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North Carolina Captures Bitcoin Custodians in New Money Transmitter Law

On July 6, North Carolina Governor Pat McCrory signed into law legislation to bring certain virtual currency businesses expressly within the existing money transfer business regulatory scheme by repealing and replacing the current law with a new article.

The new law explicitly captures virtual currency with new definitions. Under the prior law, virtual currency intermediaries were not expressly covered, although the broad definitions of “money transmission” and “monetary value” (“[a] medium of exchange, whether or not redeemable in money”) prior to the new law’s adoption likely captured virtual currency. Coinbase Inc. and Circle Internet Financial Inc. are already licensed as money transmitters. The new law provides greater legal certainty, however, by explicitly providing that money transmission “includes maintaining control of virtual currency on behalf of others.”

Engaging in the business of money transmission in any virtual currency now clearly necessitates a money transmitter license under the new North Carolina law. Unlike the New York BitLicense framework, however, virtual currency businesses captured by North Carolina’s law will only need a money transmitter license and not a separate BitLicense, but North Carolina does not provide flexibility for start-ups like New York’s BitLicense. In New York, a start-up that does not satisfy all the BitLicense requirements may obtain a “Conditional License” to continue operating in New York.

The new law captures many types of virtual currency businesses, but not all.

Within the Scope of the NC Law

  • Exchangers that hold customer funds while arranging a satisfactory buy/sell order with a third party and transmit virtual currency and fiat currency between a buyer and seller

  • Most wallet companies (hosted, custodial wallet providers)

Outside the Scope of the NC Law

  • Miners (persons who receive virtual currency as payment for verifying transactions)

  • Users (persons who use virtual currency to buy or sell goods and services, such as merchants)

  • Wallet companies that provide nonhosted, noncustodial wallets

  • Multisignature software providers

  • Blockchain technologies

In addition, the new law borrows concepts from the New York BitLicense framework by requiring applicants to include their policies and procedures, business plan, description of the firm’s organizational structure, and description of internal business controls, including those specific to IT and data integrity.

The new law also has increased net-worth requirements, license fees, and assessments for all money transmitters licensed or seeking to become licensed in North Carolina. Under the new law, the minimum net-worth requirement for any license applicant has been increased from $100,000 to $250,000. The application fee now costs $5,000 instead of $1,500 (plus $10 for each additional location). Annual assessments have increased from $1,000 (plus $10 for each additional location) to $5,000 (for businesses with volumes of no more than $1 million). A licensee with transmission volumes greater than $1 million must pay an additional sum each year as part of the licensee’s annual assessment.

Takeaways

Although the new law’s intent appears to be to capture virtual currency businesses, North Carolina has effectively revised the money transmitter framework for all existing and future money transmitters that do business in North Carolina. Application requirements are more robust under the new law, and fees are significantly higher, but these requirements are less substantial than they could be for virtual currency businesses required to be licensed because they don’t need a separate “BitLicense” like they could need under New York law.

Copyright © 2020 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VI, Number 197

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About this Author

Charles Horn, financial services attorney, Morgan Lewis
Partner

Charles M. Horn is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Horn focuses his practice on regulatory and transactional matters, primarily in the areas of banking and financial services. He works on behalf of domestic and global financial institutions of all sizes on regulatory, supervisory, enforcement and compliance matters before all major federal financial institutions regulatory agencies, and leading state financial regulatory agencies.

202-739-5951
Melissa R.H Hall, Financial services attorney, Morgan Lewis
Of counsel

Melissa R. H. Hall represents US and overseas banks, nonbank financial services companies, investors in financial services, and technology companies in regulatory and corporate matters. She advises them on a wide range of state and federal financial regulatory laws and regulations. She provides counsel on financial regulatory compliance and enforcement, including state and federal licensing requirements, consumer financial products and compliance, payment systems, corporate and transactional matters, financial institution investment and acquisition, and the development of new financial services products.

202-739-5883
Michael Philipp, Morgan Lewis, Securities Attorney
Partner

Michael M. Philipp counsels financial services clients in futures and securities transactions. He also advises them in derivatives regulation, legislation, compliance, and enforcement matters. United States and foreign exchanges and clearing organizations, banks, investment managers, proprietary trading firms, brokerage firms, and end users turn to Michael for guidance in connection with exchange-traded and over-the-counter derivative instruments. He also represents foreign exchanges and clearinghouses in their US offerings of futures and equity options products and...

312.324.1905
Sarah Riddell, Morgan Lewis, regulatory attorney
Associate

Leveraging her experience as a lawyer at the US Commodity Futures Trading Commission (CFTC), Sarah V. Riddell advises domestic and foreign exchanges, derivatives clearing organizations, swap execution facilities, and other financial institutions on a broad range of regulatory matters, including CFTC registration and compliance. While at the CFTC, Sarah worked on Dodd-Frank-related rulemakings and participated in examinations of derivatives clearing organizations, including those designated as systemically important.​

312-324-1154