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  • DFPI addresses 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:

    • Agent of Payee – Fund Transfers in Connection with Real Estate Closing Transactions. The redacted opinion letter reviewed whether a company—licensed as a money transmitter in several states, including California, and registered with FinCEN as a money services business—is eligible for the agent-of-payee exemption under the MTA. The company proposes to “facilitate fund transfers in connection with real estate closing transactions” during which it “will be authorized to receive real estate closing funds on behalf of its customer (the seller of real estate).” The payment funds will first flow from the buyer of real estate to the company via the buyer’s lawyer or title company, and then from the company to the seller after the company converts the funds from U.S. dollars to another currency. By providing these services, the company, as the seller’s agent, will receive money from the buyer pursuant to a preexisting written contract between the company and the seller. DFPI concluded that “[t]o the extent these fund transfers take place in California or are with, to, or from persons located in California, [the company’s] services constitute “receiving money for transmission” because [the company] receives money from the buyer for transfer to the seller.” However, DFPI noted that a provision in the written contract, which appoints the company as the agent of the seller when the seller is located in California, allows the company’s services to satisfy the requirements of the agent-of-payee exemption in Financial Code section 2010, subdivision (l). The agent-of-payee exemption, DFPI stressed though, does not apply to sellers outside of California. 
    • Bitcoin ATM Kiosk. Two redacted opinion letters (see here and here) examined whether the sale and purchase of bitcoin through ATMs/kiosks described by the companies is subject to licensure under the MTA. In each instance, the transaction will only be between the consumer using the ATM/kiosk and the company, the transaction will be completed instantly without involving third parties, and any bitcoin sold will be provided from the company’s own inventory. Moreover, the letters state that the companies do not hold virtual currency on behalf of customers nor do they act in a fiduciary capacity. Because the companies’ activities are limited to selling bitcoin, DFPI determined that an MTA license is not required 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.” DFPI reminded the companies that its determination is limited to the activities specified in the letters and does not relieve them from any FinCEN, federal, or state regulatory obligations.

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

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  • NYDFS to start collecting and publishing board diversity data

    State Issues

    On July 29, NYDFS announced in an industry letter that it will start collecting gender, racial, and ethnic board and management composition data as of December 31, 2019 and 2020 from state-regulated (i) banking institutions with over $100 million in assets; (ii) non-depository financial institutions with over $100 million in gross revenue; and (iii) entities authorized to engage in virtual currency business activities. Citing its authority under Banking Law 37(3) to “require any banking organization to make special reports to her at such times as she may prescribe,” the Superintendent stated NYDFS plans to collect data over late summer and will publicly publish findings on an aggregate basis in the first quarter of 2022. The results will be categorized by institution type and other relevant factors to “allow firms to assess where they stand relative to their peers” and hopefully “raise the bar for the entire industry.” In the future, the NYDFS would consider collecting and disclosing similar information, “including on a more granular basis.”  The letter also set out the NYDFS’ expectation that institutions would (i) make the diversity of their leadership “a business priority and integrate it into their corporate governance”; (ii) “pay close attention to their talent pipeline of future diverse leaders, in addition to the diversity of its affiliates”; and (iii) “view diversity like other strategic priorities.”

    State Issues State Regulators NYDFS Diversity Virtual Currency Bank Regulatory Digital Assets

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  • DFPI addresses cryptocurrency MTA licensing exemptions

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to certain cryptocurrency activities. According to the letter, the requesting company intends to provide an internet-enabled peer-to-peer (P2P) marketplace for the purchase and sale of certain decentralized digital currencies. The P2P marketplace will enable buyers and sellers of the specified cryptocurrency “to connect and arrange for the direct settlement of purchases and sales between such users” through a variety of means, such as bank transfers, gift cards, money transmission, debit card, credit card, among others. Additionally, the company’s P2P marketplace will allow customers to (i) buy goods or services with the specified cryptocurrency from unaffiliated, third-party online retailers who accept that cryptocurrency as a form of payment; (ii) exchange their cryptocurrency for the rights to a US dollar-backed stablecoin; and (iii) remit funds in different currencies, including foreign currency. The company emphasized that it will “not collect, store, or transmit any digital or fiat currency” in any of its four proposed products. DFPI concluded that the Delaware company’s proposed services are not subject to licensing under the MTA, explaining that the sale and purchase of cryptocurrency directly between two parties, in which the company does not facilitate the exchange of the fiat currency or the cryptocurrency, does not meet the definition of money transmission. Likewise, the company’s other proposed products do not constitute money transmission either. DFPI reminded the company, however, that its determination is limited to the facts as presented and that at any time DFPI may determine that the activities are subject to regulatory supervision. Moreover, the letter does not relieve the company from any FinCEN or federal agency obligations.

    Licensing State Issues California Money Transmission Act Cryptocurrency Virtual Currency Fintech Digital Assets

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  • FATF advances work on proliferation finance, virtual assets

    Financial Crimes

    On June 25, the U.S. Treasury Department announced that the Financial Action Task Force (FATF) concluded its fourth plenary meeting, in which it “advanced its core work on virtual assets, proliferation finance, digital transformation, and peer member assessments.” Among other things, FATF finalized and adopted guidance on proliferation financing risk and mitigation. FATF also completed a second 12-month review on how well jurisdictions and the private sector have implemented anti-money laundering/combating the financing of terrorism (AML/CFT) obligations on virtual assets and virtual assets service providers (VASPs). FATF found that jurisdictions and the VASP sector continue to make progress implementing the revised standards, but that “weak or non-existent AML/CFT implementation in many countries remains a key source of risk.” Additionally, FATF completed a report examining the financing of racially or ethnically motivated violent extremists, completed a report on money laundering risks arising from conservation crimes, and adopted mutual evaluation reports on Japan and South Africa that provide assessments of both countries’ “AML/CFT and counter-proliferation financing legal frameworks as well as the measures in place to implement these frameworks effectively.”

    Financial Crimes Department of Treasury Of Interest to Non-US Persons FATF Virtual Currency Anti-Money Laundering Combating the Financing of Terrorism Digital Assets

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  • Waters establishes Digital Assets Working Group

    Federal Issues

    On June 16, Chairwoman of the House Financial Services Committee Maxine Waters (D-CA) announced the organization of the “Digital Assets Working Group of Democratic Members” to develop “legislation and policy solutions” on issues emerging in the digital asset space, including those related to (i) the regulation of cryptocurrency; (ii) the use of blockchain and distributed ledger technology; and (iii) the potential development of a U.S. central bank digital currency (see InfoBytes coverage on matters related to a CBDC here). During the first hearing held by the Task Force on Financial Technology, Waters stated that the working group will “focus on making sure there is responsible innovation in the cryptocurrency and digital asset space,” noting that “[a]s cryptocurrencies, central bank digital currencies and other digital assets enter the mainstream, the Committee will look at how digital assets have begun to enter many aspects of our lives—from payments to investments to remittances—and consider how to devise legislation to support responsible innovation that protects consumers and investors while promoting greater financial inclusion.”

    Federal Issues House Financial Services Committee Fintech Virtual Currency Central Bank Digital Currency Digital Currency Blockchain Digital Assets

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  • Texas permits banks to provide virtual currency custody services

    State Issues

    On June 10, the Texas Department of Banking issued Industry Notice 2021-03, which notifies supervised Texas state-charted banks that they “may provide customers with virtual currency custody services, as long as the bank has adequate protocols in place to effectively manage the risks and comply with applicable law.” The Department noted that Texas state-chartered banks have long provided customers with safekeeping and custody resources through secure storage of assets, which is a critical role in the banking business. “While custody and safekeeping of virtual currencies will necessarily differ from that associated with more traditional assets the [Department] believes that the authority to provide these services with respect to virtual currencies already exists pursuant to Texas Finance Code §32.001,” the notice provided. In addition, the type of virtual currency a bank chooses to utilize will depend on that bank’s expertise, risk appetite, and business model. The notice also pointed out that the Department determined that custody services may be offered by a Texas state-chartered bank in a capacity that is fiduciary or non-fiduciary. A non-fiduciary capacity will allow the bank to act “as a bailee, taking possession of the customer’s asset for safekeeping while legal title to that asset remains with the customer.” Alternatively, in its fiduciary capacity, the bank will have oversight to control virtual currency assets as it would any other type of asset held in such capacity. The notice warned, however, that if a bank is offering virtual currency services, bank management must conduct due diligence and carefully examine the risks involved in offering a new product or service through a methodical risk assessment process.

    State Issues Texas Banking Virtual Currency State Regulators Fintech Risk Management Digital Assets

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  • DFPI: Bitcoin ATM kiosk not subject to MTA licensure

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released three new opinion letters (see here, here, and here) covering aspects of the California Money Transmission Act (MTA) related to bitcoin automated teller machines (ATMs) and kiosks. The letters explain that the sale and purchase of bitcoin through an ATM kiosk as described by the inquiring companies is not subject to licensure under the MTA because it does not meet California’s definition of “money transmission.” In each instance, the transaction would only be between the consumer/bitcoin purchaser using the ATM kiosk and the respective company. DFPI reminded the companies, however, that its determination is limited to the activities specified in the letters and does not extend to any other activities that the companies may engage in. Moreover, the letters do not relieve the companies from any FinCEN, federal, or state regulatory obligations.

    Licensing State Issues State Regulators DFPI California Money Transmission Act Virtual Currency Digital Assets

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  • SEC commissioner updates cryptocurrency safe harbor proposal

    Fintech

    On April 13, SEC Commissioner Hester M. Pierce released an updated version of her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. As previously covered by InfoBytes, last year Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. The three-year grace period for qualifying companies, Pierce suggested, would allow time for the development of decentralized or functional networks, adding that at the end of the three years, a successful network’s tokens would not be regulated as securities.

    The updates to the proposal reflect feedback from the cryptocurrency community, securities lawyers, and the pubic, and include, among other things:

    • A requirement for companies to provide semi-annual updates to the plan of development disclosure and a block explorer;
    • An exit report requirement, which would include either (i) an outside counsel analysis explaining why the network is decentralized or functional; or (ii) an announcement that the company will register the tokens under the Securities Exchange Act; and
    • Enhancements to the exit report requirement to address what the outside counsel’s analysis should address when explaining why a network is decentralized.

    The public is encouraged to provide feedback on the updated proposal.

    Fintech SEC Securities Agency Rule-Making & Guidance Safe Harbor Virtual Currency Cryptocurrency Digital Assets

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  • FATF updates virtual assets and service provider guidance

    Agency Rule-Making & Guidance

    In March, the Financial Action Task Force (FATF) updated pre-existing guidance on its risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The draft updated guidance revises guidance originally released June 2019, wherein FATF members agreed to regulate and supervise virtual asset financial activities and related service providers (covered by InfoBytes here) and place anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on VAs and VASPs. According to FATF, the revisions “aim to maintain a level playing field for VASPs, based on the financial services they provide in line with existing standards applicable to financial institutions and other AML/CFT-obliged entities, as well as minimizing the opportunity for regulatory arbitrage between sectors and countries.” The revisions provide updated guidance in six main areas intended to:

    • Clarify VA and VASP definitions to make it clear that these definitions are expansive and that “there should not be a case where a relevant financial asset is not covered by the FATF Standards (either as a VA or as a traditional financial asset)”;
    • Provide guidance on how FATF Standards apply to so-called stablecoins;
    • Provide further guidance on risks and potential risk mitigants for peer-to-peer transactions;
    • Provide updated guidance on VASP licensing and registration requirements;
    • Provide additional guidance for public and private sectors on the implementation of the “travel rule”; and
    • Include principles of information sharing and cooperation among VASP supervisors.

    FATF intends to consult private sector stakeholders before finalizing the revisions, and is separately considering implementing revised FATF Standards on VAs and VASPs—as well as whether further updates are necessary—through a second 12-month review.

    Agency Rule-Making & Guidance FATF Virtual Currency Of Interest to Non-US Persons Anti-Money Laundering Combating the Financing of Terrorism Financial Crimes Digital Assets

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  • Digital asset company to pay $6.5 million to settle CFTC allegations

    Securities

    On March 19, the CFTC announced a $6.5 million settlement with a California-based digital asset company to resolve allegations of false, misleading, or inaccurate reporting concerning its digital asset transactions that violated the Commodity Exchange Act or CFTC regulations. According to the CFTC, from January 2015 to September 2018, the company allegedly operated at least two trading programs that generated orders that, at times, matched each other. The CFTC claimed, among other things, that the transactional information provided on the company’s website and given to reporting services resulted “in a perceived volume and level of liquidity of digital assets. . .that was false, misleading or inaccurate.” Additionally, the CFTC alleged that the company was vicariously liable for a former employee’s use of “a manipulative or deceptive device” to intentionally place buy and sell orders that matched each other, creating a misleading appearance of interest in certain cryptocurrencies. The company did not admit or deny the CFTC’s findings and agreed to pay a $6.5 million civil penalty.

    Securities CFTC Enforcement Virtual Currency Commodity Exchange Act Cryptocurrency Digital Assets

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