On September 15, 2015, the Conference of State Bank Supervisors (the “CSBC”) issued its final Model Regulatory Framework on virtual currency activities. The CSBC notes that the framework is “to assist those states seeking to develop and implement state regulatory regimes for virtual currency activities.”
Virtual Currency Definition
The framework defines Virtual Currency 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.”
The definition specifically excludes “software or protocols governing the transfer of the digital representation of value.” Additionally, the definition excludes “units of value that are issued in affinity or rewards programs and that cannot be redeemed for either fiat or virtual currencies.”
These exclusions are consistent with the approaches taken by both the Financial Crimes Enforcement Network (FinCen) and the New York Department of Financial Services.
According to the framework, “activities involving third party control of virtual currency, including for the purpose of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.”
The policy statement in the framework provides that the licensure and supervision implemented by states would “serve as a mechanism for protecting consumers, ensuring system stability, safeguarding market development, and assisting law enforcement.”
The regulatory requirements for the framework include:
- use of a robust licensing system;
- requirements regarding a licensee’s financial strength and stability;
- requirements regarding consumer protection policies and practices;
- requirements regarding a licensee’s cybersecurity policies and procedures;
- requirements regarding a licensee’s compliance program and a designated compliance officer;
- requirements regarding a licensee’s BSA/AML compliance program;
- licensee record keeping and reporting obligations; and
- supervision of licensees.
While most of these regulatory requirements followed the draft framework proposals there are some that contain substantive differences.
With respect to BSA/AML compliance the final framework would apply verification requirements to an entity’s “service users.” Thus this is not limited to just account holders. The CSBS indicated that this change “reflects the diverse use for the block chain.” The concern is that “an individual can use a virtual currency service to transfer money via the block chain, but not necessarily create an account.”
Lack of Transitional License Provisions
The framework does not provide for any type of transitional license despite numerous comments with respect to the challenges startup companies face in trying to meeting licensing requirements. The CSBS determined that”consumers can be harmed by entities regardless of size.” The CSBS has deferred to states to address the issue of a transitional license which, of course, introduces the element of regulatory arbitrage which model frameworks are designed to eliminate.