State Money Transmitter Laws Update: Then There Was One

South Carolina became the 49th state to enact a money transmitter licensing statute, leaving Montana as the lone jurisdiction in the United States not to require money transmitters to be licensed to offer services to residents of its state. (Massachusetts still requires licensing only for international transmissions.) The new South Carolina statute, which will become effective in June 2017, is very similar to the statutes already in place in a number of states. Although virtual currencies have not been expressly addressed in the statute, the term "monetary value" has been defined broadly enough to permit the regulator to require those involved in the transmission of virtual currencies to be licensed. This definition has been the basis for other states to determine that virtual currencies are covered by the statute. No exemption is provided for payment processors other than those processing transactions between banks or other entities exempt from the licensing requirements.

North Carolina Addresses Payment Processors and Virtual Currency

Within days of the enactment of the new South Carolina law, the North Carolina governor signed into law an amendment making a number of significant modifications to the state's Money Transmitters Act. Although much of the press coverage has focused on the legislature's decision to incorporate virtual currencies expressly into the statute, we believe the significance of this action has been blown out of proportion.

In fact, while some have touted the decision to expressly address virtual currencies in the Act as a positive effort to eliminate uncertainty around whether virtual currency businesses require licenses, the amendments will potentially require more companies to get licenses and make it harder to obtain them.

What happened

The amendments to the North Carolina Money Transmitters Act updated a number of provisions of the Act. Possibly the most significant of the changes is a clear exemption from the licensing requirements for a number of different payment processors including those processing payroll and payments as the bona fide agents of payees. In addition, the scope of the statute has been limited to requiring licensing for transmissions "primarily for personal, family or household purposes" thereby eliminating the need for licenses to conduct business-to-business transactions.

The amended law also now reflects the same position as many other states: no person can "solicit[] or advertise[] money transmission services from a Website that North Carolina citizens may access in order to enter into those transactions by electronic means" without a money transmitter license.

Like the new South Carolina law, the term "monetary value" has been defined to be a "medium of exchange, whether or not redeemable in money." Although a number of states have already determined that such a definition is broad enough to require virtual currency businesses to obtain licenses, the North Carolina legislature went a step further to expressly reference "virtual currency" several places in the statute, including in the definition of "money transmission" which now includes "engaging in the business" of "maintaining control of virtual currency on behalf of others."

The newly amended law is considered by many to be more business friendly than the New York Department of Financial Services Virtual Currency Regulation. However, absent action by the North Carolina regulator, the bar for new entrants is significantly higher as there is no "on-ramp" like the one provided by the New York DFS. The minimum net worth requirement has been increased from $100,000 to $250,000 for all applicants—including virtual currency businesses. The baseline for the surety bond requirement remains at $150,000 as long as the transactional level is below $1 million. The bonding requirement increases incrementally to $250,000 when transactions exceed $50 million.

The Commissioner also has been given "discretion to require applicants to obtain additional insurance coverage to address related cybersecurity risks inherent in the applicant's business model as it relates to virtual currency transmission and to the extent such risks are not within the scope of the required surety bond."

The statute addresses several issues that have been somewhat problematic for other states adapting their licensing requirements to virtual currency businesses. One key area is the permissible investment requirement which now allows virtual currencies to be counted now as permissible investments but only limitedly. The term "virtual currency" has also been defined as "[a] digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account, or a store of value … but does not have legal tender status as recognized by the United States Government."

The Act is retroactively effective to October 1, 2015.

To read the North Carolina Money Transmitters Act, click here.

Why it matters

Regulation continues to tighten not only around virtual currency businesses but all money services businesses. South Carolina, one of the last holdouts in regulating the industry, will add a little more to this increasing regulatory burden when its statute becomes effective in 2017. And, despite praises for being a more business-friendly effort to regulate virtual currency businesses, the amended North Carolina statute raises the regulatory bar immediately not just for such businesses but all money services businesses. This tightening will continue as the Uniform Law Commission completes the drafting of a model uniform code for virtual currencies and other states—including California, Pennsylvania, Tennessee, and Wyoming—consider how to regulate virtual currency businesses.

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