The Washington Department of Financial Institutions (“DFI”) introduced a bill last month amending portions of the Washington Uniform Money Services Act (“UMSA”). The proposal includes provisions specific to digital currencies, providing clarity to an industry struggling to muddle its way through unclear and disparate regulations across 50 states. Washington has been a leader in providing sound regulation of digital currency, having previously issued Interim Regulatory Guidance on Virtual Currency Activities in December 2014.
Reflecting industry input, the definition of “virtual currency” carves out blockchain applications in which the token itself is not used as a medium of exchange. If the proposal passes, Washington will be the first state to draw a clear statutory distinction between non-financial blockchain applications and digital currencies. Under the proposal, “virtual currency” means:
“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. Virtual currency does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.”
Particularly noteworthy – the proposal provides that in lieu of holding traditional “permissible investments,” digital currency companies must hold capital reserves in “like-kind virtual currencies of the same volume” as that which is obligated to consumers. Most states require digital currency companies to hold capital reserves in dollar-denominated “permissible investments,” regardless of whether the company also holds digital currency value in the same form and volume as it is received—resulting in added burdens on digital currency companies without enhancing consumer protections. This change provides relief to companies struggling to expand due to the high cost of duplicative reserve requirements.
The proposal also imposes certain requirements specific only to digital currency companies, including consumer protection disclosures and a mandatory third-party security audit of the company’s network infrastructure.
In addition to the digital currency provisions, the proposal also includes a payment-processor exemption and a payroll exemption. Currently, Washington offers a payment-processor waiver program. Aside from Washington, only California, Nebraska, Nevada, New York and Ohio offer a similar “agent of the payee” exemption, and only Mississippi, Ohio and Texas provide an exception for money transmission “integral to the sale of goods or provision of services other than money transmission.”
A copy of the proposed bill is available here.