Blockchain
Cryptocurrency Laws and State Money Transmitter Regulation for Fintech Leaders
Aug 9, 2023
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InnReg
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6 min read
Contents
Cryptocurrency laws can be surprisingly complex because crypto businesses must also understand and adopt relevant money service business compliance rules. Moreover, money transmitter laws vary by state.
Therefore, cryptocurrency businesses need to pay close attention to cryptocurrency laws and licensing requirements in every state where they do business.
These money transmitter license requirements can apply not only where businesses are located but also where parties to crypto transactions live. Read through our guide to understand the most important considerations for your cryptocurrency law compliance approach.
See also:
Introduction: Why Money Transmission Is Relevant to Cryptocurrency Laws
Understanding the regulatory requirements for cryptocurrency transmission begins with a complex philosophical question: what is money? Regulatory definitions range widely, from a medium of exchange, whether authorized by the United States or a foreign government, to broader considerations of value, which include virtual currencies in today’s world. Moreover, each U.S. state has its own definition. Unfortunately, there is no uniform, one-size-fits-all cryptocurrency legislation for defining money and virtual currencies or licensing requirements.
Money service business compliance is also a slippery concept to pin down. Each state’s cryptocurrency law stipulates who is a money transmitter and whether they are operating within the state. Also, note that financial companies regulated by the SEC or the CFTC are exempt from transmitter registration.
The original purpose of transmission laws goes all the way back to Western Union offering transfer services instead of acting as a bank. Such laws help prevent money laundering and other wrongdoing.
Nowadays, a host of contemporary transmitters like MoneyGram and PayPal help customers move funds around the world, pay bills, and make purchases. From this perspective, cryptocurrency businesses are just the next generation of the same model and today’s cryptocurrency laws serve to regulate these modern mechanisms.
When State Money Service Business Compliance Regulations Apply to Crypto
The next challenge is defining transmission and examining the licensing requirements at state and federal levels. The patchwork of virtual currency regulation across the U.S. includes multiple approaches, from benign to strict. Some states do not even offer clear guidance on regulatory treatment. For example, Illinois, Kansas, and Massachusetts have a reasonably open-minded view, while New York and New Mexico are more rigid. Although federal regulators mainly focus on preventing money laundering, states have designed cryptocurrency laws to address particular concerns with issues like consumer protection.
The requirements tie to two questions:
Does your business have in-state customers or operations?
Are you selling or issuing coins, fungible tokens, or non-fungible tokens?
For example, in Wyoming, transmission may consist of selling or issuing payment instruments, storing value, or receiving monetary value by any means (traditional or crypto). However, it only applies to services for personal purposes. On the other hand, a similar New York law applies to any out-of-state business, but it covers services to New York businesses as well as individuals.
State and Federal Crypto Registration and Licensing Requirements
A money transmitter, including those dealing in cryptocurrency, must register at the federal level and obtain a money transmitter license separately in every jurisdiction in which it operates.
The federal element is relatively easy. Applicants can complete and file their registrations, along with an agent list, using the BSA E-filing System.
State registration can be much more complicated. Both the less regulated states (e.g., Wyoming) and the stricter states (e.g., New York) have specific requirements. However, it is the in-between, silent states that pose dilemmas. Crypto businesses face a significant risk of uncertainty because some states do not have a formal position on virtual currency. Instead, companies have to make their best assessment of requirements by analyzing court rulings instead of consulting regulations.
Cryptocurrency Law for State Licensing
Apart from money service business compliance rules, states may also enact separate cryptocurrency laws compelling virtual currency operators to obtain licenses to conduct business. Connecticut and Georgia are examples of two states that restrict unlicensed cryptocurrency transmission. Connecticut expressly forbids third parties to sell or store virtual currency without a license. Licensees in that state must also pay a surety bond, determined by the state banking commissioner.
NYDFS Cryptocurrency Law Requirements
Until recently, New York, with its rigorous BitLicense, was considered the most demanding state for crypto legislation and licensing. The stringent NYDFS crypto process often took years, typically cost hundreds of thousands of dollars to obtain, and required ongoing compliance implementation. As a result, few companies managed to obtain a license.
As of January 2022, the New York Department of Financial Services (NYDFS) had only granted 28 virtual currency licenses. However, NYDFS crypto regulators have recently reached an accommodation with a new licensing framework for virtual currency operations.
On June 24, 2020, the NYDFS proposed allowing virtual currency applicants to receive conditional licenses by partnering with pre-licensed entities in states like Wyoming. It issued the first such license in October 2020.
Compliance Obligations and Implications for Crypto Money Transmitters
Compliance obligations include the maintenance of a license in a specific state and examinations by state regulators. A crypto business itself usually is responsible for the cost of these investigations. In addition, companies must submit audited reports, attesting to background and character examinations for key executives, surety bonds, and information regarding corporate net worth and collateral.
Cryptocurrency law also applies on the federal side. Businesses must maintain an anti-money laundering program with recordkeeping. The Financial Crimes Enforcement Network (FinCEN) is a bureau of the Treasury Department, which collects and analyzes financial information to combat money laundering, terrorism, and other financial crimes.
In 2019, FinCEN punished an individual for the first time for violating money laundering regulations with crypto transactions. The bureau levied a $35,000 fine and prohibited future money transmission services. Attention crypto transmitters! Those penalties signal a stark warning in the early days of expanding cryptocurrency laws.
As with all money service business compliance, crypto companies must maintain the following compliance processes to guard against money laundering:
Written policies, procedures, and internal controls
An individual designated to ensure day-to-day compliance
Education and training of staff, with particular emphasis on detecting suspicious transactions
Independent review and monitoring of the program.
The Role of the Nationwide Multistate Licensing System (NMLS)
State compliance regulations can change swiftly, without prior consultation or warning. As a result, cryptocurrency companies should monitor the FinCEN website, the Nationwide Multistate Licensing System (NMLS), and other state portals.
The role of the NMLS, which does not grant licenses or define state laws, is purely to share information and help coordinate between businesses and state regulators.
During the license application process, money transmitters upload their applications and documents to the NMLS. Typically, documentation will consist of financial statements and business plans, the money laundering compliance program, surety or security bonds, background checks, and net worth details.
Within 15 days, money service businesses operating in the U.S. must also use the BSA eFiling online portal to file a currency transaction report for any cash transaction that exceeds $10,000 per person on any one day or any suspicious transaction for $2,000 or more.
See also:
Future Federal Crypto Legislation
New crypto tax reporting rules will take effect after December 31, 2023. A recipient of over $10,000 in crypto will have to collect, verify, and report to the IRS a sender’s personally identifiable information (PII) within 15 days.
In addition, a crypto transaction may trigger a Form 8300 filing, with valuation assessed as of the day of receipt. Failure to file may even result in fines or possible criminal liability. Brokers will also become subject to new reporting in January 2024 for their crypto-related activities. They will need to file IRS Form 1099-B reports, referencing their services in transferring digital assets.
Cryptocurrency businesses should seek rigorous legal guidance before offering services in any U.S. state. In addition, they should prepare to build a robust compliance program to meet federal and local requirements, seeking the expertise of compliance experts as relevant. With changes expected in cryptocurrency law at both national and state levels, monitoring regulatory announcements and seeking the advice of compliance professionals is essential.
If you have questions about compliance with federal and state money transmitter regulations, we’d be happy to support you.
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