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On July 25, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter concluding that a company that merely receives payment instructions, orders, or directions to transmit money or monetary value does not constitute “receiving money for transmission” requiring licensure under the California Money Transmission Act (MTA).
Citing the California regulations, DFPI states that to “receive money for transmission,” a person must actually or constructively receive, take possession, or hold money or monetary value for transmission; merely receiving instructions, orders, or directions to transmit money or monetary value does not constitute “receiving money for transmission.”
As described in the letter, the data processor facilitated payments made by customers to contracting merchants in exchange for goods and services sold by merchants. The data processor forwards customer account and transaction details to partner financial institutions for debiting the customer’s account, and also facilitates refunds initiated by the merchants, including sending ACH instructions to the partner financial institution. However, the data processor at no point handles transferred funds or has custody or legal ownership of the rights to the transferred funds. DFPI, based on several factors and not solely limited to the services described, determined that the inquiring data processor’s payment system does not constitute money transmission or require an MTA license.
The California Department of Financial Protection and Innovation (DFPI) recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) relating to whether certain payment services are exempt or subject to licensure. The redacted opinion letter examines three payment services provided by the inquiring company. DFPI first analyzed and determined that payments received by a law firm collection agent from a different entity’s collection attorneys and remitted to said entity are exempt pursuant to MTA Financial Code section 2011. DFPI next considered whether the MTA’s agent of payee exemption applies to certain tax payment transactions wherein a customer’s payment obligation to the company is extinguished once the customer has submitted a payment through a particular contractor. According to DFPI, transactions conducted pursuant to a contract between the company and the contractor (appointed as a limited agent for the sole purpose of receiving payments on the company’s behalf from taxpayers) are exempt from the MTA under the agent of payee exemption. Finally, DFPI considered whether the agent of payee exemption applies to certain payments to government entities. DFPI explained, among other things, that the language contained within the contracts with each government entity “establishes that the government entity has appointed [the company] to act as its agent and that payment to [the company] extinguishes the payor’s payment obligation to the government entity.” As such, DFPI determined that “transactions conducted pursuant to contracts containing such language are exempt from the MTA under the agent of payee exemption.”
The California Department of Financial Protection and Innovation recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) and the Escrow Act related to persons engaging in business as an escrow agency within the state. The redacted opinion letter examines a request from the inquiring company for confirmation that it does not require either an internet escrow agent license or a money transmitter license in the state of California in connection with its proposed business model (details on the model have been omitted). DFPI responded that under the Escrow Law, “it is unlawful for any person to engage in business as an escrow agent within this state except by means of a corporation duly organized for that purpose licensed by the commissioner as an escrow agent.” The definition of an “internet escrow agent,” DFPI explained, was added to Financial Code section 17003, subdivision (b) to mean “any person engaged in the business of receiving escrows for deposit or delivery over the Internet.” DFPI concluded that based on the facts asserted within the request, the inquiring company has not demonstrated that its proposed model is exempt from the Escrow Law.
DFPI further considered whether the inquiring company’s proposed model meets the definition of stored value under the MTA, and whether it qualifies for several exemptions under the statute. DFPI explained that the transactions under consideration are not considered “stored value under the definition in Financial Code section 2003, subdivision (x), because they do not represent a claim against the issuer; rather, the money comes under [the inquiring company’s] possession and control and therefore must be placed in an escrow trust account. “An escrow trust account is not the same as stored value,” DFPI said, adding that since the transaction is not stored value, it is unnecessary to address the remaining arguments regarding the MTA.
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.
Recently, 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 certain agent of payee requirements. The redacted opinion letter examines whether the inquiring company’s product for donations to nonprofit organizations (NPOs) is exempt from the MTA. DFPI also reviewed whether: (i) money held by the company in an operating account, related to MTA-exempt activities such as NPO donations, is stored value; and (ii) closed loop transactions, and specific bank-issued open-loop gift cards without cash access, are exempt from the MTA. The Washington state-headquartered company sells reward programs to businesses that are used to incentivize purchases by their customers, reward customer loyalty, and reward employee performance. The opinion letter does not address closed loop gift cards and open loop gift cards, as DFPI previously issued an opinion letter regarding these products on February 19, 2020, nor does it address a yet-to-be introduced reward program that deposits cash into a recipient’s account or provides credit to a specified credit card as the company already acknowledges that this service constitutes regulated activity under the MTA.
However, the opinion letter does address circumstances when an NPO donation is selected by a recipient from the company’s reward options. In this instance, the reward amount is transferred from the company’s operating account to its custodial bank account designated “For the Benefit Of Customers” held at a national bank. The company then “aggregates contributions to each NPO and distributes these amounts, less its 8% administrative fee, directly to the NPOs on a weekly basis.” According to the company, “[f]unds do not move out of the NPO Account until these payments are made and the NPO Account is not used for any purposes other than NPO Donations.” DFPI concluded that the company’s current NPO agreement satisfies the agent of payee requirements for exemption from the MTA, and that as such, NPO donations are not a regulated activity. Specifically, the company’s NPO agreement provides that the company is appointed as the NPO’s agent and is obligated to remit all funds collected on the NPO’s behalf to the NPO. Receipt of the funds from the company’s client “constitutes receipt by the NPO, even if the NPO does not receive the funds from [the client].” The company, and not the client or recipient, is solely responsible to the NPO, DFPI said, adding that “[c]lient funds temporarily being held in [the company’s bank] operating account in prepayment for closed loop gift cards, bank-issued open loop gift cards, and NPO donations are not stored value.”
Recently, 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 the purchase and sale of virtual currency. The redacted opinion letter examines whether a Company that offers customers the opportunities to deposit fiat currency to a Company account and then draw down that balance to purchase virtual currency from the company requires MTA licensure. The Company explained that virtual currency is purchased from a third party and is transferred to the customer’s Company-issued virtual currency wallet where it can then be stored, transferred to an external wallet, or sold for fiat currency. When a customer later wants to sell the purchased virtual currency for fiat currency, the transaction occurs in a similar fashion. The Company stated that “virtual currency sales to customers are from the Company’s own inventory,” and that for purposes of the opinion, DFPI “assumes these sales occur independently of the Company’s own transactions with third parties.”
DFPI concluded that because the Company’s activities are limited to directly purchasing and selling cryptocurrency to customers, it does not require an MTA license because it does “not involve the sale or issuance of stored value or receiving money for transmission.” Specifically, DFPI stated that because the “customer’s fiat currency balance in the Company account does not meet the definition of stored value” and because “funds in that account can only be used for virtual currency purchases from the Company or transferred out to the customer’s external bank account,” the closed loop stored value “does not constitute issuance of stored value that is regulated under the MTA.” DFPI reminded the Company that its determination is limited to the presented facts and that any change could lead to different conclusions.
On March 23, 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 digital asset trading platform. The redacted opinion letter examines whether the inquiring Company (a registered money services business) requires licensure under the MTA. The Company requesting an interpretive opinion operates a software platform that allows retail and institutional investors to buy and sell digital assets, including cryptocurrency, and access related services, within the platform. The letter explains that U.S. customers must fund an account on the Company’s platform prior to purchasing cryptocurrency with either fiat currency (U.S. dollars) or cryptocurrency. The letter also describes, among other things, how customers can buy from and sell to the Company cryptocurrencies on one or more cryptocurrency exchanges using the platform. In these transactions, the Company would sell or buy cryptocurrency from the customer at the selected price and settle the trade using fiat or cryptocurrency held in its own accounts. Simultaneously, the Company would execute a trade for its own benefit on the exchange offering the price selected by the customer. Customer funds would not be used to buy or sell cryptocurrency from or to the exchange. After executing a transaction, a customer may choose to withdraw all or part of the customer’s fiat or cryptocurrency from the platform, or may choose to maintain a balance to execute future transactions.
The DFPI stated that it “has not concluded whether a wallet storing cryptocurrency constitutes a form of monetary value representing a claim against the issuer and accepted for use as a means of redemption for money or monetary value or payment for goods or services.” As such, the DFPI will not require the Company to be licensed under the MTA to provide customers with an account via a proprietary software platform to transfer and store cryptocurrency in order to execute trades directly with the Company.
Recently, the California Department of Financial Protection and Innovation (DFPI) released new opinion letters covering aspects of the California Money Transmission Act (MTA) related to a digital currency trading platform and the referral of customers to financial institutions. Highlights from the redacted letters include:
- Digital Currency Trading Platform. The redacted opinion letter examines whether the inquiring Company requires licensure under the MTA. The letter describes that the Company’s customers would transfer digital currency into the account they have with the Company, with the balance being reflected in the customer’s wallet issued by the Company. The letter further explains that the Company would provide California residents access to its digital currency trading platform to buy, sell, or hold digital currency and provide liquidity services. The letter also describes, among other things, how customers could use the platform, transfer digital currency into the account, and transfer fiat currency by transferring it from their own bank account or by debit or credit card to the Company. Customers would not be able to send fiat or digital currency to others, except in the context of a sale. DFPI concluded that while the Company’s wallets holding fiat currency meet the definition of stored value, licensure under the MTA was not required because the Company offered fiat currency wallets to customers solely to facilitate the trade of digital currency. DFPI also noted that the Company does not require licensure under the MTA to perform Platform trading services or to issue wallets holding digital currencies.
- Referral of customers to financial institutions. The redacted opinion letter examines whether the inquiring Company’s referral service is subject to the MTA. The letter describes that under this service, the Company would refer customers to banks, trust companies, and other entities which are either licensed as money transmitters in California or exempt from licensure. Under the proposed referral service, customers would be re-directed to a financial institution’s website where they could set up and fund an account. Customers wishing to buy, sell, or exchange cryptocurrency or fiat currency could do so from the Company’s website and use a third party’s software platform to input their order details. The platform would check to make sure that the customer has sufficient assets in the customer’s account with the financial institution to purchase the cryptocurrency. The financial institution would be the only party to hold, receive, or transmit all cryptocurrencies in the customer’s account. DFPI concluded that the referral service does not meet the definition of money transmission because the service entails connecting customers with financial institutions from which customers can buy, sell, or exchange cryptocurrency. Further, DFPI noted that the transactions between customers and financial institutions are also not money transmission because the customer would simply exchange cryptocurrency directly with the financial institution. Accordingly, DFPI held that licensure under the MTA is not required because the Company will not sell or issue payment instruments, sell or issue stored value, or receive money for transmission by offering the referral service.
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.
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.