The Texas Department of Banking released a “Supervisory Memorandum” on Thursday, April 03, 2014, providing its interpretation of Texas laws on currency exchange and money transmission as applied to virtual currency. After providing a thoughtful explanation of virtual currencies, the Memorandum then unambiguously concludes that “[b]ecause neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the [Texas currency exchange] statute.” Therefore, no license to engage in the exchange of virtual currency for fiat currency is required in Texas.
The Memorandum goes on to interpret the Texas Money Services Act, which regulates “money transmissions,” as applied only to decentralized virtual currencies such as Bitcoin, Litecoin, and Peercoin. The Memorandum explicitly declines to address centralized virtual currencies, which are “created and issued by a specific source” and which “rely on an entity with some form of control or authority over the currency.”
As for decentralized currencies, though, the Texas interpretation is based on the premise that “money transmission licensing determinations regarding transactions with cryptocurrency turn on the single question of whether cryptocurrencies (decentralized virtual currencies) should be considered ‘money or monetary value’ under the Money Services Act.” The Memorandum concludes that because the holder of a unit of such currency has “no right or guaranteed ability to convert that unit to sovereign currency (fiat currency),” it is not money or monetary value. Therefore, in a transaction that does NOT involve fiat currency “no money transmission can occur.” This interpretation hinges entirely upon the definition of “money and monetary value” as “a currency or claim that can be converted into currency through a financial institution, electronic payments network or other formal or informal payment system.” The Memorandum thereby highlights the high degree of variation among state statutes, even in those states, like Texas, that have adopted the Uniform Money Services Act. Texas’ position is directly contrary to the position Washington, another adopter of the Uniform Money Services Act has publicly taken on this very same issue.
Aiming to address several common questions and business models, the Memorandum then provides several concrete examples. It makes it clear that the “[e]xchange of cryptocurrency for sovereign currency between two parties is not money transmission.” Thus, the sale of a bitcoin, for example, by one person directly to another person, either for cash or for goods or services is not considered money transmission. Similarly, the sale of a one decentralized virtual currency for another such currency is also not money transmission.
Conversely, a person or entity in the business of exchanging fiat currency for cryptocurrency as an intermediary between two other parties because “[i]rrespective of its handling of the cryptocurrency, the exchanger conducts money transmission by receiving the buyer’s sovereign currency in exchange for a promise to make it available to the seller.” This logic, explains the Memorandum, applies both to traditional web-based exchanges like “the failed Mt. Gox” exchange and to many “Bitcoin ATM” transactions, because such ATMs usually conduct transactions through an exchange like Mt. Gox. As to ATM’s, however, the Memorandum does allow that “ [i]f the machine never involves a third party, and only facilitates a sale or purchase of Bitcoins by the machine’s operator directly with the customer, there is no money transmission.”
The Memorandum closes with guidance for those who will be seeking licenses to engage in money transmission that relate to decentralized virtual currencies – guidance unsurprising following the collapse of Mt. Gox. In addition to reiterating traditional net worth requirements for licensees, the Memorandum makes it clear that “[b]ecause the new technological paradigm created by cryptocurrencies has brought with it new risks for the consumer, it is incumbent on a license applicant to demonstrate that all virtual currency is secure while controlled by the applicant.”
Companies relying on Texas’ guidance should remain mindful that the Memorandum only represents an interpretation of Texas law. State statutes vary considerably, and even where statutory language is similar, states vary widely in the interpretation and enforcement of their own statutes. Therefore, what is true in Texas may not be true elsewhere.