Money Transmission Laws

If you are forming a complementary currency, it is important to determine whether your project may be considered to be a “money transmitter” or “money services business,” and therefore subject to state and federal laws governing such businesses. The federal government and most states have enacted regulations to control entities that engage in the business of money transmission. Money transmission regulations typically serve the purpose of preventing financial crimes or protecting consumers who use money transmission services, or both. The definition of a money transmitter is so broad under federal and state laws that many organizations that administer virtual currencies – or even that manage transactions with print currencies – may come under the regulation of these laws.

Given the civil and criminal penalties that could be assessed if you fail to comply with the Bank Secrecy Act (BSA) or state money transmission laws, you should speak to a lawyer about your specific business plan to understand the liabilities involved.

Bank Secrecy Act

The federal government regulates money transmission pursuant to the Bank Secrecy Act (BSA), enacted in 1970, and administered by a bureau of the United States Treasury called the Financial Crimes Enforcement Network (FinCEN).  The BSA was passed to prevent money laundering, and requires money service businesses (MSBs) to report and record certain transactions. The purpose is to prevent people from concealing the receipt and possession of money in connection with crimes.  The regulations promulgated by FinCEN require that “money services businesses” register with FinCEN,1 keep information about transactions, report certain transactions, and implement certain procedures to prevent money laundering.

There have been several amendments to the BSA, including the most recent changes in 2001 with the passage of the USA PATRIOT Act. These amendments strengthened banking rules, increased communication with law enforcement, and expanded upon the recording and reporting requirements. “Specifically, the act requires financial institutions [including money transmitters] to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.” 2

The BSA is relevant to community currencies because it applies to Money Service Businesses (MSB). MSBs include:3

(1) A check casher;
(2) Currency dealing or exchange;
(3) Issuer of travelers’ checks, money orders or stored value;
(4) Seller of or redeemer of travelers’ checks, money orders or stored value;
(5) Money transmitter,
(6) U.S. Postal Service.

Certain community currencies, particularly if they are administered electronically, may be considered to be “money transmitters.” Activities that constitute money transmission include:

“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.”3

The definition of “by any means” includes “an electronic funds transfer network; or an informal value transfer system; or any other person engaged in the transfer of funds.” 5 Community currencies that operate virtually, using online credit systems for example, could potentially be defined as “an electronic funds transfer network” and subject to the BSA.

The regulations also specify categories of persons and entities who are not “money transmitter,” including:

(B) Acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller;
(F) Accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.” 6

We believe that further research is needed to understand the meaning of the two above exemptions, in particular.

Note that the regulations also exempt natural persons who engage in money service business on an infrequent basis and not for gain or profit.7

Importantly, a money transmitter is required to register with FinCEN regardless of the number or value of transactions it conducts. Unlike the other categories (1-4 and 6), which only require registration where a person conducts “more than $1000 in business with one person in one or more transactions on any one day,” money transmitters do not have an activity threshold and are required to comply with FinCEN “regardless of the amount of transfer activity.”8

The BSA and Virtual Currencies

FinCEN has recently issued guidance documents to help determine if and how virtual currencies are regulated under the BSA. These include:

We provide a summary and some interpretation here. However, it is important to acknowledge that may grey areas remain, even with the guidance issued by FinCEN.

State Money Transmission Laws

States without Money Transmission Laws

That we know of, South Carolina, Montana, and New Mexico do not have money transmission laws. Please check the accuracy of this, as this information may change faster than we can update it.

California Money Transmission Act (MTA)

What is California’s Money Transmission Act?

If you are starting a community currency, and you engage in activities defined as “money transmission,” you must comply with the California Money Transmission Act (MTA). California passed the MTA in 2010 with the purpose of “protecting the interests of persons in this state who use money transmission services.” 9  Because of the rapid technological advances being made in the payments industry, the State is concerned with consumer protection including cyber-attacks and privacy protection. Thus, the MTA seeks to “protect the interests of consumers of money transmission businesses . . . [and to] maintain public confidence in financial institutions.” 10

California’s MTA requires persons that transmit money to be licensed. Prior to its passage, California only regulated the transmission of money abroad with the purpose of preventing money laundering and fraud. The new MTA extended the licensing requirement to domestic transmission of money and included “stored value” providers in the definition, as well as expanded the purpose beyond protection against money laundering to consumer protection.11 With its passage, the regulatory hurdles and financial burdens for compliance in the payment industry greatly increased. As described below, in 2013, the Governor approved amendments to the MTA. 12  The MTA is administered by the Department of Business Oversight (DBO), which had not (as of this writing on June 4, 2014) issued any regulations interpreting the statute.

How to Comply with the MTA

If you determine that your organization is a money transmitter, before you begin filling out the application paperwork, you must schedule a pre-filing meeting with the Money Transmission Division staff to demonstrate your working knowledge of the MTA laws and present your proposed business plan. Next, you must submit a multi-paged application. The most significant consideration is the cost associated with licensing. Unlike the FinCEN registration, licensing is expensive in California and often precludes small and medium sized businesses from compliance. Some of the costs include:13

  • A nonrefundable $5,000 application fee;
  • A $2,500 annual licensing fee, plus various smaller filing fee expenses;
  • Your business must maintain a minimum net worth of $250,000 (unless the Commissioner requires a higher net worth);
  • Where your business issues or sells payment instrument securities on deposit or a bond of a surety company is required, no less than $500,000 or 50% of the average daily outstanding payment instrument; and
  • Where your business only receives money for transmission, no less than $250,000 in securities on deposit or a bond of surety company.

 California’s Broad Definition of Money Transmission

The MTA makes it a crime to operate a money transmission business without a license, stating it is unlawful for a person to “engage in the business of money transaction in this state, or advertise, solicit, or hold itself out as providing money transmission in this state, unless the person is licensed, exempt from licensure . . . or is an agent of a person licensed or exempt from licensure.”14 The definition of “money transmission” includes:

(1) Selling or issuing payment instruments;

(2) Selling or issuing stored value; and

(3) Receiving money for transmission.15

The statute goes on to define each of these terms, which includes virtually any type of payment – checks, drafts, money orders, or other instruments for transmission. There is a general frustration and confusion surrounding California’s MTA – its definitions have been criticized as vague, overbroad, and circular. In a magazine article, a spokesperson from the predecessor agency that administers the statute, the Department of Financial Institutions, tried to explain who is covered:

“Do you take funds/value from A and agree to pay them to B on behalf of A; and/or Do you take funds/value from A, store it so that A can make purchases from third parties or take cash out at a later date?”16

Thus, if the spokesperson’s interpretation is correct, if you simply take value from one person and agree to pay it to another, you may be a money transmitter under the MTA. Adjunct law faculty at Berkeley School of Law, Thomas P. Brown, testified before the Banking and Finance Committee of the California State Assembly and noted that the definition of “receiving money for transmission” when read literally, “appears to embrace every person, household, and company in California. Everyone receives money from some and delivers it to others.” 17 Accordingly, organizations administering complementary currencies should inquire carefully about whether the MTA applies to their activities.

Definition of Stored Value

Of particular relevance to community currencies, the statute defines “stored value” as:

 “Monetary value representing a claim against the issuer that is stored on an electronic or digital medium and evidenced by an electronic or digital record and that is intended and accepted for use as a means of redemption for money or monetary value or payment for goods and service.”18

 Stored value implies that where a person creates an instrument evidencing some value, and then issues it to a user, where the user has claim against the issuer for that value (whether by money or goods or services) the person would likely be considered a money transmitter. Under this logic, if a community currency is created that issues stored value, while also making it clear to absolve itself from any future claim to redeem that stored value, the organization might be able to argue that it is not a money transmitter. To be sure, issues of contract law should be considered to determine whether the user would have a claim against the issuer for the value.

 Closed Loop Systems Excluded from the Definition of Stored Value

research neededFurther, the definition of “stored value” excludes “any stored value that is only redeemable by the issuer for goods or services provided by the issuer or its affiliate, except to the extent required by applicable law to be redeemable in cash for its cash value.” A good example of this is a gift certificate, which is subject to separate rules and regulations.  This “closed loop” exception was confirmed by the Commissioner to not be considered stored value, and accordingly, is not money transmission. 19 However, the Opinion does not provide much clarity on what is being contemplated by closed loop a system other than the more traditional example of gift cards and gift certificates.  If a community currency organization is providing stored value in the form of “points” or electronic currency redeemable for the organization’s own goods or services or of its affiliates, then it might not be considered to be transmitting money. Would the members of a cooperatively-owned or democratically-governed community currency organization be considered “affiliates,” such that redemption of stored value only for goods and services from members in network would be considered to be a closed loop system, and therefore not subject to the MTA licensure requirements?  More research is needed on the definition of “affiliate,” and the question of whether the legal structure of the community currency organization makes a difference in this inquiry.

Commercial Barter Exchanges Do Not Need To Be Licensed Under The MTA

A recent letter from the California Department of Business Oversight (June 26, 2014) clarifies that commercial barter exchanges that act as a third-party clearinghouse for barter transactions between members do not meet definitional criteria to be considered “money transmitters” under current or proposed regulations, and therefore do not need to be licensed under the MTA. In response to an opinion request from the International Reciprocal Trade Association (IRTA) seeking to clarify this point, the DBO confirmed that commercial barter exchanges are not engaged in:

  1. “receiving money for transmission” as defined in Financial Code Section 2003(s), or
  2. “issuing or selling stored value” as defined in Financial Code Section 2003(v).

The DBO agreed with IRTA’s analysis that since a barter exchange merely serves as a record keeper of transaction between members, not as a “guarantor of a trade, or holder of collateral to guarantee the trade,” a barter exchange does not “receive” any trade credits as defined in Financial Code Section 2003(s). Furthermore,the DBO letter finds that a commercial barter exchange does not meet the definition of an “issuer” of stored value as defined by Financial Code Section 2003(k)20, because “a barter exchange is not liable to the members for the value of their trade credits, and it has not undertaken nor is it obligated to pay the trade credits.” And because a barter exchange is not an “issuer” of trade credits, “the trade credits do not represent a claim against the barter exchange. Thus, trade credits do not meet the definition of “stored value.”

Note that the letter makes no determination as to whether trade credits are considered money or monetary value.

Read IRTA’s opinion request here.

Read the California Department of Business Oversight’s response here.

Other Exemptions to the MTA

The MTA provides a list of statutorily exempt entities and also provides the Commissioner with the discretion to create additional exemptions by regulation or on a case-by-case basis, based on the “public interest.”21 The statutory exemptions are primarily for government, federally insured entities, and registered security broker-dealers. The recent amendments to the MTA also exempt payroll processors.

The discretionary exemption applies to applicants where the Commissioner finds an exemption to be “in the public interest.” Because the information about who has applied for and received exemptions in the past is not publicly available, there is no way to track which entities have been granted the discretionary exemption. In the meantime, it is worthwhile to continue to hone arguments about how many community currencies are “in the public interest” and therefore deserve an exemption.

2013 Amendments to the MTA

In fall of 2013, California adopted Assembly Bill 786 to make small amendments to the MTA.22 Specifically, these amendments (1) reduce minimum net worth requirements to $250,000, (2) allow the Commissioner to increase that net worth requirement based on his consideration of enumerated factors, (3) exempt payroll processors when making payments directly to employees, and (4) require the DBO to publish on the website written decisions, opinion letters, and formal written guidance.

Criticism of the MTA

Many critics feel that California’s MTA was created and lobbied for by big payments companies, including American Express, Western Union, and MoneyGram, in an effort to slow competitors emerging with the startup innovation in Silicon Valley. Many emerging companies, after growing to substantial size, have obtained the necessary licenses or partnered with other companies who have licenses, including: Square, Zynga, Facebook, Google, Paypal, and Venmo. 23 Both Uber and Airbnb have partnered with Venmo for licensing. 24 However, other companies have been forced out of business due to the inability to comply with California laws, and because they are unwilling to take the risk of noncompliance, the most public of which are FaceCash and ThinkLink.

Legal Challenges to the MTA

Aaron Greenspan, CEO of ThinkLink, has filed two lawsuits challenging California’s MTA. The first filed on November 14, 2011 against the State alleged that the MTA is unconstitutional because it 1) violates the Fourteenth Amendment because it facially denies vested right to use property in interstate commerce and unfairly discriminates against smaller and new entities and 2) violates the Commerce Clause by directly regulating interstate commerce by regulating money that may cross state lines and places excessive burdens on interstate commerce disproportionate to the local benefits.25 After several years the litigation is still ongoing, as of this writing. The most recent filing was to take judicial notice of the new MTA amendments.

The second lawsuit was filed more recently on May 7, 2013 against the numerous Silicon Valley money transmitter companies including Facebook, Airbnb, Dwolla, and Square. The complaint alleges that these companies willful disregard for compliance with the California MTA has damaged his company. Plaintiff argues that the companies have “decided to simply break the law while growing their businesses ‘under the radar,” knowing that the likelihood of being caught was low, and in many cases fully aware that their activities would violate both state and federal law.”26 The claims include unfair competition, unjust enrichment, Latham Act false advertising claims, and gross negligence.

Regulatory Challenge to the MTA

When statutes are passed, the administrating agencies are generally required to draft regulations establishing procedures so that the public understands how to comply. Under the California’s Administrative Procedure Act, the drafting of regulations must go through a public notice and comment process so that stakeholders can weigh in on the outcome, a critical component to a transparent democracy. Thus, if a person believes that an agency is enforcing regulations that have not gone through the public notice and comment process, you can petition the Office of Administrative Law (OAL) to challenge the alleged regulation is an “underground regulation.”  Recently, Thomas Brown who testified before the Banking and Finance Committee, California State Assembly concerning the amendment, has done just this.

The MTA was passed in 2010, directing authority to the Department of Financial Institutions (DFI) as the original administering agency. Following Governor Brown’s reorganization, the Department of Corporations and DFI were consolidated into the DBO. Currently, no agency has drafted regulations to interpret the MTA. Yet, the DBO is enforcing the law. On September 12, 2013 Thomas Brown, U.C. Berkeley School of Law lecturer and partner at a prominent law firm Paul Hastings, filed a petition for review of underground regulation being enforced by the DBO.27  Note that in late 2013, this petition was withdrawn when the DBO indicated it would adopt regulation soon. If the OAL had accepted the petition, it would have considered whether the actions and procedures that the DBO follow are considered “regulations” that should have been adopted through notice and comment.

 Comments on Proposed California MTA Rules

policy proposalIn April of 2014, the California Department of Business Oversight sought comments on potential amendments to the regulations that implement the California Money Transmission Act (MTA). Click here for comments submitted on April 26, 2014 by the Sustainable Economies Law Center (SELC). SELC made three types of recommendations:

  • Clarify the exemption process: The regulations should be amended to specify a clear process by which a person may apply to the Commissioner for a decision that the person is exempt from regulation under the MTA.
  • Create defined categories of exemption: The regulations should create additional categories of persons who are, by definition, exempt from the MTA.
  • Reduce application and compliance requirements for certain persons and entities: The regulations should create a category of person for whom application and compliance hurdles are much lower.

In July 2014, the California DBO issued a Notice of Rulemaking Action notifying the public of further proposals to amend, adopt, and repeal sections of Title 10 of the California Code of Regulations, the regulations related to implementation of the California Money Transmission Act. The proposed changes included two of SELC’s previous recommendations to 1) establish exemption from the MTA for public benefit nonprofit corporations with tax exemption under 501(c)(3) of the Internal Revenue Code, and 2) clarifying the administrative standard for determining additional categories of exemption from MTA regulations.

Also included in the Notice was an invitation to submit written comments relevant to the proposed regulatory action. Click here for further comments submitted to the DBO on September 8, 2014 by the Sustainable Economies Law Center. SELC recommended that the DBO:

  • Revise or issue a new Notice of Rulemaking Action to include analyses of the impacts on small businesses and the economy,
  • Clarify the definition of “money transmitter” to make clear what activities are not included,
  • Create exemptions from all or parts of the law for certain small businesses and organizations,
  • Specify a time period in which the Commissioner must respond to a letter requesting an order of exemption, and
  • Reduce application requirements for certain small-volume and medium-volume money transmitters.

If you would like to give input on the regulations, contact the DBO to request notice of regulatory action and to engage in pre-notice public discussions pursuant to Gov Code § 11346.45 as the matter is likely to be considered “large or complex.”

Massachusetts Money Transmission Laws

Foreign money transmission: Massachusetts requires licensing for businesses “receiving deposits of money for the purpose of transmitting the same or equivalents thereof to foreign countries.” (M.G.L. c. 169, § 1).

Check selling: In addition, Massachusetts requires licensing for  persons/entities in the “business of selling, issuing or registering checks or money orders.” (M.G.L. c. 167(F)(4))  This is the form used to register as a check seller (as of May 2014). Massachusetts uses the Nationwide Mortgage Licensing System to administer license applications for check sellers.

Overall, Massachusetts’ money transmission regulations apply to a more narrow set of activities and are easier to comply with than California’s money transmission regulations.

research neededHowever, one question to explore is: Can a local currency be interpreted to be a “check” if the users of the currency have the expectation that they can redeem it for dollars?  See this page for more information on the legal definition of “check.”

 

 

Articles and Other Resources on Money Transmission Laws

 

Consumer Financial Laws

Bureau of Consumer Financial Protection Regulation

The Bureau of Consumer Financial Protection (CFPB) has the authority to supervise any nonbank covered person that it “has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity . . . to respond . . . is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”28  More research is needed to determine the ways, if any, that the CFPB may regulate complementary currencies.

It appears that CFPB has recently proposed to regulate international money transfers, which could apply to currencies that are used across international borders. See the CFPB’s request for comments and proposed rule.

 

Banking Laws

Questions to Explore:

What is a bank?  When might a local currency be considered a bank?  How and when do banking regulations apply to local currencies?  Can an organization take deposits and make loans in local currency? What is the definition of a bank?  What is the definition of a deposit?

What local currencies are administered by credit unions?  How is it administered?

Info on Banks

Footnotes

  1. 31 U.S.C. 5330(a)(1)
  2. FinCEN’s Mandate from Congress, “Bank Secrecy Act” http://www.fincen.gov/statutes_regs/bsa/
  3. 31 CFR 1010.100(ff)
  4. 31 CFR 1010.100(ff)
  5. 31 C.F.R. § 1010.100(ff)(5)(i)(A)
  6. 31 CFR 1010.100(ff)(5)(ii)
  7. “For the purposes of this section, the term ‘money services business’ shall not include: (iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.” 31 CFR 1010.100(ff)(8)
  8. http://www.fincen.gov/financial_institutions/msb/pdf/FinCENfactsheet.pdf
  9. Cal. Fin. Code § 2002(a).
  10. Cal. Fin. Code § 2001(d).
  11. Cal. Fin. Code § 2003(o).
  12. Assembly Bill 786, Approved by Governor October 4, 2013
  13. Cal. Fin Code § 2037
  14. Cal. Fin. Code § 2030.
  15. Cal. Fin Code. § 2003(o).
  16. Owen Thomas, This Innovation-Killing California Law Could Get a Host of Startups in Money Trouble, (July 11, 2012)
  17. Banking and Finance testimony page 6-7
  18. Cal. Fin. Code § 2300(v).
  19. Department of Financial Institution, Commissioner Opinion No. 004 May 28, 2013
  20. “issuer” as it relates to stored values means “the entity that is liable to the holder of the stored value and has undertaken or is obligated to pay the stored value.”
  21. Cal. Fin. Code § 2010, 2011
  22. Video of hearing
  23.  See page 9 for Money Transmitter Applicants.
  24. Marc Lifsher and Jessica Guynn, “Silicon Valley start-ups decry state money transmission law” (April 2, 2013)
  25. See Northern District Court of California Case No. 11cv05496HRL Think Computer Corporation v. Robert Venchiarutti, et al. (November 14, 2011)
  26. See Northern District Court of California Case No. 5:2013cv02054 (May 6, 2013) ThinkLink v. Sequoia Capital Scout Fund II, LLC, et al:; see also “Aaron Greenspan sues most of Silicon Valley over money transfer laws
  27. Keith Paul Bishop, “Petition Questions Lack of MTA Regulations” (September 12, 2013)
  28. 12 U.S.C. 5514(a)(1)(C)