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Financial Services Law Insights and Observations

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  • DFPI: Certain Bitcoin ATMs not subject to MTA licensure

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released new opinion letters covering aspects of the Money Transmission Act (MTA) related to Bitcoin automated teller machines (ATMs). Each of the three letters (available here, here, and here), which contain slightly different fact patterns, explain that the Bitcoin ATMs described by the applicant companies are not subject to licensure under the MTA because they are not considered to be engaging in the business of money transmission. In each instance, the transaction would only be between the consumer using the kiosk and the company, the transaction would be completed instantly, and no third parties would be involved in the transmission of the Bitcoin to the customer’s virtual wallets. DFPI reminded each company that while it was not a subject of their inquiry, if they choose to offer virtual currency other than Bitcoin, they may have obligations under California’s broker-dealer laws to the extent that any of those virtual currencies are securities.

    Licensing State Issues State Regulators DFPI California Money Transmission Act

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  • California DBO addresses MTA licensing exemptions

    State Issues

    Last month the California Department of Business Oversight (CDBO) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the sale of foreign currency and the agent of the payee exemption.

    • Sale of Foreign Currency. The redacted opinion letter concludes that the company’s banknote replenishment service does not trigger the licensing requirements of the MTA because the company does not engage in “selling  or receiving payment instruments, selling or receiving stored value, or receiving money for transmission.” Moreover, the CDBO determined that the company “does not issue anything to the business except for the foreign currency that was ordered, and does not receive money from the business for purpose of transmission.” 
    • Agent of Payee Exemption - Payment Processing Service. The redacted opinion letter concludes that neither the company’s pay-in services nor pay-out services are exempt from the MTA. According to the letter, the company provides payment processing services to online gaming operators (merchants), which allow the merchants’ customers to submit payments to engage in online gaming, such as sports betting and daily fantasy sports betting. The CDBO determined that the pay-in and pay-out services provided by the company “constitute ‘receiving money for transmission,’” as required for the MTA to apply, because the company “receives money from the [c]ustomers for transfer to the [m]erchants” for the pay-in service and “receives money from the [m]erchants for transfer to the [c]ustomers” for the pay-out service.  However, the agent of the payee exemption does not apply to the pay-in services, despite an agreement that establishes the company as the merchant’s agent, because the funds received by the company are not owed to the merchant when they are received by the company. Instead, such funds are retained in an account for the benefit of the merchant until a gambling debt is owed to the merchant. For the pay-out services, the exemption does not apply because the merchant’s customer does not provide any goods or services to the merchant for which the merchant’s payment to the customer is owed. The CDBO also advised that some of the proposed payments described in the company’s request may involve sports betting, which is an illegal activity in the state, and cautioned that the opinion “applies only to activities that are currently legal in California and does not relieve [the company] from its obligation to comply with other applicable state and federal laws.” Furthermore, the CDBO stated that MTA licenses cannot be issued to companies engaged in the transmission of money to facilitate unlawful activities.

    State Issues Licensing California Money Service / Money Transmitters State Regulator CDBO California Money Transmission Act

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  • California DBO opinion letters cover activities exempt from MTA licensing

    State Issues

    The California Department of Business Oversight (CDBO) released several opinion letters issued throughout the summer covering virtual currency and agent of payee rules under the California Money Transmission Act (MTA). Highlights from the redacted letters include:

    • Cryptocurrency - Escrow Accounts and Exchanges. The redacted opinion letter states that the CDBO has not yet determined whether cryptocurrencies are a form of money that triggers the application of the MTA and therefore, a business model that operates brokerage accounts using cryptocurrency exchanges would not need to be licensed and supervised under the MTA. As for a business model that the letter describes as a third-party repurchase transaction related to borrowing and lending cryptocurrency, the CDBO reminds the company that the activity may still be subject to California Escrow Law.
    • Agent of Payee Exemption - Payment Processing Service. The redacted opinion letter concludes that the company’s payment processing services—which use mobile applications or card readers to capture customer information through merchants, and the payment funds flow first from the customer to the company, and then from the company to the merchant—“fall within the definition of ‘money transmission’ but are exempt from the MTA to the extent [the company], acting as the [m]erchant’s agent, receives money from [c]ustomers, via the relevant card company, as payment for goods or services.”
    • Online Foreign Currency Exchange Service. The redacted opinion letter concludes the company’s online foreign currency exchange service is not subject to licensure under the MTA, because the service does not “involve ‘payment instruments’ or ‘stored value’” and there is no indication that the company would “receive money for transmission,” as customers would use the service to purchase foreign currency “like other online retail purchases.”
    • Exemption for Operator of Payment System. The redacted opinion letter notes that California governmental entities are exempt from the MTA, and a company that provides payment processing services to facilitate the transfer from a California Department of Correction detainee’s cash at a detention facility to that detention facility’s bank account, is exempt from the MTA because it is processing payments between or among persons exempt from the MTA.
    • MTA - Agent of Payee. The redacted opinion letter states that the company’s transactions by an agent of a merchant to collect funds from the merchant’s customer for payment of goods and services are exempt from the requirements of the MTA. The company is acting as an agent of the payee when a company is receiving money as an agent of a merchant pursuant to a preexisting written contract, and delivery of the money to the company satisfies the customer’s obligation to the merchant for a good or service provided by the merchant.
    • Sending Instructions Not Money Transmission. The redacted opinion letter states that the company’s actions do not constitute money transmission under the MTA because “[the company] never ‘receives money for transmission.’” The company only “receives instructions from consumers and merchants to transmit money to each other and forwards these instructions for processing by their respective banks on the ACH network.” Because the banks are “solely responsible for payment and settlement in accordance with these instructions” the company’s payment system does not require an MTA license.

    State Issues Licensing California Money Service / Money Transmitters Virtual Currency California Money Transmission Act CDBO

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