Cryptocurrency Exchange not subject to licensing under the MTA
IN REPLY REFER TO: _________
FILE NO: _________
March 10, 2021
VIA EMAIL ONLY
Re: ___________________________ – Request for Interpretive Opinion
Dear Ms. ________:
Thank you for your letter dated January 27, 2021 to the Department of Financial Protection and Innovation (“Department”). You request confirmation that __________________ (“________ _______.”) and __________________ (“______________”) are not required to obtain licenses under the Money Transmission Act (“MTA”) in connection with their anticipated business activities in California.
BACKGROUND
_______________[1], a _______ limited liability company, and ______________[2], a Delaware limited liability company (collectively, “___________”) plan to offer California customers the opportunity to buy and sell bitcoin and other virtual currencies (the “Services”). ___________ operates a proprietary virtual currency trading and exchange platform (the “Platform”). Through the Platform, registered users (“Customers”) can trade supported virtual currencies in exchange for fiat currency or another virtual currency, either directly with ___________[3] or with other Customers through the Platform’s proprietary global order book. To facilitate trading, ___________ offers Customers custodial wallet services for fiat currency (“Fiat Currency Wallets”)[4] and for each supported virtual currency (“Virtual Currency Wallets”)[5].
___________ does not offer fiat-for-fiat currency exchange services, nor does it facilitate remittances, peer-to-peer payments, or merchant payment services. ___________ supports the following virtual currencies: Bitcoin, Bitcoin Cash, Ether, and Litecoin. At a future date, ___________ may expand its list of supported virtual currencies and may support secondary-market trading of fiat currency-backed stablecoins. ___________ does not plan to support initial issuance of any stablecoin, including fiat-currency-backed stablecoins.
ANALYSIS
The MTA prohibits a person from engaging in the business of money transmission in California unless the person is licensed or exempt from licensure, or is an agent of a person licensed or exempt from licensure.[6] Financial Code section 2003, subdivision (q) defines “money transmission” to mean selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission. “Stored value” means monetary value representing a claim against the issuer that is stored on an electronic or digital medium and evidenced by an electronic or digital record, and that is intended and accepted for use as a means of redemption for money or monetary value or payment for goods or services, but does not include value that is only redeemable by the issuer for goods or services provided by the issuer.[7]
___________’s virtual currency exchange service and Virtual Currency Wallet do not meet the definition of money transmission. ___________’s Fiat Currency Wallet meets the definition of stored value because it contains monetary value that represents a claim against ___________, is electronically or digitally stored, and is accepted as payment for virtual currency sold on the Platform.[8] However, ___________ offers Fiat Currency Wallets to Customers solely to facilitate the exchange of virtual currency. Based on these facts, the Department is not requiring ___________ to be licensed at this time. Please be aware, however, this is subject to change. At any time, the Department may determine these activities are subject to regulatory supervision. The Department may also adopt regulations or issue interpretive opinions that significantly restrict these business operations. If ____________ chooses to operate in California, it would do so subject to these risks.
The Department’s determination is limited to the activities described herein and does not extend to any other activities in which ___________ may engage. Any change in the facts and circumstances or the products or services that ___________ provides could lead to a different determination. Nothing in this letter should be interpreted to relieve ___________ from any obligations under the laws administered by FinCEN or any other agency of the federal government.
Please contact me at __________________________ or _____________ if you have any questions.
Sincerely,
Manuel P. Alvarez
Commissioner
Department of Financial Protection and Innovation
By
___________________________
Counsel
_______
cc: Dept. of Financial Protection and Innovation, Money Transmitter Division, San Francisco
[1] _______________ is licensed by the ________________________________ and registered as a money services business with the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) and with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”).
[2] ______________ is a wholly owned subsidiary of ______________. ______________ intends to register with FinCEN as a money services business and apply for state money transmitter licenses in all U.S. jurisdictions that regulate its proposed business activities.
[3] ___________ maintains its own inventory of virtual currencies which it sells to Customers at the prevailing market price.
[4] U.S.-based customers (“U.S. Customers”) will only be able to fund a Fiat Currency Wallet with U.S. Dollars. U.S. Dollars from U.S. Customers will be held in an omnibus account maintained by ___________ for the benefits of its Customers which will be kept separate and apart from funds owned by ___________.
[5] Customer virtual currency is pooled and securely stored on behalf of Customers in a combination of “hot” and “cold” storage environments maintained by and under the direct control of ___________.
[6] Fin. Code, § 2030, subd. (a).
[7] Fin. Code, § 2003, subd. (x).
[8] Stored value does not include “closed loop transactions” where stored monetary value is only redeemable for goods or services provided by the issuer of the stored value, or its affiliate. (Fin. Code, § 2003, subd. (x).) Here, Customers are not limited to purchasing virtual currency from ___________ directly but can purchase virtual currency from other Customers through the Platform’s global order book. Therefore, the Fiat Currency Wallet is not closed loop.