Yesterday, December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) released a Policy Statement on state virtual currency regulation, and a Draft Model Regulatory Framework (“Draft Framework”) to support its policy and to promote consistent regulation of virtual currency activities. The Draft Framework lists numerous recommendations for state financial regulatory regimes applying to virtual currency activities and requests public comment on an extensive list of related questions.
The Policy Statement defines virtual currencies as “digital representations of value that can be a medium of exchange, a unit of account, and/or a store of value.” The definition includes centralized, de-centralized, convertible or non-convertible virtual currencies. The Policy Statement goes on to identify consumer protection, ensuring financial system stability, safeguarding financial market development, and assisting law enforcement as the objectives of state regulator licensing and supervision. The virtual currency activities to which the CSBS believes licensing and supervision requirements should apply are:
- Sovereign (fiat) currency for virtual currency, or vice versa;
- Virtual currency for other virtual currency; and
- Facilitating the third-party exchange, storage, and/or transmission of virtual currency (e.g. wallets, vaults, kiosks, merchant-acquirers and payment processors).
However, the Policy Statement is not intended to cover “Blockchain 2.0” activities that are not financial in nature.
The CSBS does not advocate a particular approach to implementing its Policy Statement. Rather CSBS recognizes states could apply its recommendations either through laws and/or regulations written explicitly for virtual currency activities, or by interpreting or amending their existing laws and regulations to include virtual currency. However, the Draft Framework closely resembles the New York BitLicense proposal and includes numerous requirements not typical of most states’ existing money transmitter regimes. These atypical requirements include mandates for cybersecurity, data-breach notification, third-party cybersecurity audits, and customer identity verification, in addition to traditional licensing, discretionary net worth and surety bond, permissible investments, recordkeeping and escheatment requirements.
The Draft Framework also sets out a list of questions for public comment. Many of the questions relate to how best to implement the requirements previously listed, as well as requesting background information on virtual currency technology and businesses. Several of the questions also recognize the current inefficiency of the state-by-state licensing, supervisory and enforcement regimes, and ask for feedback on how this can be improved and streamlined.
The Draft Framework raises many of the same issues as the proposed New York BitLicense. Furthermore, because the Draft Framework includes non-convertible virtual currency in the definition of virtual currency in the Policy Statement, CSBS has created issues beyond those raised in New York’s proposal. We previously outlined some issues raised by the New York BitLicense proposal in a webinar and in a prior post on this blog. We encourage virtual currency users and businesses to contact CSBC with comments, including those they have provided to New York directly, on or before the comment deadline of February 16, 2015.