Fintech Payments and Crypto Research Links

Links to just about everything in fintech

We have advised hundreds of clients across almost all business models new and old. This site is not legal advice; it is information only. You should obtain qualified legal advice prior to operating any money services business (MSB) or virtual currency business (VCB).

In addition to compliance information, we also want to jog your payments innovation creativity through our www.paymentsbusinessideas.com site.

We are proud to lead the preeminent open-source payments law practice where sharing information related to payments regulation is one of our core principles.  By way of example, here is what we learned at the most recent Emerging Payments conference in Washington, D.C.

The Atlas Payments Data Vault, a treasure trove of information on regulators, laws, banks, lawyers, consultants, MSBs, VCBs, surety bonders and everything else you are likely to need in getting your payments business going.  Adam was perhaps the first lawyer to accept Bitcoin as a form of payment.

Visite también nuestro latinoamericano blog de empresa de servicios financieros aquí: Centros Cambiarios y Transmisores de Dinero.

U.S. Federal Registration of Money Services Businesses (MSB) with FinCEN

With few exceptions, each money services business (MSB) must register with the Department of the Treasury. Virtual currency businesses (VCB) may also be MSBs requiring registration. Note that failure to register when required to do so or obtain necessary state licensed, can lead to jail time. A person that is an MSB solely because that person serves as an agent of another MSB is not required to register. US Federal registration is done through the Financial Crimes Enforcement Network of the United States Department of the Treasury (FinCEN).  Registering with FinCEN is very easy, takes about 20 minutes and can be done through the BSA E-Filing System, described below.Here is the contact information for FinCEN:

FinCENTel: 800-767-2825Email: frc@fincen.gov

FinCEN BSA E-Filing System
Entities that are registered with FinCEN are required to maintain and AML program and make filings with FincEN under the US Bank Secrecy Act. Such filings must be electronic and made through the BSA E-Filing System.  If you are an MSB, you must register with FinCEN.

New to FinCEN? 

If you are an MSB (to be confirmed by advice from a lawyer) after registering a supervisory user, through BSA E-Filing System, you will have to complete a Form RMSB – Form 107. Its hard to find that form on the FinCEN website, so we have provided one here so you can actually read it before completing it online.

The online version of FinCEN’s Form 107 is not the same as the one cited above. Here are instructions on how to complete the ‘real’ online version of Form 107.

Other reports that must be filed through this system include, but are not limited to: 

  • Currency Transaction Report (FinCEN Form 104) (CTR)
  • Designation of Exempt Person (FinCEN Form 110)
  • Suspicious Activity Report (Form TD F 90-22.47) (SAR)
  • Suspicious Activity Report by the Securities and Futures Industries (FinCEN Form 101)
  • Suspicious Activity Report by Money Services Business (FinCEN Form 109, formerly 90-22.56)
  • Suspicious Activity Report by Casinos and Card Clubs (FinCEN Form 102)
  • Currency Transaction Report by Casinos (FinCEN Form 103, formerly 8362)
  • Registration of Money Services Business (FinCEN Form 107)
  • Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1)

Discussion of these forms are available here.

Bank Secrecy Act (BSA)
Money services businesses (MSBs) and other financial institutions serving the United States are regulated, in part, by the Federal Bank Secrecy Act (BSA) and its regulations, Chapter X–Financial Crimes Enforcement Network of the United States Department of the TreasuryThe Federal Deposit Insurance Corporation (FDIC), maintains a useful set of links to 31 CFR Chapter X. Here is another set of the same US Federal regulations.
FinCEN Rulings and Guidance

FinCEN has a collection of published administrative rulings that give us an understanding of some of the rules concerning which kinds of businesses should and which need not register as MSBs with FinCEN.

Our firm has published a summary of most of FinCEN’s guidance if you are interested.

Bureau of Consumer Financial Protection (BCFP) 
(f.k.a. CFPB)
The BCFPis a U.S. government agency that makes sure banks, lenders, and other financial companies treats consumers fairly.
The BCFP requires that as of February 7, 2013, all providers of international remittances issue to the senders thereof receipts that contain certain prescribed information.

Payments businesses should monitor BCFP regulation as it may creep into areas of payments that were previously unregulated.

State MSB Licensing

Here is a map with basic information for all state MSB regulators.

Most states require money services businesses operating within their territory to be licensed with the state banking department.  Note that many states also require registration of foreign MSBs that transact with their residents.  For example, money transmitters with no physical presence in New York that transact with residents of New York must be licensed in the State of New York.
The Nationwide Mortgage Licensing System (NMLS) offers a portal through which many states are cooperating to provide a single portal through which applications for money services businesses may be made.  Here is the way to find which states participate in the NMLS system for money transmitter applications.

Adam Atlas Attorney at Law maintains a 50-state database on the rules applicable in each state related to MSBs.  State regulators remain the arbiters of which entities may be licensed within the state. Below are links to the various state regulators:

State Regulators and other useful state information

Alabama
Alaska
Arizona
Arkansas
CaliforniaGreat memo on current CA issuesCA Licensees or Atlas List, there are only about 86. Note that the California DBO site invites potential applicants to arrange for a pre-filing interview. The site is silent on the fact that prior to that interview, the proposed applicant must first submit answers for certain pre-file questions, that are not posted on the site. So, as a first step in California, remember to ask for the latest version of the ‘pre-file questions’ otherwise it will not likely be possible to schedule the pre-filing meeting.
Colorado
Connecticut
Delaware
FloridaFL Licensees
Georgia
Hawaii
Idaho – Apply through NMLSVirtual currency interpretation in Idaho
IllinoisIL Licensees
Indiana
Iowa
Kansas – Apply through NMLS (soon, not live as of April 2014)
Kentucky – Apply through NMLS
Louisiana
Maine
Maryland – Apply through NMLSMD Licensees
MassachusettsMemo Re Foreign Correspondents
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire – Apply through NMLS
New JerseyNJ Licensees
New Mexico
New YorkNY RegsNY Licensees (DFS) or Atlas List, there are only about 86
North Carolina
North Dakota Apply through NMLS
Ohio
Oklahoma – Apply through NMLS
Oregon – OR Licensees
PennsylvaniaPA Guidance Letters – Apply through NMLS
Rhode Island – Apply through NMLS
South Carolina – yes you need a license here now.
South Dakota
TennesseeTN Licensees
TexasTX LicenseesTX Law and GuidanceTX DOB on Bitcoin
Utah
Vermont – Apply through NMLS
Virginia
Washington – Apply through NMLS
West Virginia
Wisconsin
Wyoming

MSB Status

MSBStatus.com is the best source for comprehensive MSB status of any U.S. entity. Alternatively, you can search NMLS and about 25 other sites one by one to fetch the MSB licensure status of an entity. 

MSBStatus.com reports include data from:

  • FinCEN
  • NMLS
  • CFPB
  • FACTA
  • US Safe Harbor
  • FINTRAC and other sources.

Payment Processor Exemption to MSB Status. If you are wondering about the difference between a payment processor and a money transmitter, please see this chart we did to help explain,  The payment processor exemption does not work in all states and does not work for all processor models. 

MSB and AML Compliance Associations
U.S.

Conference of State Bank Supervisors (CSBS) – founded in 1902Money Transmitter Regulators Association (MTRA)
Multi-State MSB Examination Taskforce (MMET)
The National Money Transmitters Association (NMTA)
Digital Asset Transfer Authority (DATA)
The Association of Money Services Compliance Officers (AMSCO)
Association of Certified Anti-Money-Laundering Specialists (ACAMS)
The Association of Certified Financial Crime Specialists (ACFCS)
Money Services Business Association (MSBA) – founded in 2015

International
European Payments Council
Association of UK Payment Institutions
International Payments Framework Association
Global Payments Forum, a NACHA International Payment Forum
International Compliance Association
International Association of Money Transmitter Networks
Canadian MSB Association
ABRACAM Brazil
International Fund for Agricultural Development (IFAD) – UN

Am I an MSB?

Your MSB status or VCB status is a matter of Federal and State law, and should be ascertained by advice from a qualified lawyer.

We maintain www.paymentsbusinessideas.com that we hope will jog your creativity and see some models that are MSBs and some that are not.

Marketplaces (many of which we list here), being more the norm and less disruptive, are asking themselves if they are MSBs or not on account of their handling money for their participants. Depending on how they are structured, the result will be MSB status or not.

Is an E-Wallet a Money Transmitter?
Most likely, yes.

FinCEN has finally published guidance on this very issue.

This is the single most frequently asked question in MSB compliance today.  Some e-wallets are categorized as providers of prepaid access within the meaning of the FinCEN Prepaid Access Final Rule, which is summarized here, while others are registered with FinCEN as money transmitters. The definitive answer to this question lies in the applicable federal and state law in each of the states in which you propose to operate your e-wallet. That said, the ability to: (i) load real currency into an e-wallet; (ii) maintain a balance; (iii) transfer e-currency between users; and (iv) unload e-currency and convert it to real currency, together, would most often fall within what state regulators would characterize as a prepaid access provider or money transmitter.  Given that the definition of a prepaid access provider is relatively new (2011), we have only seen a handful of entities claim that that is their primary activity, most of which are classic prepaid branded card issuers or sellers.

We recently published an article on the MSB status of e-wallets in the E-Finance and e-Payments Law and Policy.

Lists of MSBs, VCBs and Other Payments Businesses
Entities Registered with FinCEN

Atlas list of money transmitters licensed in New York and California, there are only about 87 in each of those two states.

There are about 38,859 MSBs registered with FinCEN, but that number includes many duplicate registrations for multiple entities each with common ownership or a common brand.  Below are examples of entities that have had multiple money transmitter licenses. For fun, we provide links to the MSB license disclosure for each entity:

FinCEN maintains a list of all US registered MSBs, that can be searched here.

P2P Payment Platforms

Here are a sampling of some of the many P2P payment platforms:

Payfacs / PSPs / TPPs That Became MSBs

The Payment Facilitator or Payment Services Provider were created by the payment networks, like Visa and MasterCard, to expedite the boarding of smaller merchants.  Payfacs contract with the merchant (payee) not so much with the customer (payer). The model, however, proves to be of limited value to some who want to offer customers more flexibility. We have therefore seen an evolution of payfacs into MSBs in the following examples:

Payments Business Ideas

The best place for a survey of new payments ideas is www.paymentsbusinessideas.com. A lot of models have already been thought of. That said, payments businesses usually succeed on sales and marketing, not on the idea alone. Of a hundred people with the same idea, perhaps only one will make it profitable.Crypto / Virtual Currencies / Digital Currencies

Virtual currency business (VCB) is the term used way back in July of 2014 by the NY DFS to describe businesses operating in the virtual currency space, and it is a term that we believe is likely to stick.  A VCB may or may not be an MSB, depending on which law you are interpreting.

Banks, investors and consumers are not wasting their time in learning about virtual currencies. Some believe that virtual currency will completely displace traditional ‘real currency’ issued by sovereign states. While that scenario is far flung for now, it is not hard to imagine a near future where a substantial portion of world economic activity takes place through virtual currency. Communication and commerce are international and instantaneous, banking is not. The contemporary disconnect between the reality of peoples personal and consumer lives, that are essentially instantaneous, and their banking activity that is subject to delays and fees that bear no connection to the cost of the underling service (transfer of digital value) sets the scene for virtual currency to now take deep root in the economy of the world.

Virtual Currency Toolbox

Everything you wanted to know but couldn’t didn’t want to waste time finding:

Virtual CurrenciesVirtual Currency WalletsVirtual Currency Exchanges

Our firm also has a subscription service through which clients can obtain an MSB risk assessment of various crypto models in all 50 states, updated monthly.

Note that virtual currencies, such as Bitcoin have also been associated with substantial and very serious criminal activity, as in the case of SilkRoad, accessible through the anonymous browser Toras reported in the New York Times. The most popular virtual currency is Bitcoin.

Bitcoin

Bitcoin (比特币) is the leading virtual currency and is thought to be invented by a mysterious Japanese mathematician by the name of Satoshi Nakamoto. Bitcoin is a virtual currency that is more or less anonymous and de-coupled from traditional banking.  Bitcoin is created by using CPU time and energy.  The algorithm by which it exists dictates that there shall be no more than 21 million Bitcoin  when all mining is complete – which has not yet occurred.  This makes some believe that it is destined for a monumental and colossal leap in value as the supply comes to a definite halt. Bitcoin operates, de facto, largely in the unlicensed arena. Here is a site that helps explain Bitcoin. The Bitcoin marketplace is interesting from an academic perspective, because it serves as a nexus for interesting debates between libertarians, anti-statists, statists, privacy advocates and others.  The efficiency of Bitcoin, being a means for the free and secure exchange of value, poses challenging questions for (a) traditional banking that offers the same service, but at enormously higher costs; and (b) law enforcement that has a legitimate right to oversee suspicious activity in the financial system.  There are competing visions for the future of Bitcoin. Some see it replacing ordinary currency, others see it as simply another currency destined to be mined for fees interest etc… like existing currencies. Like all forms of exchange, Bitcoin has value only because people believe that it does.

Watch Bitcoin traded live and in real time here.

Bitcoin Investment Vehicles

Bitcoin Payment Processors
A Bitcoin payment processor often allows a merchant’s customer to make payment in Bitcoin and then settles to the merchant in Bitcoin or real currency, such as USD.

Bitcoin Vending Machines

Bitcoin Charts and current exchange rate

Bitcoin ‘Malls’ and Directories

 ICO
Initial Coin Offering (ICO), Initial Token Offering (OTP) are like an IPO, but without the regulatory compliance of securities laws. It’s very easy to raise money with an ICO and there are hundreds of ICOs. The legality of a given ICO depends on a number of factors including whether the buyers expect a return on their investment.

Is an ICO legal? Check our our ICO legal hit or miss list here to see how some of them are doing.

Many ICOs are either securities or MSBs providing prepaid access. In order to escape one of those two classifications, quite a lot of legal thought needs to go into the piece.

Neobanks

Neobanks are small banks, bank-like services or resellers of limited bank services which present an alternative to traditional big-bank banking with annoying fees, like overdraft fees etc… Some examples of neobanking players include:

Chime
Empower
Simple
Moven
Monzo
Revolut
Aspiration
Robinhood

Is a neo-bank a regular bank with a better UI or something else entirely? Time will tell.  Note that use of the term ‘bank’ or ‘banking’ is legally restricted to entities that are actually banks, so tread lightly with those terms.
Office of the Comptroller of Currency (OCC)

The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury.

Banks that open bank accounts for MSBs have to prove to the OCC that they have adequate AML / CIP / KYC and risk mitigation programs in place to provide banking services to MSBs.  The OCC’s Bank Supervision Process Comptroller’s

OCC Special Purpose National Bank Charters for Fintech Companies

Why become an MSB with the need to be licensed in 49 states when you can get a single special purpose national bank charter? This is the opportunity presented by the Office of the Comptroller of Currency on December 2, 2106.

For full instructions on how to get one of these charters, see the Comptroller’s Licensing Manual.

The basic requirements for a special purpose national bank charter for a fintech company are:

  • National Bank Act Charter
  • Robust, well-developed business plan
  • Good governance structure
  • Capital commensurate with the risk and complexity of the proposed activities (including on- and off-balance sheet activities). Because these banks do not make loans or rely on deposit funding, the OCC typically requires them to hold a specific minimum amount of capital, which often exceeds the capital requirements for other types of banks.
  • Liquidity. In assessing the liquidity position of a proposed bank, the OCC considers a proposed bank’s access to funds as well as its cost of funding. Some key areas of consideration include projected funding sources, needs, and costs; net cash flow and liquid asset positions; projected borrowing capacity; highly liquid asset and collateral positions (including the eligibility and marketability of such assets under a variety of market environments); requirements for unfunded commitments; and the adequacy of contingency funding plans.
  • Compliance Risk Management. 
  • Financial Inclusion. These principles include “encouraging” the national bank “to provide fair access to financial services by helping to meet the credit needs of its entire community” and “promoting fair treatment of customers including efficiency and better service.”
  • Revery and exit strategies.
  • Internal audit systems.

The OCC is welcoming comments on the proposal until January 15, 2017 at specialpurposecharter@occ.treas.gov.

Lots of discussion of this OCC proposal from American BankerWSJBloomberg and NYT, December 2, 2016.
Cyber Security Program (CSP)

As financial institutions and gateways to the financial infrastructure, MSBs are expected to make appropriate provisions for cyber security. Most U.S. states will wish to see an MSB taking security seriously, but some have gone further and mandated that the MSB have a Cyber Security Program that meets certain prescribed criteria.

New York DFS on Cyber Security Program

New York is the first state in the U.S. to adopt an explicit requirement for MSBs to have a Cyber Security Program:
March 1, 2017New York MSBs must have a Cyber Security Program.  
Getting a Bank Account for an MSB
Once licensed, the hardest task for a new MSB is to obtain a commercial bank account.

If a bank refuses to bank you because you are an MSB, show them this guidance from FinCEN saying that banks are not supposed to reject clients just because they are MSBs.

We believe that  the following banks have, on some occasions, provided banking services to MSBs, you’ll have to ask them to find out for sure.

  • Key Bank
  • Mellon Trust of New England
  • Sterling Savings Bank
  • US Bank
  • Wells Fargo Bank
  • TwinStar Credit Union
  • Bank of America
  • Mountain Pacific Bank
  • West Coast Bank
  • South Sound Bank

These banks have attended the National Money Transmitters Association events and they are familiar with transmitters:

We do not have any referral relationships with any banks, but if you call the above banks, please mention where you learned about them.

Marijuana Payments Law

It is a U.S. federal crime to process payments in the U.S. related to marijuana because marijuana is restricted under the U.S. Federal Controlled Substances Act, at Schedule I. Our firm does not advise on marijuana payments law.

FinCEN has published guidance setting out the specific kinds of due diligence and risk assessments required of financial institutions that wish to service marijuana businesses.  This is just the beginning of an evolving body of law that navigates between Federal and state law related to marijuana.

Marijuana Payments in the News

US State Sales Tax for Online Sales
It has become common for US merchants and marketplaces that service US buyers and sellers to collect US state sales tax and remit it to US state departments of revenue.  There have been various efforts in the U.S. Congress to adopt national legislation on this topic, but none are yet in effect. Retailers and marketplaces, however, are not waiting as the penalties for non-compliance can be very substantial.

A leading, automatic and free solution for this issue is TaxCloud.
International Money Services Business Regulations
Some of the key national regulators are listed here.
Mexico and Latin America

Visite también nuestro latinoamericano blog de empresa de servicios financieros aquí: Centros Cambiarios y Transmisores de Dinero.

The Federal Mexican AML agency is Unidad de Inteligencia Financiera(UIF).
Canada Federal FINTRAC MSB Registration

 Handbook sets out these requirements. All OCC enforcement actions can be obtained here.  
The regulatory framework for MSBs (money services businesses) in Canada is much simpler than in the United States. With some exceptions, there are few provincial licensing requirements. There is, however, a Federal agency called Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) that requires registration of certain MSBs.

Financial Consumer Agency of Canada
The FCAC (like its US counterpart, the CFPB) was created to bolster regulation of consumer financial services, but its mandate has gone further into merchant-facing credit card payment processing, in part through the Code of Conduct for the Credit and Debit Card Industry in Canada.
Payments businesses operating in Canada, should monitor CFPB regulations as they may creep into previously unregulated payments markets.

Canadian Provincial MSB Licensing
In Canada, government has effectively outsourced protection of the financial system to banks. It is relatively easy to become registered with FINTRAC and licensed in the one Canadian province that requires MSB licensing, Quebec.  Opening a bank account for an MSB, which is necessary for its operation, is however, very difficult. Be weary of Canadian banks that put MSBs through long account-opening procedures, sometimes lasting as much as a year, only to close the account because it is for an MSB.

FINTRAC

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is the Canadian equivalent of U.S. FinCEN.

FINTAC has published some very handy guidance here.

Quebec publishes regulations on the licensing of virtual currency exchanges.

Quebec has become the first the ten Canadian provinces to enact MSB licensing requirements.  As of January 1, 2013, all Quebec MSBs will require a license from the L’Autorité des marchés financiers – Quebec MSB Regulator to operate an MSB in Quebec. Other Canadian provinces have yet to enact similar legislation.

Virtual Currency in Canada

For the moment, it appears that FINTRAC has decided that Bitcoin is not real currency, but don’t that this as legal advice, get a written confirmation from FINTRAC before operating in Canada.  Note that operating a Bitcoin exchange in Canada that services US residents would require compliance with US law.

EU

In order to increase efficiency in the licensing of financial services in the European Union, the European Commission has enacted directives concerning financial services within the EU.  For example, the EU E-Money Directive (2009/110/EV) (EMD)  provides for the licensing of electronic money institutions and issuers which licenses are recognized throughout the EU.

EU FAQ concerning AML.

SEPA B2B Mandate Forms.  These are the EU equivalent of a business ACH consent. They aren’t specific to payment institutions, but they are new in 2014 and frequently asked for.

United Kingdom

The Financial Conduct Authority (FCA) is the competent authority for most aspects of money services businesses in the UK under the Payment Services Regulations (PSR) of the Payment Services Directive (PSD). The UK implemented the PSD through the Payment Services Regulations 2009 (PSRs), which came into effect on 1 November 2009.

The FCA is creating the Professional Body Anti-Money Laundering Supervision (OPBAS) to bring coherence to AML rules.

Search entities registered with the FCA here.

The following are some key categories of entities of particular interest in the UK:

Rather than a surety bond (as required in US states) the FSA requires that the payments business have a certain minimum capitalization:

  • €20,000: capital required for authorization as a money transmitter;
  • €50,000: capital required for authorization as a paperless money transmitter; and
  • €125,000: capital required for authorization as another payment service.

Application for registration in the U.K. is pursuant to the The Payment Services Regulations 2009.
Singapore

Singapore must be included in any serious discussion of international payments. As Southeast Asia’s banking and commercial hub, Singapore has specifically catered to FinTech.

The Singapore Stored Value Facility (SVF) regulated by the Monetary Authority of Singapore, can be used as the banking host for an international e-wallet. Here are some examples of Singapore Stored Value Facilities:
Paypal Singapore Stored Value Facility
Ripple Singapore Stored Value Facility
Citibank Singapore Stored Value Facility
SmoovPay Singapore Stored Value Facility
Paylink Singapore Stored Value Facility

The Singapore SVF is astonishingly easy to setup thanks to the efficacy of the MAS. That said, if you have an SVF and take on customers in the US, EU, Canada or other countries that license MSBs, make sure the entity is compliant with the local MSB / payment institution licensing and registration requirements. Getting ewallet banking in one jurisdiction does not make compliance with AML laws in other jurisdictions disappear.

(p.s. As an alumnus of the National University of Singapore, it’s nice to see Singapore leading in supporting Fintech innovation.)

France

Here is some analysis of the various payment systems in France that we have published.

Here is an article in a French law journal about Adam Atlas being one of the first lawyers who accepts Bitcoin.
Brazil

Money transmission in Brazil is regulated by Conselho de Controle de Atividades Financeiras – Council for Financial Activities Control (COAF) which has promulgated an interesting COAF – RESOLUTION Nº 006, OF JULY 2, 1999, requiring independent sales organizations to comply with record-keeping and reporting requirements of MSBs within Brazil. (Ironically, the COAF site does not have a trusted internet security certificate.)

China (中国汇款,支付服务) (Money Transfer, Payment Service in China)

On 18 March 2018, China’s lawmaker, the National People’s Congress approved a reform plan for
the institutional organizations of the State Council.  According to the Reform, the regulator of banking industries and the regulator of insurance industry will be merged into China Banking and Insurance Regulatory Commission (CBIRC).

Key financial regulators in China are:

Financial Stability and Development Commission (FSDC) – reform and development
Peoples Bank of China (PBOC) – monetary policy, regulation of financial industry
China Banking and Insurance Regulatory Commission (CBIRC) – market supervision, risk
China Securities Regulatory Commission (CSRC) – securities regulation

The China Banking Regulatory Commission (CBRC) 中国银监会 used to regulate banks in China.
One of the challenges in dealing with money transmission in and out of China (中国) are the strict
restrictions on remittances (汇款) in and out of China.

One popular provider of international remittance from China is ICBC (工商银行) . 欢迎中国的汇款 / 支付公司向 Adam Atlas 进行法律咨询。(Welcome Chinese MSB / Payment companies to Adam Atlas Attorney at Law firm site.)

Rest of the World

The Bank for International Settlements, that is like the Fed for the world, has a handy list of national banking regulators.

Payments Business Modelling

When planning a payments business, it’s important to have a clear understanding of the flow of funds and who is taking risk on the loss of funds at each moment. Here is a sample 3D model to jog your imagination. You can also check out our www.paymentsbusinessideas.com.

MSB Compliance and Civil Cases: Notable U.S. Cases

Payments business operators should make no mistake about the seriousness of U.S. law enforcement of MSB laws, such as the Bank Secrecy Act or state MSB licensing laws. Whether or not your payments business is an MSB, you should be aware of recent enforcement actions against MSB and non-MSB entities alike to see that you are not the target of this kind of case.  Here is the language of the Federal law that makes it a crime to transmit money in the U.S. without the necessary Federal registration and state licenses. Anyone who is new to the payments industry should read this section:

Title 18 U.S.C. ß 1960
(a) Whoever conducts, controls, manages, supervises, directs, or owns all or part of a business, knowing the business is an illegal money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.
(b) As used in this section –
(1) the term “illegal money transmitting business” means a money transmitting business which affects interstate or foreign commerce in any manner or degree and –
(A) is intentionally operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law; or
(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or
(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity;
(2) the term “money transmitting” includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier; and
(3) the term “State” means any State of the United States, the District of Columbia, the Northern Mariana Islands, and any commonwealth, territory, or possession of the United States.

With the benefit of the above bit of law, you can now read the following civil, criminal or other regulatory enforcement cases of interest.

2019

2018

2017

2016

2015

2014

2013

2011

LibertyReserve

May 28, 2013. Liberty Reserve is reported in the New York times as being accused of being responsible for laundering billions of dollars, conducting 55 million transactions that involved millions of customers around the world, including about 200,000 in the United States.  Principals were charged with conspiracy to commit money laundering, conspiracy to operate an unlicensed money-transmitting business, and operating an unlicensed money-transmitting business. The money laundering count carries a maximum sentence of 20 years in prison, and the other two charges carry a maximum of 5 years each.

May 28, 2013 FinCEN published a Notice of Proposed Rule Making concerning Liberty Reserve seizing its accounts and prohibiting other financial institutions from dealing with Liberty Reserve.

Dwolla / MtGox / Mutum Sigillum / Bitcoin

2013 was a big year in virtual currency law enforcement. You might say, VCBs earned their stripes in that year.  On May 15, 2013, the U.S. Department of Homeland Security seized some assets of Dwolla, a popular payment processor for Mt.Gox, the world’s largest Bitcoin exchange which is based in Japan. The amount of this seizure is reported to be $2,900,000. Here is the seizure affidavit: Mt Gox Dwolla Warrant 5-14-13.

You can also reach us through www.moneyservicesbusiness.lawyer or www.law.money.

Here are some notes from a recent payments regulation conference.

The best place for fintech law.

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Agent-of-the-payee and Crypto Seller MSB Status

1. Agent-of-the-payee up for comment in California: On February 8, 2019, the California Department of Business Oversight published an invitation for comments on possible amendments to the California Financial Code / Money Transmission Act concerning the agent-of-the-payee exemption. The exemption allows agents of the payee to be exempt from money transmitter status if they meet certain specific criteria, including contracting with the payee and accept funds for goods or services sold by the payee and received by the payor. The good news is that the exemption itself is not on the chopping block. Instead, DBO is wondering whether key defined terms should be narrowed or more precisely defined. Specifically, “goods or services” and “receive”. The invitation distinguishes between the types of goods sold at online marketplaces like Amazon and Airbnb (see agent language for each) and other goods sold at (perhaps less popular) marketplaces that handle housing, real estate, insurance etc… Any attempt to distinguish between one kind of payee, giving some the right to the exemption and others not, will create a flurry of requests for guidance and, perhaps, niche processors that try to walk a line between permitted processing and processing that needs a license. The deadline for comments is April 9, 2019.

Agent-of-the-payee is expressly available in only a handful of states, tolerated in many other states and downright confusing the the remainder of states that take a case by case approach. At least under the BSA, the availability of the exemption is fairly clear thanks to guidance produced as a result of an enquiry by our firm.

2. Florida Bitcoin Sellers Need MSB Licenses: In the long-observed Espinoza case, on January 30, 2019, the Florida Court of Appeals has ruled that simply selling Bitcoin in Florida was equivalent to selling payment instruments and therefore requires MSB licensure under Florida law. The court held that, unlike the BSA, the Florida statute does not require transmission to a third party for MSB activity to occur. The case yields the awkward outcome that Espinoza was not an MSB under the BSA but was one under the Florida statute. This ruling contradicts a number of guidance letters from the Florida DFS holding that merely selling Bitcoin was not MSB activity, including the cases of Grapefruit and Cryptobase. 

3. All Bitcoin Sellers Must Register with FinCEN as MSBs: In direct contradiction of the Espinoza case, the February 1, 2019 case of US v. Sterkiwheld that a mere seller of Bitcoin was an MSB under the BSA. Not only does this contradict the Espinoza case but it also puts in jeopardy FinCEN’s guidance exempting investors, who buy and sell for their own account.

 4. Quadrega.ca Security Policy Case Study. The now defunct virtual currency exchange, Quadega.ca, fell apart because its CEO passed away in India with private keys controlling $250 million of crypto. This is a case study in why payments companies (not just crypto exchanges) need security policies and disaster recovery policies. It goes without saying, that no single person should have the unique keys to substantial reserves of client assets.

Adam Atlas Attorney at Law is licensed in New York and Quebec. This email is ATTORNEY ADVERTISING. Nothing in this e-mail should be construed as a legal opinion or commentary on laws other than in the two jurisdictions where the author is admitted.  

4 Questions not to ask banking regulators

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State and federal regulators do excellent work in keeping up with payments models. However, some of their excellent work has led to legal dead-ends. Here are five quandaries that regulators might rather not face.

1. California DBO: Does a non-California money transmitter need a California MSB license to send money to California?

Cutting right to the chase, the California Money Transmission Act requires all those who “receive money for transmission” 2003(q)(3) “in this state”, meaning in, to or from California 2003(k) to have a money transmitters license from the DBO. So, every money transmitter in the U.S., and possibly the whole world, that sends money to California may need a license from DBO. If this were true, a lot of U.S. payments would instantly be ‘shutdown’, so to speak.

2. New York DFS: Are NYDFS-approved stablecoins being used in OFAC-sanction jurisdictions? 

[Rant Alert] Stablecoins are virtual currency backed by real currency. For example, one Tether is backed by one USD. Earlier this month, the Texas DOBupdated its very elegant memo 1037 on virtual currency regulation and included discussion of stablecoins. OFAC, other federal and state regulators and the compliance professionals who answer to them, spend a lot of time trying to prevent bad actors from abusing the privilege of accessing the U.S. financial system. In plain English, bad guys are not supposed to bank in USD or through US-licensed financial institutions. NYDFS has sanctioned the issuance of a USD-backed stablecoin. Unlike USD, virtual currency tokenized stablecoins can generally be held and transferred without a bank account or any KYC and using a virtual currency wallet. Regardless of the amount of KYC and OFAC-checking of the first buyer of stablecoin and the first redeemer (i.e. the distant-future theoretical person who finally asks for a USD in exchange for their token), it’s not clear what controls are in place in between. The ‘in between’ is where the majority of stablecoin transactions will occur and is the whole purpose of stablecoins. We don’t understand how NYDFS’ position on the majority of stablecoin transactions, some being licensed USD instruments and potentially de-coupled from OFAC oversight. In a test transaction, we were able to purchase stablecoin and send it to an unverified recipient. But don’t take my word on this, check out this news item this blog, this blog, and, humorously, this shutterstock image that, effectively, pose the same question by depicting stablecoin as an opportunity for sanction countries.

There are lots of stablecoins out there. Here are links to a handful of popular ones:

Gemini Dollar https://gemini.com/dollar/

Paxos https://www.paxos.com/

TrueUSD https://www.trusttoken.com/trueusd/

USD Coin https://www.circle.com/en/usdc

Tether (ECR20) https://tether.to/

3. Pennsylvania DBS: Why are Pennsylvania virtual currency exchanges able to hold USD in their own bank accounts without an MSB license while prepaid issuers and money transmitters need licenses to do the same? 

The Pennsylvania Department of Banking and Securities has, helpfully, published guidance answering a number of key questions concerning virtual currency regulation in the state. The guidance says, concerning virtual currency exchanges or Platforms: “These Platforms never directly handle fiat currency; any fiat currency paid by or to a user is maintained in a bank account in the Platform’s name at a depository institution. […] Under the MTA, these Platforms are not money transmitters. The Platforms, while never directly handling fiat currency, transact virtual currency settlements for the users and facilitate the change in ownership of virtual currencies for the users. There is no transferring money from a user to another user or 3rd party, and the Platform is not engaged in the business of providing payment services or money transfer services.” The language of that guidance suggests, perhaps mistakenly, that because money of the exchange is held at a bank, the exchange is somehow not a money transmitter. This is, of course, not true of other money transmitters, who require licenses in Pennsylvania regardless of where they keep their money.

4. FinCEN: Exactly where is the line between virtual currency investor (not MSB) and a virtual currency exchanger (MSB)? 

FinCEN has published excellent guidance on number of aspects of virtual currency, including key definitions, mining, investing, software, trading platform and processors. Taken as a whole, however, the guidance comes up as somewhat inconsistent on the practice of buying and selling virtual currency for your own account (as a user or investor). A person or company that buys and sells virtual currency for their own account (not involving third parties) in only two-party transactions, in any quantity, at any speed and for any volume, should naturally be exempt from MSB status. If they were not, a few hedge funds could be promptly indicted. 

Owing to the ever-growing methods of exchanging value, regulators will never achieve perfection in regulating each of them. It is perfectly normal for the ‘range of the possible’ to be much broader than the ‘range of the regulated’. That said, it is incumbent on payments businesses to help regulators understand the latest payment methods so that they can be, where necessary, subject to oversight for the security and soundness of the financial system and weed-out bad actors.

Is there any startup that is not a payments company?

Leave a founder and a calculator alone in a room for 10 minutes and out comes a unicorn payments company. Let’s test this theory.

1. UberDidi Kauaidi, Lyft. Uber and most of its competitors are classic biller models. Some, such as Uber, may actually be going further and becoming MSBs. The Uber Gift Card terms, for example, allow a payer to deliver up to $2,000 of value from one user to another through a promotion code. Uber still has no FinCEN registration.

2. Airbnb. Using classic biller model language, Airbnb terms state: “Airbnb Payments serves as the limited authorized payment collection agent of the Host for the purpose of accepting, on behalf of the Host, payments from Guests […].” Airbnb has had its FinCEN MSB registration since 2014.

3. Palantir. According to Techcrunch reporting, one of the three industries serviced by this big data company is the finance sector, making Palantir payments support business.

4. Snapchat. With Snapcash, a Paypal collaboration, Snapchat hops on the band-wagon of other startups eyeing the presumed billions in P2P transactions.

5. Flipkart. Ebay & PayPal for India? This India-focused platform for sellers and buyers includes the following in itsTerms of Use: “You have specifically authorized Flipkart or its service providers to collect, process, facilitate and remit payments and / or the Transaction Price electronically or through Cash on Delivery to and from other Users in respect of transactions through Payment Facility.”

6. WeWork. WeWork is perhaps the unicorn that best distinguishes itself from a payments company, because its members are tenants of WeWork and actually purchase WeWork services, as per its terms of service.

7. Stripe.  At first blush, Stripe looks like a plain, vanilla PSP.Stripe is, however, registered with FinCEN as an MSB despite the fact that Strip’s terms of use say: ” Stripe is not a bank or a money services business (“MSB”) and Stripe does not offer banking or MSB services as defined by the United States Department of Treasury.”

8. ApplePay. In the inverse of all the other examples, everyone thinks of ApplePay as a payments business except Apple itself which thinks it’s just a gateway. The ApplePay terms refer to it as creating a virtual representation of a card for which Apple is not responsible.

5 Currency and Payments Law Mysteries Solved

1. Can a money transmitter license be rented? No. Licensed MSBs, such as money transmitters are licensed based on their specific business model, financial position, AML procedures and overall compliance profile. Some licensed money transmitters will, however, appoint authorised delegates or agents that assist in operating their licensed business.  Here are money transmitters licensed in New York and California.

2. Can and ISO Aggregate? Sort of. In the old days, ISOs had to treat merchants as stand-alone entities, each getting their own unique merchant account. The new Payment Services Provider (PSP) concept has allowed ISOs to step into the shoes of acquiring banks and actually create sub-merchants and MIDs for each of them.  The PSP remains liable for the transactions of each of the sub-merchants, but the PSP has the ability to quickly board merchants. See, for example, Square, Stripe and WePay.

3. Why isn’t ApplePay an MSB? Good question. It looks like ApplePay has managed to soak up all four corners of a payment transaction, less only the settlement of funds. It stores and tokenizes cardholder data, merchant transaction data within a proprietary gateway. Apple might eventually have to slog through the licensure process like everyone else in at least some states that cast the net wide on what constitutes money transmission, like Maine.

4. How much is your payments business worth? Generally, a multiple of the monthly revenue net of agent payouts. You should also look at the residuals on a static pool of clients. For example, look at the monthly revenue on your clients of one year ago and compare that to the revenue on those same old clients today. The difference between those two numbers is called ‘attrition’. You’ll want attrition to be as low as possible. There are many other factors, but concentration of clients of one kind or another will put downwards pressure on valuations.

5. Is Bitcoin Illegal. No it’s not. Just like other forms of barter, it is not illegal to sell goods or services in exchange for Bitcoin.  For example, a merchant selling computers can sell a computer for Bitcoin and not be in breach of the law. Where legal issues arise is on the accounting and tax treatment of the Bitcoin received and the process by which, if any, the merchant then elects to turn the Bitcoin into ‘real’ currency. Virtual currency exchanges, being businesses that exchange Bitcoin for real currency are also likely to need MSB licensing.

ETA. Our next show is the acquiring industry’s annual gathering, Transact15 March 31-April 2.

Adam Atlas Attorney at Law is licensed in New York and Quebec. Nothing in this e-mail should be construed as a legal opinion or commentary on laws other than in the two jurisdictions where the author is admitted.