Money Transmitter Registration And Licensing: U.S. Cryptocurrency Entities

Recent Developments in the Cryptocurrency Economy

In addition to being a year of historic volatility and economic disruptions, 2020 accelerated developments of various trends and emerging technologies, including cryptocurrencies.

• PayPal announced it will allow its customers to use cryptocurrency holdings as a payment source for PayPal’s 26 million merchants globally. [1]
• Tech giants Google and Coinbase formed a partnership to allow Android and iOS users to link their crypto-based Coinbase cards with their Google Pay wallets. [2]
• Facebook announced plans to roll out its cryptocurrency Diem, and the social networking firm’s wallet, Novi, in 2021.[3]
• The Bank for International Settlements (BIS) issued a survey indicating 80% of the world’s central banks are working on some form of virtual currency. [4]
• Venezuela, Senegal, Tunisia, and the Marshall Islands are among the countries that have already created their national cryptocurrencies, with more nations looking to do the same. 
• The virtual currency, Bitcoin, tripled in value during 2020, growing steadily during the pandemic and hitting new all-time highs as 2021 began. [5]

Recent developments have shifted virtual currency technology from a disruptive trend to a mainstream idea, signaling a promising outlook for cryptocurrencies. Since their origination, virtual currencies have attracted much attention from the investing public, traditional financial institutions, and has challenged regulators with maintaining stability.

U.S. Regulatory Environment for Cryptocurrencies

Following the explosive rise of their price and popularity, cryptocurrencies have come under increased scrutiny from governments and regulatory bodies. Within the U.S. Federal government, the focus has been at the administrative and agency level including:

• Commodity Futures Trading Commission (CFTC),
• Securities and Exchange Commission (SEC),
• Federal Trade Commission (FTC),
• Internal Revenue Service (IRS),
• Office of the Comptroller of the Currency (OCC),
• Federal Reserve,
• Financial Crimes Enforcement Network (FinCEN).

Each regulator has its own stance on the regulation of cryptocurrency, or on the contrary, deregulation. Additionally, the different classifications of cryptocurrency by the regulators often makes it confusing. The SEC oversees digital assets that are considered securities; the CFTC treats virtual currency as a commodity, while the IRS treats it as property. This paper will do a deep dive into Anti-Money Laundering/Bank Secrecy Act (AML/BSA) and state licensing requirements for cryptocurrency entities.

FinCEN is the United States’ primary AML and Counter-Financing of Terrorism (CFT) regulator. FinCEN exercises its regulatory functions primarily under the BSA, and regulates MSBs.

The term MSB includes any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities:

1. Currency dealer or exchanger,
2. Check casher,
3. Issuer of traveler's checks, money orders or stored value,
4. Seller or redeemer of traveler's checks, money orders or stored value,
5. Money transmitter,
6. U.S. Postal Service.

On March 16, 2013, in response to questions and gray areas as to what constitutes MSBs, and in particular Money Transmitters, FinCEN issued Guidance FIN-2013-G001 – Application of FinCEN’s Regulations to Persons Administering, Exchanging or Using Virtual Currencies.  In this guidance, FinCEN declared that virtual currencies are the same as traditional currencies. MSBs that deal with      Convertible Virtual Currency (CVC) are defined as Money Transmitters and must register with FinCEN as well as comply with all relevant AML/CFT regulations. FinCEN also defined CVC as an unregulated virtual currency that has the ability to act as a replacement for real and legal currency. It has an equivalent value in fiat currency and can be exchanged for real money.

Each company mentioned earlier - PayPal, Google, Facebook and Coinbase – is considered a Money Transmitter, and must be in full compliance with the rules outlined below. This process can be demanding for cryptocurrency entities, both financially and operationally. The following are the major requirements with which MSBs, including Money Transmitters, must comply with under FinCEN in order to operate in the U.S.

Step 1: Registration of Money Services Business

The first step is to register with FinCEN as an MSB. This is accomplished by filing a “FinCEN Registration of Money Services Business” form through FinCEN’s BSA E-Filing System, and renewing the registration every two years.

Step 2: Establishing an AML Program

FinCEN requires MSBs to develop, implement and maintain an effective AML Compliance Program that is reasonably designed to prevent entities from being used to facilitate money laundering and the financing of terrorist activities. At a minimum, this program must:

• Incorporate written policies, procedures, and internal controls to assure ongoing compliance,
• Designate a person to ensure day-to-day compliance with the BSA requirements,
• Provide education and/or training of appropriate staff under the AML program, which specifically includes training to detect suspicious transactions,
• Provide for independent review to monitor and maintain an adequate program.

Step 3: Suspicious Activity Reports (SARs) and U.S. Sanctions Reporting

An MSB is obligated to report any activities of customers over $2,000 in value that it believes or knows to be suspicious. A transaction is considered “suspicious” if it:

• Involves funds from illegal activities;
• Is intended to hide ownership, nature, source, location, or control of funds from illegal activities,
• Is designed to evade any BSA requirement;
• Serves no business or lawful purpose (and the MSB is not aware of a reasonable explanation even after examining the available facts); or,
• Is facilitating criminal activity with the use of the MSB.

Additionally, an MSB must monitor that its customers are not on, or do not conduct transactions with entities and individuals on, the Specially Designated Nationals and Blocked Persons List maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).

Step 4: Money Transmitter State License

To operate as a Money Transmitter, an MSB must apply for a Money Transmitter License (MTL) for each state in which it intends to do business. While regulations at the Federal level are primarily designed to ensure financial security and prevent money laundering, the money transmission licensing at the state-level is directed towards protecting consumers, and ensuring safety, soundness, and solvency of the applicants.

There is no one-size-fits-all license to operate across the country. States have different approaches for defining and regulating virtual currencies. There is a lack of consistency among the state requirements for licensing, as well as their definition of “money” and whether it includes virtual currencies. Therefore, cryptocurrency entities might face a potentially expensive, and time-consuming, licensing process if they wish to operate across multiple states.

Nationwide Multistate Licensing System

During the licensing process, most states require Money Transmitters to upload their state license application and additional documents to the centralized government website - the Nationwide Multistate Licensing System (NMLS). Despite great variance among states, minimum requirements for a licensing application generally require the following:

• A license application form and license fees,
• Financial statements and business plan(s),
• AML compliance program,
• Surety bond or other form of security,
• Background checks,
• Minimum net worth threshold.

As of December 31, 2020, the heat map below shows the likelihood of cryptocurrency only entities being required to obtain Money Transmitter Licenses in each state.

Although a few states are pro-virtual currency, most are neutral towards the industry, or have adopted strict regulatory requirements. In some cases, states are unclear as to their positions on virtual currencies, and whether they require an MTL. Below are examples of states from each category, to further demonstrate the differences among the classifications. The full list of states can be found in the Appendix (available to download at the end of this article).

• It is most probable that cryptocurrency businesses will be required to obtain their MTLs from the states of Oregon, Vermont, and Connecticut.

It is probable that cryptocurrency businesses will be required to obtain their MTLs from the states of Florida and Kentucky.

It is improbable that cryptocurrency businesses will be required to obtain their MTLs from the states of Pennsylvania and Illinois.

Crypto entities are not required to obtain MTLs from Montana.

Alternatively, the New York State Department of Financial Services (NYSDFS), requires a BitLicense, as well as a Money Transmitter License, for companies engaging in “Virtual Currency Business Activities”. This practice is known to be one of the most rigorous licensing procedures in the country. In August 2020, Louisiana became the second state, after New York, to adopt a licensing regime specific for virtual currency businesses, requiring licensure of businesses conducting virtual currency transactions in Louisiana (also known as the Virtual Currency Business Act).

Wyoming stands out as the most cryptocurrency-friendly state in the U.S. In the past two years, the state has passed a total of 13 laws enabling and promoting virtual currencies, making the state a champion in providing crypto businesses with a clear and transparent regulatory environment.

In most cases, cryptocurrency entities must contact state agencies in the jurisdictions in which they wish to operate, in order to fully understand state licensing procedures and overall compliance needs. The Appendix (available to download at the end of this article) illustrates the requirements for MTLs in each state and Washington D.C., as of December 31, 2020.

Multistate MSB Licensing Agreement Program (MMLA)

The MMLA Program [6] is a regulatory initiative aimed at simplifying, improving and accelerating the state MSB licensing process.

This program only applies to MSBs seeking to apply for 5 or more state licenses over the next 12 months, and which can be accessed through the NMLS.

Prospective multistate applicants interested in applying through the MMLA Program must submit their “Intake Form” to the Washington Department of Financial Institutions, which currently serves as the lead state for the MMLA Program.

The MMLA Program consists of two phases:

• Phase 1: A Phase 1 state agency [7] conducts a Phase 1 review of a MSB’s application. If approved, the state agency certifies its review to other state agencies.
• Phase 2: Participating state agencies [8], after receiving an application, perform a Phase 2 review of the licensing request based on their state specific regulations. If all Phase 2 reviews are approved, the applicant will be granted a license from each state.

Step 5: Ongoing Compliance

Upon the registration of a cryptocurrency entity with FinCEN, and obtaining licenses in all states in which it operates, it is equally crucial that the entity routinely monitors requirements to ensure that compliance is maintained on both the Federal and state-levels. This is a rigorous commitment because state regulations can rapidly change, often without consultation or a timely warning. As a result, cryptocurrency companies must constantly monitor changes in regulations, including reviewing the FinCEN website as well as NMLS and other state-specific reporting portals.

U.S. financial institutions are required to stay up to date with all Federal and state rules and regulations, and non-compliance can result in significant consequences.

18 U.S.C. § 1960 prohibits the operation of an unlicensed money transmitting business and provides that a five-year prison sentence can attach to any such violation. A violation can occur if the MSB fails to register with FinCEN, or operates in a state without the appropriate Money Transmitter License.

Most recently, in October 2020, FinCEN issued a $60 million civil money penalty for Larry Dean Harmon, the founder and operator of Helix and Coin Ninja, which are companies serving as “mixers” or “tumblers” for cryptocurrencies. These companies were not registered as an MSB, did not implement or maintain an effective AML program, and failed to show any suspicious activity reporting.

In light of the serious legal and financial consequences of non-compliance with FinCEN, and individual state regulations, it is critical businesses complete the required steps for Money Transmitter registration and cryptocurrency licensing accurately, efficiently and on a timely basis.

With our extensive abilities in compliance including former U.S. regulators on staff, Sia Partners is ready to assist you with your FinCEN and individual state registrations, and help manage all your compliance needs as a cryptocurrency entity. Sia Partners remains current on all state licensing processes and requirements applicable to cryptocurrency businesses, to provide you with the best MTL strategy and compliance solutions aligned with your business plans.

Sources

[1] “PayPal Launches New Service Enabling Users to Buy, Hold and Sell Cryptocurrency.” PayPal Newsroom, Oct. 2020, https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service…

[2] “Coinbase Card Comes to Google Pay.” Finextra, 17 Mar. 2020, www.finextra.com/pressarticle/81835/coinbase-card-comes-to-google-pay.

[3] “Facebook Hopes the Cryptocurrency It Backs Will Launch in 2021, Top Exec Says.” CNBC, 8 Dec. 2020, www.cnbc.com/2020/12/08/facebook-hopes-the-cryptocurrency-diem-it-backs….

[4] “Rise of the central bank digital currencies: drivers, approaches and technologies” Bank for International Settlements, Aug. 2020, https://www.bis.org/publ/work880.pdf

[5] “Bitcoin Powers Through $30K. Will It Last?” Forbes, Forbes Magazine, 4 Jan. 2021, www.forbes.com/sites/simonmoore/2021/01/02/bitcoin-powers-through-30k-w….

[6] https://nationwidelicensingsystem.org/slr/Pages/Multistate-MSB-Licensin…

[7] As of January 20, 2021, MMLA Phase One states include: Connecticut, Georgia, Kansas, Maryland, North Carolina, North Dakota, Tennessee, Texas, Vermont, Washington, and Wyoming.

[8] As of January 20, 2021, MMLA Phase Two states include: California, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Nebraska, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, and Utah.