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Hawaii enacts licensing legislation
On June 17, the Hawaii governor signed two bills into law. HB 2113 permits money transmitter license applicants to submit to either a state or federal criminal history record check, rather than both, upon application. SB 1105 establishes that, in addition to application fees, and any fees required by NMLS, a mortgage loan originator licensee must pay a mortgage loan recovery fund fee of $200, and upon application for renewal of a license, a mortgage loan originator licensee must pay $100. The bill also permits a person aggrieved by the fraud, misrepresentation, or deceit of a mortgage loan originator company licensee to receive restitution payment upon a final court order. The bills are effective July 1.
Florida amends money service businesses provisions to define “control persons”
On May 26, the Florida governor signed HB 389, which amends provisions related to money service businesses and related licensing requirements. The bill, among other things, replaces the term “officers” with “control person” and expands the definition of “control person” to designate the type of individuals that may be considered to control a licensee. As a result of this amendment, the bill sets forth and clarifies various requirements related to the vetting and reporting of control persons, as opposed to officers generally, going forward. The law is effective October 1.
Arizona passes money transmitter licensure legislation
On May 20, the Arizona governor signed SB 1580, which revises provisions related to money transmitters. The bill, among other things, provides that “a person may not engage in the business of money transmission or advertise, solicit or hold itself out as providing money transmission unless the person is licensed." The provision does not apply to “a person that is an authorized delegate of a person licensed under this article that is acting within the scope of authority conferred by a written contract with the licensee,” and to exempt persons provided the person “does not engage in money transmission outside the scope of the exemption.” The bill also creates provisions related to consistent licensure, application for licensure, and information requirements for certain individuals.
Connecticut amends banking statutes
On May 17, the Connecticut governor signed S.B. 268, which makes various revisions to state banking statutes. Among other things, the bill establishes that a money transmission license is not transferable or assignable, but a licensee may be acquired under certain circumstances. The bill also establishes that the commissioner cannot approve a state-bank’s loan production office to be established unless the commissioner has considered the out-of-state bank's record of compliance. Additionally, the bill establishes certain definitions, including the meaning of “control”, “control person,” “key individual,” and “passive investor.” The bill is effective October 1.
Florida amends MSB provisions to define “control persons”
On May 12, the Florida governor signed HB 273, which amends provisions related to money services business activities. The bill, among other things, revises provisions related to prohibited activities without a license and other requirements for written contracts between a money transmitter or payment instrument seller and an authorized vendor, and provides requirements for a money transmitter that receives virtual currency, among other things. The bill also establishes that “each money transmitter that receives virtual currency, either directly or through an authorized vendor, for the purpose of transmitting such virtual currency from one person to another location or person must at all times, until the transmission obligation is completed, hold virtual currency of the same type and amount owed or obligated to the other location or person.” The bill is effective January 1, 2023.
California reinstates single commercial loan licensing exemption under the CFL
On April 28, the California governor signed SB 577, which amends provisions relating to certain financial institutions, including California Financing Law (CFL), Escrow Agent, and Money Transmitter licensees.
The bill reinstates a licensing exemption available to commercial lenders in California. Specifically, the bill reenacted a provision that formerly expired on January 1, 2022. This reinstated provision permits a lender to make a single loan within a 12-month period, if the loan is a commercial loan as defined by the CFL, without having to obtain a CFL license.
The bill also updates contact information to be included on notices posted by California Money Transmitter licensees. Specifically, the bill establishes that California Money Transmitter licensees are required to prominently post, in English and in the same language used by the licensee to conduct business, on the premises of each branch office that conducts money transmission activities a certain notice, including specific contact information for the California Department of Financial Protection and Innovation.
Finally, the bill removes obsolete language from provisions governing criminal and civil background requirements for Escrow Agent licensees.
The bill is effective immediately.
West Virginia updates money transmitter licensing law
Recently, the West Virginia governor signed SB 505, which updates laws regarding licensure and regulation of money transmitters. Among other things, the bill (i) enhances and expands defined terms, including the definition of “control”; (ii) removes the provisional licensing option for check sellers; (iii) gives West Virginia the authority to participate in multistate examinations; (iv) increases the net worth requirement for licensees; (v) sets forth prior approval requirements for a change in control of a licensee; and (vi) requires licensees to maintain specified “permissible investments” at all times. The bill is effective June 7.
NYDFS fines money transmitter $8.25 million for AML compliance failures
On March 16, NYDFS announced the imposition of an $8.25 million fine on a money transmitter alleged to have violated anti-money laundering (“AML”) requirements and New York law by failing to adequately supervise local agents in New York City that processed an unusual volume of suspicious transactions to China. NYDFS conducted an examination and enforcement investigation, which found that the company “did not adequately oversee the activity of six agents that saw a large spike in transaction volume of business with China.” According to the investigation, there were roughly 7,500 transactions aggregating approximately $30 million in 2014. These figures rose to more than 25,000 transactions aggregating more than $100 million during the period between January 2016 and May 2017. Most of these transactions were processed by small, store-front independent agents—“a clear indicator of increased money laundering risk, particularly given that the destination was known to carry a high AML risk,” NYDFS stated, adding that the company should have also addressed risks resulting from a suspicious pattern of different senders transmitting money to the same recipient. NYDFS acknowledged that the company, when alerted to the increased transaction activity, severed its relationship with the problematic agents and implemented remedial measures to improve supervision of its agents. Under the terms of the consent order, the company will pay an $8.25 civil money penalty and is required to submit a report to NYDFS outlining enhancements made with respect to new and existing agents, suspicious activity reporting program, and special transaction limitations. Additionally, NYDFS announced that the company will also update the Department on improvements to the policies and procedures of its Bank Secrecy Act/AML compliance program and will provide data to NYDFS for ongoing monitoring purposes.
DFPI addresses several MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the purchase and sale of digital assets and agent of payee rules. Highlights from the redacted letters include:
- Purchase and Sale of Digital Assets; Payment Processing Services. The redacted opinion letter examines whether the inquiring company’s client is required to be licensed under the MTA. The letter describes two types of transactions proposed to be conducted on the client’s online trading platform: (i) transactions in which customers purchase and sell digital assets from the company in exchange for fiat currency (Direct Purchase Transactions); and (ii) transactions in which merchants use the platform as a payment processor to accept digital assets from customers in exchange for non-fungible tokens (Payment Processing Transactions). DFPI concluded that the Direct Purchase Transactions do not require an MTA license because they do not “involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI similarly concluded that the Payment Processing Transactions do not require licensure at this time because DFPI has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission[.]” Notwithstanding, DFPI added that it has been “studying the cryptocurrency industry closely” and that “[a]t any time, the Department may determine these activities are subject to regulatory supervision. The Department may also adopt regulations or issue interpretive opinions that significantly restrict [the contemplated] business operations.”
- Agent of Payee. The redacted opinion letter addresses whether the inquiring company’s proposed payment processing activities are exempt from the MTA’s licensing requirements. The letter explains that the company proposes to process payments related to purchases of apps through a virtual marketplace that operates on the company’s point of sale terminals. Through the virtual marketplace, customers (generally small businesses or merchants) may purchase apps that are developed and licensed to customers by third-party developers. Pursuant to a developer agreement, the company is appointed by such third-party developers to act as an “agent” of the developers “to collect and hold all Gross Revenue on [the developers’] behalf and to remit the Remittance Amount to [the developers’] Payment Account.” DFPI concluded that receiving funds from a customer for the purposes of transmitting payments to the developer “constitutes ‘receiving money for transmission.’” However, DFPI noted that these activities also satisfy the “agent of payee” exemption requirements because, pursuant to the developer agreement, the company acts as an agent of the developer, and the company’s receipt of payment satisfies “the customer’s (payor’s) obligation to the Developer for goods or services.” Accordingly, DFPI concluded that while the activities described constitute “money transmission” the company is exempt from the MTA’s licensure requirement.
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions.
DFPI addresses several MTA licensing exemptions
Recently, the California 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 and agent of payee rules. Highlights from the redacted letters include:
- Cryptocurrency and Agent of Payee Exemption. The redacted opinion letter reviewed whether MTA licensure is required for a company’s proposal to offer payment processing services that would enable merchants to receive payments in U.S. dollars from buyers of goods and services, automatically exchange these payments into dollar-denominated tokens on a blockchain network, and to store the tokens in a custodial digital wallet. DFPI currently does not require licensure for companies to receive U.S. dollars from a buyer for transfer to a merchant’s wallet as dollar tokens. DFPI explained that even if it did regulate this activity, the structure of the company’s payment processing services satisfies the requirements of the agent-of-payee exemption, wherein the company acts as the agent of the merchant pursuant to a preexisting written contract and the company’s receipt of payment satisfies the buyer’s obligation to the merchant for goods or services. DFPI further explained that while storing dollar tokens in a custodial digital wallet or making subsequent transfers out of a wallet do not currently require licensure under the MTA, DFPI may later determine the activities are subject to regulatory supervision.
- Asset-Backed Tokens and Other Cryptocurrency. The redacted opinion letter asked DFPI whether an MTA license is required to (i) provide technical services to enable owners of metal to create digital assets representing interests in that metal; (ii) facilitate trading in these digital assets; or (iii) provide digital wallets to customers. The company intends to create a platform to facilitate the creation, sale, and trading of metal asset-backed tokens, whereby a customer purchases metal asset-backed tokens (ABTs) or currency tokens using fiat currency stored in an FBO account. Customers will not be allowed to transmit fiat currency to each other except to facilitate the purchase of ABTs or currency tokens, to receive proceeds from ABTs, or to pay platform fees. DFPI explained that while issuing stored value is generally considered money transmission, “[p]roviding technical services to assist in the creation of a [m]etal ABT and [i]ndustrial [t]okens and issuing a digital wallet holding the [m]etal ABT does not require licensure.” DFPI noted that the company is not itself issuing the ABT or industrial tokens. DFPI further concluded that the company does not need an MTA license to issue a digital wallet holding metal ATBs because the digital wallet is not stored value nor can the wallet’s contents be redeemed for money or monetary value or be used as payment for goods or services. DFPI separately indicated that a license is not currently required to facilitate the sale of ABTs, nor the issuance and sale of currency tokens. However, DFPI warned the company that the opinion only pertains to MTA, and that the company should be aware that metal ABTs and industrial tokens “could be considered a commodity and California Corporations Code section 29520 generally prohibits the sale of a commodity, unless an exception applies.”
- Cryptocurrency-to-Precious Metals Dealer. The redacted opinion letter reviewed whether an online cryptocurrency-to-precious metals dealer, which accepts a variety of different cryptocurrencies in exchange for precious metals and also purchases precious metals from customers using different cryptocurrencies, requires MTA licensure. The company referenced a 2016 decision where DFPI determined that a company operating a software technology platform to facilitate the purchase and sale of gold was not engaged in money transmission, that gold and other precious metals were not payment instruments, that the transactions did not represent selling or issuing stored value, and that “the activity did not constitute receiving money for transmission because the sale or repurchase of gold was a bargained-for-exchange and did not involve transmission to a third party.” The company argued that purchasing and selling precious metals with cryptocurrency is similar and should not trigger MTA’s licensing requirement. DFPI agreed that the company’s business activities do not meet the definition of money transmission because precious metals are not payment instruments, and as such, purchasing and selling precious metals for cryptocurrency does not represent the sale or issuance of a payment instrument. Additionally, DFPI concluded that the company is not selling or issuing stored value, nor do the transactions “involve the receipt of money or monetary value for transmission within or outside the U.S.”
- Virtual Currency Wallet. The redacted opinion letter asked whether an MTA license is required to operate a platform that will provide customers with an account to store and transfer virtual currencies. The company will also provide customers access to an exchange where they can facilitate the purchase or sale of virtual currencies in exchange for other virtual currencies. Fiat currency will not be used on the platform. DFPI stated that it does not currently require companies to obtain an MTA license to operate a platform that provides customers with an account to store and transfer virtual currencies. DFPI further stated that a license is not required to operate a platform that gives customers access to an exchange to purchase or sell virtual currencies in exchange for other virtual currencies.
- Purchase of Cryptocurrency. The redacted opinion letter examined whether a company that offers clients a direct opportunity to buy cryptocurrency in exchange for fiat currency requires MTA licensure. The company explained, among other things, that there is no transmission of cryptocurrency to third parties and that it does not offer money transmission services. DFPI concluded that because the company’s activities are limited to directly selling cryptocurrency to clients, it “does not require an MTA license because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions. Moreover, the letters do not relieve the companies from any FinCEN or federal regulatory obligations.
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