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Financial Services Law Insights and Observations

California DFPI concludes MTA licensure not required for crypto exchange

Licensing State Issues Digital Assets DFPI California State Regulators Money Service / Money Transmitters Cryptocurrency California Money Transmission Act

On November 3, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to a cryptocurrency exchange’s transactions. The redacted opinion letter examines whether the inquiring company’s proposed business activities—which “will offer the purchase, sale, and trading of various cryptocurrencies using a platform provided by its affiliate and in conjunction with another affiliate that is a . . . registered broker-dealer”—are exempt from the MTA. Transactions on the company’s platform will involve the use of the company’s tokenized version of the U.S. dollar. Customers will deposit U.S. dollar funds into a company account where an equivalent amount of tokens will be created and used to facilitate a trade for cryptocurrency. The tokens can also be exchanged for U.S. dollars, or customers can hold the tokens in their wallet. According to the letter, the company says it “does not take custody of its client’s currencies or offer digital wallets,” but rather a “client’s digital wallet is directly linked to the platform and transacts on a peer-to-peer basis with other clients.” In addition to trading cryptocurrencies, the company also plans to allow customers to “trade in cryptographic representations of publicly listed securities,” thereby permitting customers to purchase, sell, or trade the securities tokens on the platform. The company will also be able to transfer customers’ shares of securities tokens from the platform to a customer’s traditional brokerage account. The company explained that these transactions of securities tokens will be covered by the company’s affiliate’s broker-dealer license.

DFPI concluded that because the Department has not yet “determined whether the issuance of tokenized versions of the U.S. Dollar or securities, or their use to trade cryptocurrencies, is money transmission,” it will not require the company to obtain an MTA license in order to perform the aforementioned services or to issue tokenized version of the U.S. dollar or securities. DFPI noted, however, that its conclusions are subject to change, and emphasized that its letter does not address whether the proposed activities are subject to licensure or registration under other laws, including the Corporate Securities Law of 1968.

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