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DFPI addresses several MTA licensing exemptions

Licensing State Issues DFPI California Money Transmission Act State Regulators

Recently, California’s 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, agent of payee rules, and transactions in which recipients are paid before a company is reimbursed. Highlights from the redacted letters include:

  • Agent of Payee Exemption Online Gaming/Sports Betting. The redacted opinion letter reviewed whether a company’s payment processing services—which allow customers to use bank accounts to purchase stored value redeemable for goods and services, including “e-commerce, digital goods, financial services, travel, and online gaming/sports betting”—require licensure under the MTA. DFPI concluded that the company’s “pay-in” transactions qualify for the agent-of-payee exemption where the merchant is the payee, the customer is the payor, and the company is the agent of the payee, because the pay-in transactions are ultimately for goods and services since the customer is purchasing stored value redeemable in a closed loop of issuing merchant, and the company’s master agreement with the merchant states that payment to the company satisfies the customer’s obligation to pay the merchant. However, DFPI noted that the agent-of-payee exemption does not apply to transactions involving refunds and the pay-out of winnings. Pay-out transactions, DFPI explained, “constitute ‘receiving money for transmission’ because the [company] receives money from the [m]erchants for transfer to the [c]ustomers” and the customer does not provide goods or services to the merchant for which payment is owed.
  • Agent of Payee Exemption – Payments to Daily Fantasy Sports Providers. The redacted opinion letter, which supersedes an interpretive opinion issued last August (covered by InfoBytes here), reviewed whether MTA licensure is required for a company that plans to offer U.S.-based merchant clients (primarily daily fantasy sports providers) an ACH payment platform to allow customers to use bank accounts to purchase credits for their accounts with the merchants. According to DFPI, pay-in transactions for stored monetary value “constitute ‘receiving money for transmission’”; however, DFPI noted that based on provided information, the pay-in activities qualify for the agent-of-payee exemption because the merchant is the payee, the customer is the payor, and the company is the agent of the merchant. Additionally, the company’s “receipt of funds from the [c]ustomer satisfies the [c]ustomer’s payment obligation to the [m]erchant for the goods or services.” Here, DFPI also explained that the pay-in transactions are closed loop since the customer’s stored value can only be redeemed for goods or services provided by the issuing merchant or its affiliate. DFPI further explained that “selling or issuing” closed loop stored value is excluded from the definition of money transmission. In both the first and second opinion letters, DFPI reiterated that MTA licenses cannot be issued to companies engaged in the transmission of money to facilitate unlawful activities, such as sports betting.
  • Purchase and Sale of Cryptocurrency. The redacted opinion letter concluded that a company’s activities, which are limited to buying and selling virtual currency directly from and to consumers via ACH or wire transfer, do not trigger the licensing requirements of the MTA 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.”
  • Paying Recipients Before a Company is Reimbursed. The redacted opinion letter examined whether a company’s payment reimbursement model requires licensure under the MTA. The company offers transactions that result in beneficiaries being paid before the company receives money from the sender. The company “obtains a payment authorization on the customer’s debit card for the transaction,” and the debit card authorization then “puts a hold on the cardholder’s funds for the purchase and guarantees that [the company] will be paid.” Once the customer authorizes the transaction, the funds are instantly moved to the recipient’s wallet or bank account for immediate use. To be reimbursed, however, the company must initiate a second step, which actually processes the payment and converts the hold status to payment/post status. According to DFPI, the company’s payment reimbursement model does not involve transactions that constitute money transmission because the company “never ‘receives money for transmission. . ., does not actually or constructively receive, take possession of, or hold money or monetary value for transmission. . ., incurs no transmission liability,” or puts consumer funds at risk.
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