Cryptocurrency License in USA: An Overview
The cryptocurrency license in USA is not a single c license. The license to undertake a cryptocurrency business within the jurisdiction of USA requires obtaining a Money Services Business from the Financial Crimes Enforcement Network (FinCEN) along with a Money Transmitter License from the respective state agencies within which the cryptocurrency business is undertaking its business activities. In the USA, cryptocurrencies or virtual currencies have not been granted the status of fiat currency. However, encouraging signs have emerged from some state governments who are progressing towards according the cryptocurrencies the status of fiat currency.
Regulatory Framework for Cryptocurrency license in USA
Cryptocurrency businesses in the USA are subject to a number of regulations depending on the type of digital assets and the nature of the business. Most of the states in the USA regulate cryptocurrencies under the prevailing money transmitter rules, and these state-specific cryptocurrency laws vary from state to state. The Initial Coin Offerings (ICOs) in the USA are regulated by the SEC provided the coins offered are considered securities. There may be certain instances where the issuer of the ICO has to register the offering with the SEC (unless they qualify for an exemption).
Regulatory Authorities for Cryptocurrency license in USA
Cryptocurrency license in USA is granted by both the Federal and State governments. At the Federal level, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Department of Treasury through the Internal Revenue Service (IRS), the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency (OCC) and the Financial Industry Regulatory Authority (FINRA). Apart from the statutes and rules and regulations of these regulatory agencies at the federal level, to obtain a cryptocurrency license in USA, certain state-level laws and licenses are also required, which include the state-chartered banking regulations, usury laws applicable to interest rates, money transmitter laws, data privacy laws and security laws.
If you intend to obtain your cryptocurrency license in USA, speak to our Cryptocurrency and Fintech business Consultants at Enterslice.
Procedure to obtain a cryptocurrency license in USA
Every company that provides Cryptocurrency services in the USA is considered a Money Transmitter and should be in full compliance with all the prescribed procedures mentioned below. Following is the procedure that every Money Services Business in the USA, including Money Transmitters, needs to comply with under the FinCEN framework:
- Registration as a Money Services Business:
The first step in obtaining a cryptocurrency license in USA is to register your business entity with the FinCEN as a Money Services Business (MSB). The entity has to fill and submit a Form “FinCEN Registration of Money Services Business” through FinCEN’s BSA E-Filing System. This registration with the FinCEN has to be renewed after every two years.
- Develop and Implement an AML program:
FinCEN has made it mandatory for the MSBs to develop, implement and integrate an effective AML compliance program which prevents the entity from being used to facilitate money laundering activities and financing of terrorist activities. The following are the minimum provisions that every AML program should consist of:
- Structured documented policies, internal controls and procedures, ensuring ongoing compliance with the applicable requirements,
- A person should be designated to ensure day-to-day compliance with the BSA requirements,
- Provide training and education to the existing employees and staff under the AML program, teaching them how to detect and respond to suspicious transactions,
- Independent reviewing for monitoring and maintaining an adequate program.
- S. sanctions reporting and Filing of the Suspicious Activity Report:
It is incumbent on every MSB to report any transaction over the value of $2,000 in value if it believes it to be suspicious. A transaction is said to be suspicious if:
- The transaction draws funds from illegal activities;
- The transaction intends to hide the nature, source, ownership, location or control of funds from illegal activities;
- The transaction is made in order to evade any BSA requirement;
- The transaction serves no reasonable or lawful purpose (and the MSB is not satisfied with the reasonable explanation given even after examining the available facts); or,
- If the transaction facilitates criminal activities using the MSB as a platform
It is also the duty of an MSB to monitor its customers to find out whether they are on or do not enter into transactions with individuals and entities that appear on the Specially Designated Nationals and Blocked Persons List that is maintained by the Office of Foreign Assets Control (OFAC) under the US Department of Treasury’s.
- Obtaining a Money Transmitter License:
For an MSB to operate as a Money Transmitter, it has to apply for and obtain a Money Transmitter License from every state where it wants to do its business. The regulations at the federal level are made to ensure financial security and to prevent the menace of money laundering. On the other hand, at the state level, money transmission licensing is directed towards protecting the consumers and ensuring the safety, soundness and solvency of the applicants.
There is no one license that is applicable across the states due to the different criteria of each state in defining and regulating cryptocurrencies. Additionally, there is a lack of consistency among the states over the requirements for licensing, such as differences in the definition of money and whether it includes cryptocurrency or not. This makes the process of obtaining a license an expensive and time-consuming affair if the license is sought across multiple states.
For the purposes of obtaining a Money Transmitter License, most of the states upload their license applications and additional documents to a centralised website called the Nationwide Multistate Licensing System. Considering great variance among the states with respect to the minimum requirements for obtaining a Transmitter license, a licensing application requires the following items:
- License application form along with the applicable fee
- AML compliance program
- Business Plan and Financial Statements of the business
- Background checks
- Minimum net worth threshold
- Surety Bonds or other forms of security
As per the latest trends, the states that have issued the maximum number of Money Transmitter Licenses include Alaska, Oregon, West Virginia, New Mexico, North Carolina, New York, Georgia, Mississippi etc.
While some of the states in the USA have a positive attitude towards cryptocurrency, others have remained neutral towards the industry or remained unclear about the requirement to obtain a Money Transmitter License.
For the states of Connecticut, Vermont and Oregon, businesses need to obtain a Money Transmitter License.
Department of Banking defines virtual currency as any type of digital unit that can be used as a medium of exchange, has a digitally stored value or is incorporated into the payment system technology. The Connecticut General statute finds cryptocurrency as similar to fiat currency depending on the firm’s activities, under the money transmission scheme
The Oregon Division of Financial Regulation obligates cryptocurrency businesses to obtain a Money Transmitter license. All those businesses that are engaged in the activities of issuing or selling cryptocurrencies or operate cryptocurrency exchanges within the USA or abroad by wire, electronic transfer, payment instrument, facsimile or by other means are obligated to obtain a money transmitter license.
The definition of “stored value” contains the term “virtual currency”, and it is located in the definition of “money transmission”.
There are certain states, such as Kentucky and Florida, where it is probable to obtain a Money Transmitter License for cryptocurrency businesses.
No position has been taken yet by the Kentucky Money Transmitter Act on its stand or cryptocurrency. However, the definition of money transmission includes the concept of “monetary value”, which has been defined as a “medium of exchange whether or not redeemable in the money”.
The Money Transmitter Act of Florida does not explicitly include the concepts of cryptocurrency. Additionally, the State’s Office of Financial Regulation has not provided any direct guidance to the applicability of the Act on cryptocurrency/ virtual currency users and issuers. However, it suggests that persons who are offering ‘wallet’ services, engaged in buying and selling of cryptocurrencies or exchanging cryptocurrency for legal tender do not fall outside the scope of activity that is subject to Florida’s Money Transmitter Act.
Illinois and Pennsylvania are the two states in the USA where it is improbable for cryptocurrency businesses to obtain money transmitter licenses.
According to the definition of money in the Transmitters of Money Act, an entity or a person that is solely engaged in the transmission of virtual currencies is not be required to obtain a license. Further, the exchange of virtual currency for money doesn't qualify as money transmission.
According to the state’s Department of Banking and Securities, the definition of money has been restricted to fiat currency. Therefore, all the virtual currency exchange platforms, vending machines, ATMs and Kiosks are not considered ‘money transmitters’.
Montana is the only state in the USA where cryptocurrency companies are required to obtain a money transmitter license. Montana is the only state that does not regulate or license the transmission of money in the case of both fiat and virtual currencies.
Those companies that are engaged in “Virtual Currency Business Activities” in the state of New York have been mandated by the New York State Department of Financial Services (NYSDFS) to obtain a BitLicense along with a Money Transmitter license to continue and commence their commercial activities within the state of New York. This is one of the most rigorous licensing requirements across the USA. After New York, Louisiana became the second state to adopt a licensing regime specific for cryptocurrency/ virtual currency businesses in Louisiana under the Virtual Currency Business Act.
One of the most cryptocurrency-friendly jurisdictions in the USA is the state of Wyoming. It has passed around 13 enabling laws in the past two years to promote digital currencies, making it a champion state in terms of providing a clear and transparent regulatory framework for cryptocurrency businesses.
Where the regulatory framework is not very clear, the companies in those states should contact their respective state agencies or professional consultancy firms like Enterslice to fully understand the state licensing procedures and compliance requirements for starting their cryptocurrency businesses.
Multistate Money Service Business Licensing Agreement Program (MMLA)
In order to simplify, improve and accelerate the regulatory procedure of obtaining an MSB license across multiple states, the MMLA program has been initiated. This program has been designed for those businesses that are willing to apply for five or more state licenses in the next twelve months and which can be accessed through the platform of the Nationwide Multistate Licensing System.
The prospective multistate applicants are required to submit their intake forms to the Washington Department of Financial Institutions, which is currently serving as the lead state for the MMLA program.
The MMLA program consists of two phases:
Phase 1 – In this phase, a phase 1 state agency conducts a Phase 1 review of an MSB application. If this state approves the application, the application is sent to other state agencies for the second phase of review.
Phase 2 – in the second phase, after receiving the application, a Phase 2 review of the application begins, where the state reviews the application on the basis of their state-specific regulations. If all the Phase 2 reviews are approved, then the applicant gets a license in each of the states.
- Ongoing compliances for the cryptocurrency license in USA:
After obtaining the license for the cryptocurrency business from FinCEN at the Federal level and Money Transmitter Licenses at the state level in which it operates, it is equally important to keep a tab on the compliances that are required to be met on both the Federal and State levels to maintain the validity of the cryptocurrency license.
This is usually a taxing exercise because the regulatory framework for cryptocurrency licenses across the USA is in its nascent stages and rapidly changing, often without providing a timely warning. This makes it incumbent on the cryptocurrency companies to constantly monitor changes in the regulatory environment which includes reviewing the FinCEN website and the Nationwide Multistate Licensing System.
Consequences for Non-Compliance with the FinCEN requirements
Significant consequences can accrue as a result of non-compliance with all the federal and state-level rules and regulations. Therefore, it is advised that cryptocurrency businesses remain up to date with all these rules.
As per 18 U.S.C. § 1960, operating an unlicensed money transmitting business is prohibited, and a 5-year prison sentence can be pronounced for violation of any of the requirements. Operating a Money Services Business without registering with the FinCEN is a violation and operating within a state without an appropriate Money Transmitter License is also an offence.
Recently, in the year 2020, FinCEN issued a civil penalty to the founder and operator of a cryptocurrency operator because the company was not registered as an MSB, did not have an effective Anti-Money Laundering Program in place and also failed to report a Suspicious Activity Report.