August 15, 2022

Volume XII, Number 227

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August 15, 2022

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California DFPI: Virtual Currency Platform Activity Is Not Money Transmission

Highlights

  • Certain virtual currency and digital asset exchange services were not considered Money Transmission in the state of California

  • Without transmission to a third party, fiat and virtual currency transactions were not deemed Money Transmission

  • Closed loop transactions within digital asset platform were not Money Transmission under the MTA

  • Uncertainty remains with regard to digital asset wallets and custody accounts as “claims against the issuer” under the MTA

Responding to a request for guidance regarding California’s Money Transmitter laws, the California Department of Financial Protection and Innovation (DFPI) determined that a digital asset trading platform that supports both the purchase and sale of digital assets as well as the exchange of cryptocurrencies was not a Money Transmitter under the California Money Transmission Act (MTA). 

The requesting Platform provides retail and institutional investors with the ability to buy and sell digital assets, including cryptocurrency and stable coins, and to access related products and services through a web interface and mobile application. 

DFPI provided an interpretive opinion concluding that, under the facts presented, MTA licensure is not required because:

  • The sale and purchase of cryptocurrency and digital assets directly between the Platform and the customer, where the Platform does not facilitate the exchange of the fiat currency or cryptocurrency with a third party, does not meet the definition of money transmission because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.

  • The exchange of one cryptocurrency for another directly between two parties (the customer and the Platform) does not meet the definition of money transmission requiring licensure by the Platform.

  • The customer can only redeem the monetary value stored in their fiat account for digital currency sold by the Platform, making the Platform a closed loop transaction that does not constitute regulated money transmission under the MTA

The status, under the MTA, of certain wallets storing cryptocurrency at or on digital asset platforms still remains unclear. DFPI made no determination as to the status of these wallets and custody accounts as “claims against the issuer” accepted for use as a means of redemption for monetary value or payment for goods or services.

The interpretive opinion highlights the importance of carefully designed flow of funds and transactional platforms for virtual currencies and digital assets. Similar to many other U.S. money service and money transmission regulatory regimes, account structures, counterparties, and the flow of assets into, within and out of certain technology platforms may define applicable licensure obligations under the California MTA and applicable DFPI interpretations.

Money Transmitter determinations for any digital asset, cryptocurrency, non-fungible token (NFT), or virtual currency activities under the California MTA are facts and circumstances dependent analyses. Similar virtual asset platform and digital asset exchange services may be interpreted differently to the extent that their operations, products, services and or the structure of their transaction mechanisms differ from the facts presented to DFPI in the letter referenced above. 

© 2022 BARNES & THORNBURG LLPNational Law Review, Volume XII, Number 111
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About this Author

Mark Kindelin, Barnes Thornburg Law Firm, Chicago, Corporate and Finance Law Attorney
Partner

Mark T. Kindelin is a partner in the Chicago office of Barnes & Thornburg LLP, where he is a member of the firm’s Corporate Department and chair of the Financial Institutions Practice Group.

Mr. Kindelin has counseled financial institutions for more than 27 years on a wide variety of regulatory, transactional and corporate matters. He advises banks on capital raising transactions, mergers and acquisitions, operational issues and general corporate matters. In addition, he has a unique specialty advising on treasury management issues,...

317-214-8314
Katerina Katie Mills Finance Attorney Barnes and Thornburg Los Angeles
Associate

Katerina (Katie) Mills assists with a range of financial services and digital asset regulatory matters, transactions, compliance, and licensure. Knowledgeable and driven, Katie works collaboratively with her colleagues and clients to find flexible and comprehensive solutions to meet clients’ needs.

She advises on day-to-day compliance issues, anti-money laundering and financial institution regulatory matters, payment products and cryptocurrency regulations, and issues involving financial technology products. She also as a deep understanding of...

310-284-3830
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