the supervision of non-depository institutions. The bill clarifies the statute of limitations applicable to certain violations by non-depository institutions by providing that enforcement actions for violations of the Escrow Act, the Mortgage Broker Practices Act, the Uniform Money Services Act (UMSA), the Consumer Loan Act, and the Check Cashers and Check Sellers Act (CCSA) are subject to a five-year statute of limitations. In addition, the bill provides that licensees under the CCSA and the UMSA that conduct business in multiple states and register through the NMLS must submit call reports to the Department of Financial Institutions. The changes take effect June 12, 2014.
FinCEN Releases Additional Guidance Related To Virtual Currency Mining, Software, And Investment Activity
On January 30, FinCEN issued two rulings related to virtual currency mining and virtual currency software development and investment activity. The guidance clarifies FinCEN’s previous convertible virtual currency guidance. In FIN-2014-R001, FinCEN explains that miners of Bitcoins, whether individuals or corporations, who are engaging in mining solely for the miner’s own personal purpose are “users” of virtual currency and not MSBs under FinCEN’s previous guidance. FinCEN found this to be the case even if the miner from time to time must convert the mined Bitcoins into real currency or another convertible virtual currency so long as the conversion is solely for the miner’s own purposes and not as a business service performed for the benefit of another. In FIN-2014-R002, FinCEN states that a company that develops its own software to purchase virtual currency for its own account and to resell the virtual currency at the company’s own discretion and based on the company’s own investment decisions also is not an MSB under FinCEN’s prior guidance.
This week, New York State Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky presided over a two-day hearing regarding emerging virtual currencies and the appropriate role of regulation. The hearing was the next step in an inquiry announced last August, and was held as the NY DFS considers developing a state license specific to virtual currency that would subject operators to state oversight. The panels featured the views of private investors, virtual currency firms, regulatory experts, and law enforcement officials. From our view inside the room, the most prominent, theme to emerge is that regulators will need to strike a balance between protecting the public interest—both from a consumer protection standpoint and with regard to the potential for criminal activity—while allowing emerging virtual currency technologies to develop, evolve, and thrive. Read more…
On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.
The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.
Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.
A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.
On November 14, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky issued a notice that the DFS intends to hold a public hearing on virtual currency regulation in New York City “in the coming months.” The hearing will focus on the interconnection between money transmission regulations and virtual currencies. Additionally, the hearing is expected to consider the need for and feasibility of a licensing regime specific to virtual currency transactions and activities (i.e. a “BitLicense”), which would include anti-money laundering and consumer protection requirements for licensed entities. The notice makes clear that no decisions on licensing or other regulation of virtual currencies has been made. Rather the hearing and license notice is part of the agency’s broader inquiry launched in August into the need for a regulatory framework specific to virtual currencies. With regard to potential licensing, the DFS would like stakeholders to consider: (i) what, if any, specific types of virtual currency transactions and activities should require a BitLicense; (ii) whether entities that are issued a BitLicense should be required to follow specifically tailored anti-money laundering or consumer protection guidelines; and (iii) whether entities that are issued a BitLicense should be required to follow specifically tailored regulatory examination requirements.
On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” to: (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds as well as the amount of funds the recipient will receive; and (ii) investigate consumer disputes and remedy errors. The rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.
The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations. Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.
Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.