Money Transmission Licensing is broken. Here’s how to fix it.
A federal alternative would give users an option that fits with internet businesses
Last week the Chairmen of the SEC and CFTC co-authored an op-ed in the Wall Street Journal that, among other things, called for a “revisit” of the policy thinking behind state-by-state licensing of digital currency exchanges. It’s fortuitous, then, that for some time we’ve been working on a report to help jumpstart that revisit and hopefully begin a conversation about better regulatory approaches.
Today we are releasing a new Coin Center report: The Need for a Federal Alternative to State Money Transmission Licensing. After offering an explanation of state-by-state licensing regulations and a brief description of the range of businesses and technology companies that are implicated by these regulations we explain, in detail, why the whole system is inefficient and in need of a change. From the executive summary:
State-by-state money transmission licensing is inefficient because transmitters provide a networked good that inherently crosses state lines, and because state regulators cannot and do not account for these externalities when they calibrate their regulations. The regime is also inefficient because it generates uncertainty for innovative financial services businesses whose novel products and technologies straddle the statutory definitions of money transmission. Critical legal language differs state by state, including the definition for “money transmission.” Unlicensed money transmission carries significant penalties, both state and federal, but the patchwork of state statutes fails to offer clear and justiciable standards eroding the rule of law and hindering innovation.
These inefficiencies prevent effective regulatory cooperation between licensing authorities and anti-money laundering or investor protection regulators. They hinder economic growth because they raise the costs of starting innovative businesses. They hinder American competitiveness in financial technology because regimes internationally eschew overlapping multi-state licensing in favor of a unified approach. They hinder effective consumer protection efforts because regulators calibrate their protections to the activities of a licensee with respect only to customers in the regulator’s state and ignore the risk-profile of the licensee’s national or international business as a whole. And they hinder financial inclusion by stymying the development of new financial tools that can deliver cheaper, safer, or more palatable services to underserved communities. The U.S. is long overdue for a solution to the challenges of state-by-state licensing in the form of a sensible unified national approach to money transmission regulation.
Possible solutions are various and range from least to most extensive: (a) the creation of a license passporting regime resembling the E.U.’s e-money system, (b) the creation of a federally administered alternative license and limited preemption of state law for federal licensees, (c) the creation of a federally administered license and full preemption of all state money transmission licensing, and (d) the creation of a more comprehensive CFTC-run investor protection regime focused on digital currency exchanges that also preempts state licensing. All approaches must also include a safe harbor for novel businesses that do not create the sort of risks to consumers that money transmission licensing is meant to address (but which may be treated as money transmitters under a loose interpretation of some state statutes). All approaches should also contemplate the creation of a sandbox program where novel businesses that would otherwise qualify and need a full license can negotiate for flexible regulatory treatment.
All things being equal, Coin Center prefers federal legislation that would create a federal money transmission license as an alternative to state licensing for companies that seek it out. The federal legislation would not preempt state licensing except with respect to (a) federally licensed firms, (b) those that fit within a safe-harbor for non-custodial activities, and (c) qualified participants in a federally administered regulatory sandbox.
Read the whole report; We support our claims of regulatory inefficiency, debunk some myths about the advantages of state-by-state regulation (experimentation, regulatory competition, discretion), and outline the various alternatives as we see them.