On April 2-3, 2016, the third meeting of the Uniform Law Commission (ULC) Drafting Committee on the Regulation of Virtual Currencies (the “Committee”) was held in Chicago, Illinois. Dana Syracuse was in attendance as an official Observer along with Committee members, industry stakeholders, thought leaders, and government representatives. The Committee’s work in Chicago reflects comments received in response to drafts generated in previous meetings in Washington, D.C. last fall and Palo Alto in February. The Committee’s primary goal is to establish a common set of standards regulating certain types of virtual currency companies, including transmitters, custodians, and exchangers of virtual currency.
Subsequent to that meeting the Committee released an updated Draft Model Act reflecting all comments received to date. The current version of the Draft Model Act is divided into eight articles, as summarized below.
Article 1 (General Provisions): This Article includes definitions, which are important for laying out the scope of the Draft Model Act. Of significance is the revised definition of “control,” which states that “control means possession of sufficient virtual currency credentials or authority on a virtual currency network to execute unilaterally or prevent indefinitely virtual currency transactions, but does not control possessing, for a reasonably time-limited period, virtual currency credentials sufficient to prevent virtual currency transactions to provide a service such as an escrow function or transaction management.” This definition is significant because it arguably takes some of the more interesting features of the blockchain, such as escrow functions and some multi signature implementations, outside of licensure. Other significant definitions include custody, storage, transfer, virtual currency, and virtual currency business activity. This Article also contains exemptions for certain categories of institutions including government agencies, banks charted under state law or the jurisdiction of the United States, certain payment systems, those dealing in foreign exchange, those engaged in personal use of virtual currency, miners, and those who fail to meet a minimum threshold of monetary activity.
Article 2 (Licensure): This Article contains general requirements for licensing and any renewal. Significantly, this provision provides for reciprocity where one is “licensed in a jurisdiction pursuant to a law substantially similar” to the Draft Model Act. If the Draft Model Act is widely adopted this provision could potentially streamline the licensing process for those that fall within its jurisdiction. This article also contains a section on net worth and minimum capital requirements, which sets certain base net worth requirements for both continued operation and in a potential wind down scenario. The Draft Model Act also contains a section on permissible investments, which provides substantial latitude to the states so long as investments are highly liquid. It also states that potential licensees should be permitted to hold virtual currency in the type over which they have custody on behalf of others. This section also contains language providing for provisional registration where the volume of one’s activity fails to meet a certain threshold. The current draft does not state the actual threshold as this point is still being actively discussed.
Article 3 (Examinations; Reports; Records; Cooperation and Data-Sharing; Interim Reports; Change in Control; Merger and Acquisition; Advance Notice of Other Proposed Changes): This section governs:
- The state’s authority to conduct examinations
- A requirement that licensees maintain books and records for a period of three years
- Cooperation and data sharing among the states
- A requirement that licensees notify the state within 15 days of any material change to its business and 30 days prior to any change of control
- Prior written approval from the state prior to any merger or acquisition
This section is of great significance as inaccurate drafting could result in licensees needing to receive permission every time they make small changes to their business model. Moreover, a poorly drafted change of control provision could result in licensees needing state approval every time they receive significant investor funds.
Article 4 (Enforcement): This section governs suspension, revocation, and the power to appoint a receiver, cease and desist orders, hearings, consent orders, civil penalties, and the lack of a private right of action. Under this provision, licensees will be subject to the suspension or revocation of their licenses after a hearing, should it be found that the licensee was engaged in fraud or acts in an unsafe or unsound manner. Depending on the severity of their acts, licensees may also find themselves subject to wide ranging civil penalties.
Article 5 (Disclosures): This section contains a statement requiring licensees have a consumer protection policy and states the minimum consumer disclosures that licensees must make prior to establishing a relationship with a customer and at the end of each transaction. These disclosures include providing a fee schedule, stating whether the licensee is insured, a notice regarding the irrevocable nature of the transaction, sufficient information to file a complaint against the licensee, and pertinent information regarding the transaction. Significantly, this section also contains express language stating that virtual currency in the custody or control of the licensee is not the licensee’s property and shall not be subject to a claim of creditors of the licensee.
Article 6 (Anti-Money Laundering Responsibilities and Reports): The current proposed language is short and is modeled after the Uniform Money Services Act. It is bracketed for consideration and simply requires the filing of all reports required by federal authorities.
Article 7 (Other Responsibilities of Licensees and Provisional Registrants; Compliance Policy): This section requires that licensees establish a cybersecurity program, business continuity program, disaster recovery program, anti-fraud program, and anti-money laundering program. These programs must be adequate for the contemplated business and must be compatible with each other. Once the programs are established and approved by the appropriate authority or officers, the licensee must nominate an individual with adequate authority and experience to act as the program director. This section is of great significance as the cost of compliance is great and lawmakers must be cautious to not saddle small companies with outsized compliance functions that do not adequately reflect the risk presented.
Article 8 (Miscellaneous Provisions): The most significant section of this article deals with savings and transition provisions. Specifically, parties with money transmission licenses who are denied a virtual currency business license many not have that denial used as a basis to revoke their money transmission license.
The Committee’s efforts represent a real step forward toward a comprehensive uniform 50 state licensing scheme. The Committee’s stated goal is to produce a finished product in time for the ULC annual meeting in July 2016. Accordingly, interested parties wishing to have a voice in this important process should submit comments to the Committee as quickly as possible for consideration.TAGS: Dana Syracuse, Digital Insights and Trends, Uniform Law Comission, Virtual Currency