States Take Action on Bitcoin Online Lending

Financial Services Law

State regulators are keeping a close eye on cryptocurrency and digital lending activities, with a cease and desist order involving bitcoin and a new law targeting online lenders.

The moves come in the wake of the Office of the Comptroller of the Currency’s (OCC) announcement that it will begin accepting applications for special purpose national bank charters geared toward fintech companies, a move that likely will encroach upon state regulation and oversight of fintech companies.

What happened

The Georgia Department of Banking and Finance announced a cease and desist order against CampBX, a bitcoin trading platform. The move demonstrates that Georgia is serious about enforcing traditional lending laws against companies that operate in new and novel ways.

Pursuant to state law, companies that are engaged in money transmission or the sale of payment instruments must be licensed (unless an exemption applies). While these rules typically have applied to traditional lenders and fiat currency brokers, the Department concluded they also apply to virtual currency traders. The Department announced its order on July 26.

Meanwhile, Governor John Kasich signed into law restrictions on so-called payday loans in Ohio. The new law (House Bill 123) prohibits most loans where the amount is less than $5,000, the term is less than one year or the annual percentage rate exceeds 28 percent. The law imposes additional restrictions on loans that are less than $1,000 or have a duration of less than one year. Lenders are also prohibited from demanding collateral for short-term loans, are restricted to a cap (including both fees and interest) of 60 percent of the original principal, and are required to permit borrowers three business days to rescind their loans without interest.

The law contains a variety of other disclosure requirements and lender restrictions, making it one of the most comprehensive changes to state consumer lending rules so far this year. The bill was signed into law on July 30 and will apply to new loans starting in early 2019.

To read the cease and desist order, click here.

To read H.B. 123, click here.

Why it matters

As the administration in Washington has generally eased the pace of consumer lending law enforcement, state regulators have increasingly stepped up to fill the vacuum. We anticipate seeing more actions like those taken in Georgia and Ohio as state policymakers react to the rapidly evolving fields of digital currency and consumer lending.

Increasing state action will further complicate the patchwork of regulation that consumer lenders must navigate when operating in multiple states. This in turn will increase startup and compliance costs that ultimately could increase the cost of borrowing by consumers.

While the heady days of digital currency appear to be over, following aggressive enforcement action by the Securities and Exchange Commission, the commercial viability of these instruments may be further dampened by the expanding reach of state law. We anticipate state regulators will be particularly focused on emerging technologies that are not well understood by consumers.

With the OCC’s recent announcement that it will accept applications by fintech companies for special purpose national bank charters, the ultimate reach of state regulation to cryptocurrency and digital lending activities remains to be seen. With the OCC as their primary regulator in all 50 states, chartered fintech companies can expect that significant portions of state banking regulation will be pre-empted by federal law. Nonetheless, the shifting boundary between federal and state jurisdiction in this area likely will take years to be settled.