Money transmitters are included in the broader definition of a money services business (“MSB”), which is overseen by FinCEN. A money services business could be a money transmitter, a check cashier, one who deals in foreign exchange or traveler’s checks, or one who provides a prepaid program, among others. There are two important exceptions to this definition. The first is that a bank is not an MSB. This is due to the vast regulation and several regulatory authorities that banks are already subject to. The second limitation is that those persons or institutions that are registered with, and functionally regulated or examined by, the Securities and Exchange Commission or the Commodity Futures Trading Commission are not considered an MSB. Furthermore, even though most businesses under a $1,000 do not need to register as an MSB, no such minimum threshold exists for money transmitters, which means that all money transmitters must register as an MSB. MSBs are required to register with FinCEN via Form 107, which is due within 180 days after the date on which the MSB is established.
The narrower definition of money transmitter includes those who accept currency, or funds denominated in a currency, and transmit such currency or funds by any means through a financial agency or institution or an electronic funds transfer network; or any other person engaged in the transfer of funds as a business. But to be a money transmitter, the entity must carry on money transmission as a business. Generally, the acceptance and transmission of funds as an integral part of the execution and settlement of a transaction other than the funds transmission itself (e.g., in connection with a bona fide sale of securities), will not cause a person to be a money transmitter.
Money transmitters are not only required to register as an MSB, but they are also subject to state licensure in the states where their customers are located, not where the entity is incorporated. Therefore, unlicensed foreign entities conducting money transmission within the U.S. or with U.S.-based customers may run afoul of money transmission regulation. In fact, FinCEN noted that foreign-located persons engaging in MSB activities in the United States are subject to the rules of the Bank Secrecy Act and have the same reporting and recordkeeping and other requirements as MSBs with a physical presence in the United States. This licensing scheme is often the cause of much legal and financial headache and it is often the reason many businesses shy away from being labeled a money transmitter within any state.
For those businesses that offer money transmission services, their choice is to either comply with each state’s licensing procedures or to rely on one or more of the exemptions from being a money transmitter. One such exemption would require the business to utilize another business’ money transmitter license. To do this, the exempt business would need to become an authorized delegate of the entity that holds the money transmitter license. This is similar to entering into a principal-agent relationship. In order for this to work, all payments must go through the account of the principal licensee and the product and/or service that the authorized delegate is marketing or extending out, has to tie-in to the core product and/or service of the principal licensee. This arrangement must be formed by contract between the parties.
The second exemption is the payment processor exemption. To utilize this exemption, the business would need to prove that it is receiving payment for services separate from the money transmission itself and then sending the money to a third party. For a business that makes its money on money transmission services, the payment processor exemption would not apply, but for non-transmission services businesses, this exemption is available.
The exemptions raise the issue of whether initial coin offerings (“ICO”), token generation events, tokenized private funds, or the like are running afoul of the money transmitter licensure procedures. Such an inference was made when an individual at FinCEN stated in a letter to U.S. Senator Ron Wyden (a minority-party Senator on the Intelligence Committee), “[A] developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with [anti-money laundering/combatting financing terrorism] requirements that apply to this type of [money services business]. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically also be a money transmitter.” Furthermore, in May 2015, virtual currency exchanger Ripple Labs Inc. entered into a consent agreement with FinCEN in which Ripple consented to a $700,000 civil penalty for “acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN.”
The push for money transmitter licenses could cause many ICOs to rethink their business plan. Cryptocurrency issuers, platforms, and other intermediaries, unless there is an applicable exemption, they may be engaged in money transmission. Therefore, they would be required to obtain a money transmitter license from each applicable state and register with FinCEN as an MSB. This adds to the regulatory questions already surrounding ICOs, including broker-dealer and investment advisor registration.
This article is not legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its authors Andrew Silvia. Mr. Silvia is an associate at Ross & Shulga PLLC, a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate and securities law.
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