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  • DFPI addresses several MTA licensing exemptions

    Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:

    • Cryptocurrency and Agent of Payee Exemption. The redacted opinion letter reviewed whether MTA licensure is required for a company’s proposal to offer payment processing services that would enable merchants to receive payments in U.S. dollars from buyers of goods and services, automatically exchange these payments into dollar-denominated tokens on a blockchain network, and to store the tokens in a custodial digital wallet. DFPI currently does not require licensure for companies to receive U.S. dollars from a buyer for transfer to a merchant’s wallet as dollar tokens. DFPI explained that even if it did regulate this activity, the structure of the company’s payment processing services satisfies the requirements of the agent-of-payee exemption, wherein the company acts as the agent of the merchant pursuant to a preexisting written contract and the company’s receipt of payment satisfies the buyer’s obligation to the merchant for goods or services. DFPI further explained that while storing dollar tokens in a custodial digital wallet or making subsequent transfers out of a wallet do not currently require licensure under the MTA, DFPI may later determine the activities are subject to regulatory supervision.
    • Asset-Backed Tokens and Other Cryptocurrency. The redacted opinion letter asked DFPI whether an MTA license is required to (i) provide technical services to enable owners of metal to create digital assets representing interests in that metal; (ii) facilitate trading in these digital assets; or (iii) provide digital wallets to customers. The company intends to create a platform to facilitate the creation, sale, and trading of metal asset-backed tokens, whereby a customer purchases metal asset-backed tokens (ABTs) or currency tokens using fiat currency stored in an FBO account. Customers will not be allowed to transmit fiat currency to each other except to facilitate the purchase of ABTs or currency tokens, to receive proceeds from ABTs, or to pay platform fees. DFPI explained that while issuing stored value is generally considered money transmission, “[p]roviding technical services to assist in the creation of a [m]etal ABT and [i]ndustrial [t]okens and issuing a digital wallet holding the [m]etal ABT does not require licensure.” DFPI noted that the company is not itself issuing the ABT or industrial tokens. DFPI further concluded that the company does not need an MTA license to issue a digital wallet holding metal ATBs because the digital wallet is not stored value nor can the wallet’s contents be redeemed for money or monetary value or be used as payment for goods or services. DFPI separately indicated that a license is not currently required to facilitate the sale of ABTs, nor the issuance and sale of currency tokens. However, DFPI warned the company that the opinion only pertains to MTA, and that the company should be aware that metal ABTs and industrial tokens “could be considered a commodity and California Corporations Code section 29520 generally prohibits the sale of a commodity, unless an exception applies.”
    • Cryptocurrency-to-Precious Metals Dealer. The redacted opinion letter reviewed whether an online cryptocurrency-to-precious metals dealer, which accepts a variety of different cryptocurrencies in exchange for precious metals and also purchases precious metals from customers using different cryptocurrencies, requires MTA licensure. The company referenced a 2016 decision where DFPI determined that a company operating a software technology platform to facilitate the purchase and sale of gold was not engaged in money transmission, that gold and other precious metals were not payment instruments, that the transactions did not represent selling or issuing stored value, and that “the activity did not constitute receiving money for transmission because the sale or repurchase of gold was a bargained-for-exchange and did not involve transmission to a third party.” The company argued that purchasing and selling precious metals with cryptocurrency is similar and should not trigger MTA’s licensing requirement. DFPI agreed that the company’s business activities do not meet the definition of money transmission because precious metals are not payment instruments, and as such, purchasing and selling precious metals for cryptocurrency does not represent the sale or issuance of a payment instrument. Additionally, DFPI concluded that the company is not selling or issuing stored value, nor do the transactions “involve the receipt of money or monetary value for transmission within or outside the U.S.”
    • Virtual Currency Wallet. The redacted opinion letter asked whether an MTA license is required to operate a platform that will provide customers with an account to store and transfer virtual currencies. The company will also provide customers access to an exchange where they can facilitate the purchase or sale of virtual currencies in exchange for other virtual currencies. Fiat currency will not be used on the platform. DFPI stated that it does not currently require companies to obtain an MTA license to operate a platform that provides customers with an account to store and transfer virtual currencies. DFPI further stated that a license is not required to operate a platform that gives customers access to an exchange to purchase or sell virtual currencies in exchange for other virtual currencies.
    • Purchase of Cryptocurrency. The redacted opinion letter examined whether a company that offers clients a direct opportunity to buy cryptocurrency in exchange for fiat currency requires MTA licensure. The company explained, among other things, that there is no transmission of cryptocurrency to third parties and that it does not offer money transmission services. DFPI concluded that because the company’s activities are limited to directly selling cryptocurrency to clients, it “does not require an MTA license because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”

    DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions. Moreover, the letters do not relieve the companies from any FinCEN or federal regulatory obligations.

    Licensing Digital Assets State Issues DFPI California Money Transmission Act Money Service / Money Transmitters California Cryptocurrency Fintech

  • CSBS urges early NMLS licensing renewal

    On October 28, the Conference of State Bank Supervisors (CSBS) issued a reminder to individuals and businesses operating in the mortgage, money transmission, debt collection and consumer financial services industry that they should begin renewing their licenses in the Nationwide Multistate Licensing System (NMLS) on November 1 to avoid licensing delays. According to CSBS, early renewal is critical due to an increase in the number of licensees eligible for renewal. Renewal periods in most states run from November 1 to December 31, and licensees are encouraged to review state-specific renewal requirements early. State regulators may employ operational efficiencies to streamline the renewal process, CSBS stated, adding that it also plans to implement an online request process on November 1 for licensees to resolve and check in on NMLS access issues, including password reset/unlocking, changes in email addresses, and confirming renewal status. The online request process is available on the NMLS Call Center Information webpage, available here. As a reminder federally-registered mortgage loan originators and institutions are also required to renew their registrations through NMLS by December 31.

    Licensing CSBS NMLS Mortgages Money Service / Money Transmitters Debt Collection Consumer Finance

  • DFPI addresses MTA licensure requirements in new letters

    Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to bitcoin automated teller machines (ATMs) and kiosks and the Agent of Payee exemption.

    • Bitcoin ATM Kiosk. The redacted opinion letter explains that the sale and purchase of bitcoin through ATMs/kiosks described by the inquiring company is not activity that is subject to licensure under the MTA. DFPI states that the customer’s purchase of bitcoin directly from the company “does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” In each instance, the transaction would only be between the customer using the ATM/kiosk and the company, the bitcoin would be sent directly to the customer’s virtual currency wallet, no third parties are involved in the transmission, and the company does not hold digital wallets on behalf of customers. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion. Moreover, the letter does not relieve the company from any FinCEN or federal regulatory obligations.
    • Agent of Payee Exemption. The redacted opinion letter analyzes a proposed future service to be provided by the inquiring company and determines whether the service meets the agent of payee exemption from the MTA. The company and its global affiliates “provide a global, fully integrated suite of back-end service, including sales compliance management, fraud prevention, risk management, tax and regulatory fee calculation, billing optimization, and remittance services to manufacturers, merchants, and retailers” (collectively, “brands”) that want to sell or license products and services to shoppers. The company proposes a future service, which will allow brands to sell products directly to shoppers and transfer the products to the shoppers. The company will not take title to or purchase the products and will continue to provide its suite of back-end services including payment processing, tax and regulatory fees calculations, and refund processing. The company’s contracts with the brands appoint the company as the agent of the brands for facilitating product sales and receiving payments and funds from shoppers. Agreements will also be entered between the company and the shoppers with terms that state a shopper’s payment to the company is considered payment to the brand, which extinguishes the shopper’s payment liability. The company will accept funds for the sale of products on behalf of the brands, and at the conclusion of the sale, will settle the funds paid by the shoppers and remit sales taxes to the appropriate authorities. The company will be the entity responsible for paying and reporting taxes accrued by the sales to shoppers.

    DFPI states that the company will “receive[] money for transmission,” thus triggering the license requirement in the MTA, by receiving funds from the shoppers in the sales transactions. However, the company qualifies for the Agent of Payee exemption because the company will be the recipient of money from the shoppers as an agent of the brands pursuant to a written contract, and payments from the shoppers to the company as the agent will satisfy the shoppers’ payment obligation to the brands. DFPI further notes that refunds facilitated by the company on behalf of the brands will be a reversal of the original transactions with the shoppers, and therefore will not require licensure. Finally, DFPI notes that by contract, the company will be legally responsible for paying local sales taxes on transactions. According to the agreement, because the company will pay taxes on its own behalf, and will not be paying taxes owed by the shoppers, its tax payments will not constitute money transmission. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion.

    Licensing State Issues DFPI State Regulators California Money Transmission Act Virtual Currency Money Service / Money Transmitters Digital Assets

  • CA governor signs legislation on money transmission website requirements

    On October 4, the California governor signed AB 1320, which requires a licensee to supply a toll-free telephone number on its internet website so that a customer may contact the licensee for customer service issues and receive live customer assistance, in addition to displaying the days and times that the telephone line is operative. Among other things, the bill requires that a telephone number be included in the information contained in a receipt given to a customer at the time of a money transmission transaction. In addition, the bill specifies that the telephone line must be operative “at least 10 hours per day, Monday through Friday, excluding federal holidays.” The bill is effective July 1, 2022.

    Licensing State Issues California State Legislation Consumer Finance Money Service / Money Transmitters

  • CSBS responds to regulators’ request on emerging technologies

    Federal Issues

    On September 27, the Conference of State Bank Supervisors (CSBS) sent a letter to Ranking Member of the Senate Banking Committee Senator Pat Toomey (R-PA) detailing state bank regulators’ role in supervising money transmission and virtual currencies, in addition to recommending an activities-based approach to regulation. The letter is in response to a request by Senator Toomey for input on the regulation of financial technologies earlier this year. In Senator Toomey’s August 26 letter, he requested collection of public comments on proposed legislative language, among other things, to regulate emerging technologies. The Senator also requested that each proposal have a brief description that includes “how it will encourage the growth of cryptocurrency and blockchain technology” in the U.S. According to the letter from CSBS, state bank regulators are encouraging “Congress and federal regulators to focus on the activities at issue and making clarifications in existing laws, regulations, and interpretations,” and believe that “[a]n activities-based approach must be performed with collaboration from all stakeholders or risk one regulatory view overextending into areas where it would hurt innovation and consumers.” CSBS also points out that the Money Transmission Modernization Act established a regulatory baseline and represents a critical step in enhancing multistate harmonization in the money transmission industry. CSBS further discussed Networked Supervision, a strengthened collaboration which permits states to operate as a network. According to the letter, earlier this year, CSBS approved public priorities, which highlighted efforts that states will take to advance Networked Supervision  focused on money services businesses. CSBS states that these priorities “emphasize the states’ commitment to harmonization, collaboration, and innovation throughout the state regulatory system.”

    Federal Issues Digital Assets CSBS State Issues Supervision Money Service / Money Transmitters Cryptocurrency Fintech

  • CSBS releases Uniform Money Transmission Modernization Act

    On September 9, the Conference of State Bank Supervisors (CSBS) released the Uniform Money Transmission Modernization Act as part of states’ broader effort for modernizing the state financial regulatory system. The act, also referred to as the Money Transmitter Model Law, is intended to replace 50 sets of state-specific money transmitter laws and rules with a single set of nationwide standards and requirements designed by state and industry experts. According to CSBS, the law is a result of continuing discussion among state regulators and industry that began under CSBS’ “Vision 2020”, which convened a Fintech Industry Advisory Panel to determine pain points in the state system (previously covered by InfoBytes here). Among other things, the law: (i) “[p]rovides regulators with the tools needed to regulate money transmitters of all sizes, including those that operate globally or small businesses operating locally”; (ii) standardizes definitions, exemptions, the licensing process, the change in control process, and requirements regarding safety and soundness; (iii) enables multistate licensing and multi state supervision; and (iv) “[f]acilitates the development of technology and data analytics necessary to supervise at scale with local accountability.” CSBS also notes that the law will benefit customers of companies that offer digital wallets, prepaid cards, money orders and cash or virtual currency transmissions by establishing a common regulatory floor and standardized and risk-based requirements.  In addition to the law, CSBS released Money Transmitter Model Law FAQs and Fintech Industry Advisory Panel Recommendations.

    Licensing Money Service / Money Transmitters CSBS Fintech Vision 2020

  • DFPI addresses MTA licensing exemptions

    Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:

    • Agent of Payee – Fund Transfers in Connection with Real Estate Closing Transactions. The redacted opinion letter reviewed whether a company—licensed as a money transmitter in several states, including California, and registered with FinCEN as a money services business—is eligible for the agent-of-payee exemption under the MTA. The company proposes to “facilitate fund transfers in connection with real estate closing transactions” during which it “will be authorized to receive real estate closing funds on behalf of its customer (the seller of real estate).” The payment funds will first flow from the buyer of real estate to the company via the buyer’s lawyer or title company, and then from the company to the seller after the company converts the funds from U.S. dollars to another currency. By providing these services, the company, as the seller’s agent, will receive money from the buyer pursuant to a preexisting written contract between the company and the seller. DFPI concluded that “[t]o the extent these fund transfers take place in California or are with, to, or from persons located in California, [the company’s] services constitute “receiving money for transmission” because [the company] receives money from the buyer for transfer to the seller.” However, DFPI noted that a provision in the written contract, which appoints the company as the agent of the seller when the seller is located in California, allows the company’s services to satisfy the requirements of the agent-of-payee exemption in Financial Code section 2010, subdivision (l). The agent-of-payee exemption, DFPI stressed though, does not apply to sellers outside of California. 
    • Bitcoin ATM Kiosk. Two redacted opinion letters (see here and here) examined whether the sale and purchase of bitcoin through ATMs/kiosks described by the companies is subject to licensure under the MTA. In each instance, the transaction will only be between the consumer using the ATM/kiosk and the company, the transaction will be completed instantly without involving third parties, and any bitcoin sold will be provided from the company’s own inventory. Moreover, the letters state that the companies do not hold virtual currency on behalf of customers nor do they act in a fiduciary capacity. Because the companies’ activities are limited to selling bitcoin, DFPI determined that an MTA license is not required because the activities “do[] not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI reminded the companies that its determination is limited to the activities specified in the letters and does not relieve them from any FinCEN, federal, or state regulatory obligations.

    Licensing State Issues DFPI State Regulators California Money Transmission Act Virtual Currency Money Service / Money Transmitters Digital Assets

  • 5th Circuit holds global payment services company is not a “bank”

    Courts

    On June 1, the U.S. Court of Appeals for the Fifth Circuit determined that a “global payment services company” does not qualify as a bank under U.S. tax code, 26 U.S.C. § 581. According to the opinion, the company described its activities to the IRS in 2008 as “banking” while referring to its products as “financial services” despite making no meaningful changes to its business from prior years when it described itself as a “nondepository credit intermediation” business and its services as “money/wire transfers.” Because companies who claim bank status receive certain significant tax benefits, the company—which had invested billions of dollars in asset-backed securities, including mortgage-backed securities—deducted losses it incurred during the Great Recession against ordinary income. However, according to the opinion, nonbanks are only permitted “to deduct losses on securities to the extent they offset capital gains, which [the company] did not have during the relevant years.” The IRS disagreed with the company’s deductions, determined it was not a bank, and assessed tens of millions of dollars in tax deficiencies. The company unsuccessfully challenged the IRS in tax court, and, following a first appeal resulting in a remand, the tax court again concluded that the company was not a bank “because it neither accepts deposits nor makes loans.”

    On appeal, the 5th Circuit affirmed the tax court’s decision, stating that it only needed to address the “deposit” requirement and holding that because customers do not deposit money with the company for safekeeping “the most basic feature of a bank is missing.” The appellate court explained that therefore, under the tax code, the company was not entitled to deduct from its taxes “large losses it incurred in writing off mortgage-backed securities during the Great Recession.”

    Courts Appellate Fifth Circuit Money Service / Money Transmitters Payments Securities Non-Depository Institution

  • Counter ISIS Finance Group seeks to isolate ISIS from the international financial system

    Financial Crimes

    On May 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced the release of a joint statement by the Counter ISIS Finance Group (CIFG) of the Global Coalition to Defeat ISIS, which coordinates efforts to isolate the Islamic State of Iraq and Syria (ISIS) from the international financial system and eliminate revenue sources. The CIFG held its fourteenth meeting on May 17 to discuss ongoing efforts to combat ISIS financing worldwide, which coincided with sanctions against three individuals and one entity connected to ISIS for allegedly helping ISIS access the financial system in the Middle East through a network of international donors (covered by InfoBytes here).

    Among other things, the statement highlighted ISIS’s “reliance on regional money services businesses (MSBs) to transfer funds internationally,” its focus on funding “the release of its detained operatives and family members, and its extortion and looting of Syrian and Iraqi populations.” CIFG members and observers also noted the significance of “information-sharing, increased oversight over financial institutions, and coordinated disruptive actions to deter ISIS financial supporters from accessing the regional financial system.” CIFG members and observers were also briefed on ISIS supporters’ abuse of the charitable sector and madrassa networks in Asia, in addition to “discussions on how ISIS branches and networks in Africa utilize informal funds transfer mechanisms and participate in looting to support their extremist affairs.” Delegates also “presented case studies on security operations against Europe-based ISIS supporters who raise and transfer funds online, in some cases via virtual currencies.” The statement concludes: “The work of the CIFG is critical to the global fight to defeat ISIS in all corners of the world and we will continue to engage global partners to deprive ISIS of its sources of revenue and prevent it from accessing the international financial system. We will continue learning from each other’s successes and challenges, and empowering partners in the most vulnerable jurisdictions to strengthen their anti-money laundering and combating the financing of terrorism regimes.”

    Financial Crimes OFAC OFAC Designations Of Interest to Non-US Persons Department of Treasury Sanctions SDN List Money Service / Money Transmitters

  • CSBS seeks feedback on proposed MSB national licensing requirements

    On May 24, the Conference of State Bank Supervisors (CSBS) announced a request for feedback on proposed national licensing requirements for money service businesses (MSBs). According to CSBS President and CEO John W. Ryan, the purpose of the proposal is to set “a national standard that allows the state system to operate as a single network while retaining local accountability and local control.” The proposal is based on a set of nationwide requirements reviewed by a lead state agency. According to the CSBS, the remaining state-specific requirements would be limited to items not covered by the national standards. Key aspects of the proposal include an overview of MSB-specific requirements and how they apply to companies, key individuals (the new name for what was previously referred to as “control persons”), and business location, in addition to proposed changes to the license application process for the MSB industry. The national standards for MSBs include core requirements for all applicants in all industries and MSB industry-specific requirements. The new requirements are expected to notably streamline the licensing process as part of efforts by state regulators to expand uniformity in state regulation through a strategy called Networked Supervision, which incorporates technology, data, and uniform practices to strengthen regulation.

    Comments on the proposal must be submitted by July 23.

    Licensing State Issues CSBS Money Service / Money Transmitters

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