States have begun to consider how their money transmission licensing requirements apply to digital currency businesses. For example:
- Texas and Kansas have published guidance explaining that third-party bitcoin exchanges do engage in money transmission and therefore must simply be licensed as money transmitters with state authorities.
- California, Pennsylvania, and North Carolina are looking to amend their existing money transmission laws to incorporate digital currencies.
- New York has decided to place digital currency businesses under a special regulatory regime and has proposed a so-called, “BitLicense.”
To aid in these efforts, Coin Center is today making available a State Digital Currency Principles and Framework report. This report outlines what a sound digital currency law must encompass:
- Precise definitions of key digital currency concepts.
- Guidelines for exemption of non-money transmitting digital currency businesses.
- Terms for interaction with existing state money transmission law.
- An explanation of real-time provable solvency, which is only possible for digital currency businesses.
This report offers model language for a digital-currency-specific statute or implementing regulation. It is not a draft or model bill in full. Instead, legislative language is offered for the essential components of any digital currency law: who must be licensed, how are start-ups encouraged, how is solvency guaranteed, etc.
To be a leader in the future of financial technology, a state must carefully forge a path toward consumer protection and avoid the pitfalls of inartful and unnecessarily costly regulation. As the report explains, this path has several essential steps that (1) only those with unilateral control of customer funds should be subject to a license requirement; (2) innovative and small startups should be protected with a non-discretionary on-ramp; (3) licensed firms should not need not seek a duplicative money transmitter license; (4) it should be possible to satisfy capital requirements by holding digital currency, (5) AML requirements, if absolutely necessary at all, should at least match and not exceed federal standards; and (6) changes of business should only require notification, rather than pre-approval.
Each state will independently travel this craggy and dimly-lit terrain. The state that reaps the benefits of new technologies, new jobs, and enhanced financial inclusion will be the state that first discovers a path worth following. We hope this report will help in that endeavor.