Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
California. AB-1326, the California Senate’s proposed digital currency bill, was recently amended to include a provisional application process for early-stage virtual currency industry services. If passed, the bill would require individuals and companies offering services involving digital currencies to first obtain a license. Significantly, the revised bill would allow California developers and start-ups looking to work on bitcoin and blockchain-related projects to receive conditional approval from the State’s Department of Business Oversight, which operates under the framework of the State’s Money Transmissions Act.
The draft’s revised language would “authorize a person or entity conducting a virtual currency business with less than $1,000,000 in outstanding obligations and whose business model, as determined by the commissioner, represents low or no risk to consumers, to register with a $500 license fee and, if approved, to receive a provisional license to conduct virtual currency business.” Under the bill’s previous formulation, license applicants would have incurred a $5,000 non-refundable registration fee, in addition to being required to complete a background identification process.
The provisional approval process is somewhat reminiscent of the requirements in New York’s BitLicense framework, which officially became law last month. Like New York’s BitLicense, California’s provisional approval process specifically takes into account consumer-risk factors such as anticipated transaction volume, existing risk mitigation strategies, and the overall nature of the business. Furthermore, both the California and New York provisional licenses are set at two years in duration (although each may be extended at regulators’ discretion). However, the California and New York provisional approval processes differ in several notable ways. First, the New York process does not impose an objective threshold for eligibility, unlike California’s $1,000,000 threshold in outstanding obligations. Second, as compared to the California process, the New York process gives regulators substantially more discretion to subject conditional licensees to heightened examinations or to impose unspecified additional conditions. Finally, all California applicants will be required to register with the US Financial Crimes Enforcement Network (FinCEN) before being granted a provisional license, whereas FinCEN registration is taken into consideration – but not formally required – for New York applicants.
The bill has already been hailed by groups of bitcoin businesses for its modified definition of “virtual currency business.” Although the new definition appears to waive the licensing requirements for non-custodial exchanges, custodial exchanges maintaining “full custody or control of virtual currency in this state on behalf of others” would still be required to obtain a license. Without further clarification, it may become challenging to decide whether a company is in the “virtual currency business.” The provisional approval process’ $1,000,000 obligations threshold is similarly ambiguous because it fails to define what kinds of obligations would be considered for the purposes of calculating the threshold.
After passing a State Assembly vote by 55-22 last month, the amended bill will now be re-referred to the California Senate Committee on Banking and Finance for renewed review. According to California’s legislative process, if the bill is approved by the Senate, it will proceed to the state’s Governor who can either sign it into law, allow it to become law without a signature or veto it. If they do become law, most bills typically come into effect on the first day of January of the following year.
Brazil. Last week, Brazilian Congressman Manoel Junior proposed a public hearing to discuss digital currency regulation in Brazil. Congressman Junior’s letter called for dialogue about the potential impact of virtual currencies on financial markets. Despite a report issued by the Brazilian Senate in December of last year recommending that bitcoin regulation was unnecessary, discussion in favor of a public hearing has been growing. If held, the hearing would include representatives from the Brazilian Central Bank, the Brazilian department of Federal Revenue, the Brazilian tax enforcement agency, the country’s anti-fraud agency, and representatives from the local bitcoin industry.
UK. In response to the UK Treasury’s call for information on digital currencies, Silicon Valley Bank (a U.S.-based commercial bank with several global offices) indicated that the UK government should foster global legislation to help regulate activity in the cryptocurrency space. According to SVB, the legislation would provide a framework for digital currency companies to follow, mitigating the risks associated with the currencies, and making the use of digital currencies more appealing.
SVB’s submission is the latest in a string of responses to the Treasury’s call for information. Accenture previously called for enhanced regulations in the form of robust identification requirements for bitcoin wallets. Master Card suggested that the risks posed by digital currencies were greater than the benefits, while Citibank proposed that governments should issue their own cryptocurrencies. Consistent with their own suggestion, Citibank also admitted to running a test platform for digital currencies, including a proprietary digital currency solution, dubbed Citi Coin.
Just this week, the Government of the British Crown Dependency of Jersey opened a consultation period to seek public opinion on whether it should regulate virtual currencies such as bitcoin. The consultation paper included a discussion of the risks associated with digital currencies, a list of potential regulatory frameworks to be applied, and a discussion of the potential impact of digital ledger technology. Set to close on August 7th, the consultation follows the lead set by the UK Treasury’s plan to apply anti-money laundering laws to virtual currency exchanges, and reinforces the unique role of financial services for the island.
FATF. The Financial Action Task Force (FATF), an inter-governmental organization tasked with setting international standards to prevent money laundering and terrorism financing, published its ‘Guidance for a Risk-Based Approach to Virtual Currencies’ at its plenary meeting in Brisbane, Australia. Most notably, the publication adopted the standard description ‘virtual currency payments products and services’ (VCPPS), and advocated for closer monitoring of digital currency exchanges, singling out these gateways as a distinct risk for money laundering and terrorism financing activities. To combat these risks, the report recommended that all exchanges be registered, licensed, subject to the same scrutiny as other financial institutions and money transfer businesses. Although FATF recommendations are intended to be implemented at a national level through legislation and other legally binding measures, the recommendations themselves do not represent binding authority. Instead, the recommendations are designed to set out principles for action, and give countries the flexibility to implement the principles according to their particular circumstances and constitutional frameworks.
For an updated summary of the status of virtual currency regulations across jurisdictions, see our chart.