On September 15, 2015, the Conference of State Bank Supervisors (“CSBS”), the trade organization for state banking supervisors, issued its “Model Regulatory Framework for State Regulation of Certain Virtual Currency Activities” (“Model Framework”) which was developed after an assessment of virtual currency activities and solicitation of comments on a draft issued late last year. Licensing of money transmission activities in the United States is at the state level.
“Virtual currency” is defined in the Model Framework as:
[A] digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States Government. Virtual Currency does not include the software or protocols governing the transfer of the digital representation of value. Virtual Currency does not include stored value redeemable exclusively in goods or services limited to transactions involving a defined merchant. Virtual Currency does not include units of value that are issued in affinity or rewards programs and that cannot be redeemed for either fiat or virtual currencies. Virtual currency, as used in this framework, includes “digital currency” and “cryptocurrency.”
Subject to certain exclusions, entities engaged in the following activities are covered under the Model Framework:
- Entities involved in transmission of virtual currency
- Exchanging sovereign currency for virtual currency and vice versa
- Services that facilitate the third-party exchange, storage and/or transmission of virtual currency (such as wallets and kiosks)
The Framework does not apply to depository institutions; other exclusions include merchants and consumers who use virtual currencies solely for the purchase or sale of goods or services, activities involving use of the virtual currency block chain technology for non-financial purposes, and activities involving units of value that are used solely within online gaming platforms.
The Framework recommends use of the Nationwide Multistate Licensing System (the NMLS) and development of a model report of financial condition that all states could use for consistency in applications for licenses to engage in, and ongoing supervision of, virtual currency activities. The NMLS is an Internet-based system through which businesses can apply to over 60 state and territorial governmental agencies for certain nonbank licenses or registrations.
Unlike in the recently adopted New York State virtual currency regulations, there is no provision for a conditional virtual currency activity license.
Other key elements of the Model Framework’s regulatory requirements include review of a business’s financial strength and stability, appointment of a compliance officer, and establishment of consumer, cybersecurity and anti-money laundering compliance policies and procedures.
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