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Rules & Regs, Virtual Currencies

It’s Official: Foreign Bitcoin Operators Servicing Texas Residents Must Obtain a Texas Money Transmitter License

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As of May 1, the state of Texas became the second US state to explicitly require foreign-located money transmitters (including Bitcoin exchangers and administrators) to obtain a state money transmitter license if their customers are residents of Texas.  The state of New York had taken a similar stance back in March of 2011.

In no ambiguous terms, the Texas Banking Department ruling, states that:

” […] it is the Department’s position that any money transmitter who allows Texas consumers to initiate transactions through its website is subject to the licensing requirements of the Money Services Act, regardless of where the transmitter is physically located.”

Equally clear had been the state of New York Banking Department in 2011 when ruling that:

” […] there is no doubt that businesses located out-of-state are subject to the jurisdiction of the state in which they do business.  […] Likewise, it is clear that businesses located out-of-state that do business with residents and other persons located in state are properly subject to that state’s laws and licensing requirements.”

In what some will consider a mission to create a host of professional services jobs in the US, the Texas ruling goes even further to make explicit that, whether the money transmitter is located in Kazakhstan, Japan, Chile or Spain, if they are to obtain and maintain a Texas Banking Department license, they must also:

    1. Keep all records in English
    2. Demonstrate their corporate and regulatory good standing in their home countries
    3. Register with FinCEN
    4. Submit financials conforming to generally-accepted accounting principles (GAAP)
    5. Have their financials audited by a US-based certified public accountant (CPA)
    6. Hire a search firm to conduct background checks on all controlling individuals, executive officers, directors, general partners, trustees or managers
    7. Maintain security in the form of a surety bond (a form of insurance to protect consumer funds) or other collateral
    8. Provide a location in Texas where they can be examined by state authorities

As I explained in my April 14 post arguing that US regulation was a high barrier to entry for Bitcoin and other crypto-currency entrepreneurs, both US-based and foreign money transmitters must obtain state money transmitter licenses when so required, among a slew of other federal and state United States obligations.  

In the United States there is no federal money transmitter license, so licensing of this type of business is left to the individual states of the Union.  Some of the states requiring licensing use the “physical presence” test, and others the “customer residency” test.  In the first one, a money transmitter must apply for a license if the company and its retail network are physically located in the state.  In the second test (applied by New York and Texas), the company must be licensed in the state when its consumers are residents of that state, regardless of its physical presence (domestic or international).  The only states in the US that currently do not require licensing are New Mexico, Montana and South Carolina.

Although all of this has been a hard fact since day one for all Bitcoin operators (and all other money transmitters), to what extent this applied to Bitcoin and other virtual currency operators was not clear until March 18 last, when the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), a federal agency tasked with protecting the financial system from money laundering, and terrorist financing, brought Bitcoin exchangers and administrators into the regulatory fold by making it clear that these activities are money transmission under US law.

As always, comments, questions, critique and venting are welcome, but please don’t shoot me, I’m just a messenger trying to help.

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About Juan Llanos

Innovative compliance, operations and technology executive leveraging emerging technologies, management and leadership best practices (and, above all, common sense!) to empower businesses and compliance professionals for success.

Discussion

9 thoughts on “It’s Official: Foreign Bitcoin Operators Servicing Texas Residents Must Obtain a Texas Money Transmitter License

  1. This article is grossly misleading. None of the jurisdictions cited address Bitcoin specifically, and so it can be argued successfully in court that neither Texas nor New York have jurisdiction over Bitcoins (foreign or domestic).

    Until there is a legislation explicitly defining what Bitcoin is and then explicitly laying out actual legislation (not administrative rules) that apply to it, Bitcoin remains unregulated. This is a fact in law.

    No amount of breathless blog posts, wishful thinking on the part of wicked, unimaginative second rate Crony Capitalist Bitcoin startups or anything else other than passed legislation counts.

    The longhorn legislators can bluster all they like; they are a toothless phantom that cannot and would not dare try and prosecute a foreign based individual or corporation in another country; this is why they always wait like underhanded thieves until an unwitting executive makes the mistake of entering the USA to make an arrest, as we have seen with the men who own poker sites that are outside of US jurisdiction getting themselves nabbed at the border:

    http://www.nytimes.com/2006/09/08/technology/08iht-gamble.2743111.html?_r=0

    To sum up, it is not “official”, nothing has changed in any way.

    Posted by Sviatoslav Richter | 2013/05/10, 11:03 am
    • Thanks for your comment, Sviatoslav.

      If Bitcoin is a value-transfer system, there IS arguably regulation in place already. I will just refer you to the US government’s official position:http://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html. If virtual currencies (e.g., Bitcoin) are equated to money transmission, then currencies ARE subject to US jurisdiction. Until FinCEN says otherwise, this will be the case. Let’s just wait for further clarification or, less desirably, for a US Department of Justice action to confirm or rectify this.

      Posted by Juan Llanos | 2013/05/10, 11:12 am
  2. How will this affect Ripple?

    Posted by CharlesWT | 2013/05/11, 9:55 pm
  3. Government regulation is inevitable. Anyone thinking that crypto currencies (e.g. bitcoin) and financial exchanges/networks (e.g. Ripple) would be immune are living in a fantasy world. Also, efforts to make the transfer of “funds” anonymous (e.g. zerocoin) will quickly be quashed by governments due to the somewhat legitimate concern of money laundering.

    Posted by Jack Steel | 2013/05/12, 3:08 pm
  4. So if bitcoin (or some other financial exchange firm (swiss banks?) or located ovrseas, and texas (or new york) wants these foreign entities to comply with local regulations, what actions can the local govt take if the foreign entities (perhaps never even hearing, or otherwise not caring) about texas and NY laws choose to ignore the mandates and continue to operate a foreign based internet focused business?

    as a part 2, would this affect offshore online gambling institutions?

    Posted by minemineweb (@MineMineWeb) | 2013/05/12, 8:08 pm
    • (1) The key word is “can.” Law enforcement do only what they can (are able to), and like smart businesses, they prioritize their actions based on probability of success and size of the bounty. And, of course, there are differences in power between federal and state authorities. Assuming the law enforcement agent is able to locate the alleged violator (very hard in cyber-space), the usually start with a letter requesting additional information. Then they can send you a “cease-and-desist” letter, or whatever the equivalent is in your country. [I’m not an international public law expert.] Again, how far they will go depends on the size of the problem and the resources the authorities have.

      There’s also a difference between private actions and public actions. Take, for example, the actions against Kim Dotcom or The Pirate Bay. They were initiated in the United States by a very powerful group of corporations whose IP was allegedly being violated. Why did were these cases pushed? Because of the big size of the “problem.”

      In this hyper-connected world, many of these things are uncharted territory.

      BTW, banks are NOT subject to the same obligations. They’re depositary institutions and their KYC (Know Your Customer) rules are (perceived) to be more stringent than those of the non-banks.

      (2) The rules I discussed apply to ANY non-bank financial institution that transmits money, regardless of the product or service being paid, whether brick and mortar or online.

      Posted by Juan Llanos | 2013/05/12, 9:05 pm
  5. The best rule is not to deal with U.S. persons (citizens/residents or green card holders) or the US Dollar if you are doing anything with Bitcoin and are outside the United States, there is already enough rules on the books to cause you headaches like FATCA.

    If you’re in the U.S. good luck.

    Posted by statelessman | 2013/05/13, 3:28 am
  6. “In the United States there is no federal money transmitter license, so licensing of this type of business is left to the individual states of the Union.”

    Right but according to the recent FinCEN guidance the federal Bank Secrecy Act applies to money transmitters and imposes certain reporting and recordkeeping requirements. FinCEN did not purport to provide guidance regarding whether state money transmission statutes apply.

    Posted by Harlan Pepper | 2013/05/17, 12:35 pm
    • Do you know that for a fact, or is it your opinion (or desire)? All I know is that FinCEN officially chose to equate virtual currency exchangers and administrators to money transmitters, and not to prepaid access providers, for example, who don’t always need licenses. And they didn’t explicitly exempt them from licensing. If your assumption is right, then it wouldn’t be fair to the thousands of money transmitters which did have to obtain licenses where required, would it? Until FinCEN says otherwise (unequivocally), money transmission statutes do apply to convertible virtual currencies.

      Posted by Juan Llanos | 2013/05/17, 7:21 pm

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