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What Is a Money Transmitter?
The U.S. government has identified the following as money services businesses:
- Currency dealer or exchanger
- Check casher
- Issuer of traveler’s checks, money orders, or stored value
- Seller or redeemer of traveler’s checks, money orders, or stored value
- Money transmitter
For every entity on this list other than money transmitters, there is an activity threshold of $1,000 per day in one or more transactions to be considered a money services business. There is no activity threshold for money transmitters. Anyone engaging as a business in transferring funds in any amount as an intermediary between two parties is a money transmitter. Money transmitters must be registered with the Department of Treasury and licensed in every state in which they operate.
The question is whether transferring Bitcoin and other cryptocurrencies is considered to be transmitting “money” and therefore subject to regulation as a money transmitter.
How Is Cryptocurrency Money Transmission Defined?
Initially, cryptocurrency existed in a gray zone as governments around the world scrambled to determine how to regulate its use and exchange to prevent fraud, money laundering, and terrorist financing.
In 2013, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, published guidance making it clear that virtual currency such as Bitcoin would be subject to the same money transmission regulations as legal tender currency issued by the federal government. Specifically, FinCEN defined money transmission as the “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” The phrase “other value that substitutes for currency” specifically includes virtual currencies like Bitcoin.
The FinCEN guidance establishes three types of cryptocurrency entities:
- Users who acquire virtual currency and exchange it for products and services,
- Exchanges who, as a business, exchange virtual currency for fiat currency or other virtual currency, and
- Administrators who, as a business, issue virtual currency and are able to redeem it or take it out of circulation.
Only exchanges meet the definition of money transmitter.
Money Transmitter Registration and Licensing
All money transmitters, including those who exchange cryptocurrencies, are subject to certain federal regulations, including the requirement to obtain a state-issued money transmitter license in every state where the business will operate. (Montana is the only state that does not have money transmitter laws.)
To register with the U.S. Department of Treasury, a money transmitter must first prepare a list of all its agents. The registration is done online using the BSA eFiling System.
Money Transmitter Bond
Obtaining a state money transmitter license requires the purchase of a money transmitter bond. Every state’s bonding requirements are different in terms of the minimum bond amount (also known as the bond’s “penal sum”), the duration of the bond’s term, and how long the bond must remain in force after a money transmitter ceases operation. (Many states require a 2-3 year coverage period after a money transmitter business closes, as it could take a while for a financial crime to surface and be investigated.)
A money transmitter license bond provides financial protection for the state and the public against financial losses that could result from a money transmitter’s failure to comply fully with state and local regulations governing money transmitter businesses. In the event of a violation that causes a monetary loss, the injured party can file a claim against the bond and, if the claim is found to be legitimate, will be compensated for the loss.
The bond is a legally binding contract among three parties: the state (the bond’s “obligee”), the money transmitter (the “principal”), and the company guaranteeing the bond (the “surety”). The surety agrees to lend the money transmitter the funds to pay a valid claim, if necessary. But the legal obligation to pay claims belongs entirely to the principal.
Typically, the surety will pay the claimant directly as an extension of credit to the principal, which creates a debt the principal must repay within a certain length of time. Failing to do so can result in the surety taking legal action against the principal to recover the debt.
Again, the licensing and bonding requirements apply to all money transmitters, including those involved in the transmission of cryptocurrency.
The typical bond rate for a crypto money transmitter may range from 1.5% to 3% per annum, depending on the principal’s financial capacity and credit.
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