By Andrea O’Sullivan
Proposed Legislation Aims to Bring Consistency to Money Transmission Regulations on Cryptocurrency Firms
Florida is ready to be a leader in cryptocurrency. The state’s new fintech sandbox leads the nation in providing a path to market for Bitcoin businesses. To attract even more growth and investment, the legislature is considering two bills, HB 1351 and SB 1758, that would modernize our money transmission regulations in accordance with new developments in cryptocurrency.
What is the problem?
Money transmission regulations apply to businesses that handle and transfer consumer funds. These rules governing licensure, reporting, and custodianship are intended to protect customers from poor stewardship and fraud. Regulated money transmitters often have related duties to maintain customer records for the purpose of anti-money laundering/know your customer (AML/KYC) requirements.
Money transmission rules were developed long before the advent of cryptocurrency, which allows individuals to send money directly to another party without a custodian. Vagueness around the definition of the legal term “payment instrument” fit awkwardly on the developing cryptocurrency industry. As a result, a landmark legal decision in State v. Espinoza ruled that virtually all cryptocurrency users would have to register as regulated money transmitters to be able to operate legally in the state.
Money transmission regulations were not intended to fall upon every person who uses a payment instrument to purchase goods and services. But when it comes to cryptocurrency, this is the current judicial precedent. Although such a strict interpretation has yet to be enforced, this ruling is a serious limitation to the growth of the cryptocurrency industry. Entrepreneurs and users alike simply do not want to bear this liability.
What would HB 1351 and SB 1758 do?
HB 1351 and SB 1758 introduce a clear definition of virtual currency, which is defined as “a medium of exchange in electronic or digital format” that does not include online gaming platform currencies or consumer rewards programs. This definition resolves some of the legal vagueness that the court grappled with in the Espinoza decision.
Furthermore, virtual currency businesses would not be penalized for holding virtual currencies on behalf of customers as part of the “permissible investments” requirements for money transmission licensure. Holding enough virtual currency to satisfy customer deposits is sufficient to cover these requirements; virtual currency businesses would not need to have double the reserves in an equivalent cash value, for instance.
Finally, the bills clarify that a business needs to register as a money transmitter when it serves as an intermediary for virtual currencies, which is defined as the ability to “unilaterally execute or indefinitely prevent” a transaction. This exempts non-custodial cryptocurrency activities from inappropriate money transmission regulations.
This legislation would modernize Florida’s money transmission regulations and ensure that the rules are technology neutral. Virtual currency businesses would be treated just like any other traditional business. Regulations would be no more or no less onerous simply because cryptocurrency is involved. If a firm is serving as a custodian for consumer funds, they will be regulated as such, regardless of what form the payment instrument takes.
This is a particularly important clarification for cryptocurrency activities, as there are a host of non-custodial applications that will benefit from regulatory clarity. Developers, miners, full node operators, smart contract participants, Lightning network entities, and normal users will have legal certainty that their activities will not be improperly considered money transmission by the state of Florida.
What are some next steps?
Modernizing our money transmission regulations to account for updates in cryptocurrency is a great first step to encourage growth and innovation in Florida. The legislature could also consider measures 1) to define crypto-assets for the purpose of banking as the state of Wyoming has done, 2) to understand and encourage cryptocurrency mining in the state as Kentucky has proposed, and 3) explore how the state may invest in and maintain crypto-assets as part of its portfolio.