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.