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.
U.S. Developments
Bitcoin Companies Stop Service to Hawaii and Washington Customers Because of State Regulations
Coinbase announced this week that it will stop serving customers in Hawaii due to Hawaiian regulations on money transmitters. Hawaii’s money transmitter statute requires money transmitters to hold permissible investments at all times that have an aggregate market value of not less than the aggregate amount of all outstanding payments instruments issued or sold by the licensee. Hawaii Revised Statutes § 489D-8. Hawaiian regulators informed Coinbase in September that it would not accept virtual currency as a permissible investment, which means that Coinbase would need to hold $1 in fiat currency for every $1 of Bitcoin or Ethereum it holds. Coinbase determined this requirement was cost prohibitive and decided to require all Hawaii-resident customers to close their accounts within the next 30 days. Coinbase will implement controls to prevent Hawaii residents from establishing Coinbase accounts for the indefinite future. Coinbase blog
Similarly, the Bitcoin exchange, Bitfinex, announced this week that it will stop doing business with Washington customers effective immediately, due to regulatory issues. The Washington Department of Financial Institutions (“DFI”) determined that Bitfinex needed a state money transmitter’s license to operate its business in Washington. Bitfinex decided that it will not be obtaining a money transmitter license in Washington at this time. As a result, Washington customers had until Wednesday to withdraw their funds from the exchange. Coin Telegraph
The California Legislature Attempts to Prohibit Using Bitcoin in Charitable Raffles
A bill before the California State Senate related to charitable organizations, introduced by state senator Tony Mendoza, includes a provision that specifically prohibits an eligible organization (e.g., a private, nonprofit organization) from selling charitable raffle tickets in exchange for “Bitcoin or any other cryptocurrency.” This bill may be acted upon on or after March 23. CA SB 741 (2017)
Alabama Legislature Considers a Bill to Adopt the “Alabama Money Transmitter Act.”
Alabama Legislators have taken steps to adopt legislation regulating money transmitters. Currently, Alabama does not currently regulate money transmission, just sale of checks. The new Act repeals the existing Sale of Checks Act and replaces it with the Alabama Monetary Transmission Act. The bill would require any person engaging in the business of money transmissions to apply for and obtain a license from the state. The bill defines money as “[a] medium of exchange that is authorized or adopted by the United States or a foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.” Money transmission is defined in the bill as “[s]elling or issuing payment instruments, stored value, or receiving money or monetary value for transmission. The term does not include the provision solely of delivery, online or telecommunications services, or network access.” AL HB215
West Virginia Legislators Introduce a Bill Adding Cryptocurrency to the Criminal Statutory Scheme
Late last month, a bill was introduced to the West Virginia House that would make money laundering with cryptocurrency a felony under the state’s criminal code, Chapter 61. Within this crime, cryptocurrency is defined as “digital currency in which encryption techniques are used to regulate the generations of units of currency and verify the transfer of funds, and which operates independently of a central bank. The proposal also adds “cryptocurrency” to the definition of “monetary instrument” – “coin or currency of the United States or of any other country, travelers’ checks, personal checks, bank checks, gift cards, prepaid credit cards, money orders, cryptocurrency, investment securities in bearer form or otherwise in such form that title thereto passes upon delivery, and negotiable instruments in bearer form or otherwise in such form that title thereto passes upon delivery.” WV HB2585
FinCEN Announces Measure to Track Cash Buyers of High-End Real Estate in Six Metropolitan Areas
The Financial Crimes Enforcement Network (“FinCEN”) recently announced its plan to renew its existing “Geographic Targeting Orders” or “GTOs,” which require U.S. title insurance companies to identify the natural persons behind shell companies used to purchase residential high-end real estate with all cash. According to FinCEN, these orders are temporary and limited to six metro areas of the U.S.: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north; (3) Los Angeles County; (4) the three counties comprising the San Francisco area; (5) San Diego County; and (6) the county that includes San Antonio, Texas (Bexar County). This GTO began February 24, 2017 and will last for 180 days. FinCEN has found that since title insurance is common to most real estate transactions, the information collected from title insurance companies under these GTOs has provided valuable information about real estate transactions of concern. FinCEN Press Release, Feb. 23, 2017
Federal Reserve Governor Powell Remarks on the Future of Finance and Capital Markets
Governor Jerome H. Powell of the Federal Reserve System’s Board of Governors addressed a group at the Yale Law School Center for the Study of Corporate Law on Friday. Governor Powell discussed the effects new technologies and innovative businesses have on the public’s daily financial lives. Governor Powell explained the Federal Reserve’s objectives and focused on the intersection of those objectives with areas where technological innovation is driving change: “creating a real-time retail payments system, using distributed ledger technology to develop new clearing and settlement services, and the issuance of digital currencies by central banks.” The Governor noted that the U.S.’s infrastructure for payments systems is “decades old” and industry members are working to make payment systems faster and maintain safety to consumers.
Governor Powell recognized that distributed ledger technologies (or “DLT”) may soon have important implications to the payments and financial systems. While Bitcoin helped bring this technology to the public eye, the Governor opined that the use of DLT by banks may prove difficult for several reasons. First, whether Bitcoin’s open architecture can translate to the financial industry and whether the finality of settlement will be determined by a central trusted party or by a majority of participants. The Governor noted that for now “in payment, clearing, and settlement, safety and confidence must weigh in the balance.” Second, whether financial firms will be able to make a business case for upgrading and streamlining payment, clearing, settlement, and related functions with DLT. Third, whether the industry has worked out the technical issues such as reliability, scalability, and security. Finally, the Governor raised the topics of governance, risk management, and legal foundations as areas that will still need to have issues resolved in this space before it becomes mainstream in a central banking system.
Governor Powell also discussed the potential for central banks to use DLT, other technologies, or to issue digital currency to the general public. The Governor described digital currency as a “21st century analog of paper currency,” but continued to explore the policy issues that the Federal Reserve believes need analysis. Governor Powell raised a concern that “meaningful technical challenges” remain including the central bank’s responsibility to keep a digital currency safe and secure over the long run while avoiding the threat of cyber-attacks, cyber counterfeiting, and cyber theft. The Fed believes that these threats could “significantly exceed historical experience with paper currency.” The Governor also introduced the idea that a digital currency could be a potential vehicle for global criminal activities, including money laundering. The Governor noted that the privacy issues may arise from the records that need to be kept on customers and individual transactions. The Governor predicted that private-sector systems will be “more forward leaning than central banks in providing new features to the public through faster payment systems as they compete to attract retail customers.”
After discussing the various security, privacy, and legal concerns raised by these innovations, the Governor closed his remarks committing to be open to new ideas and innovations that will drive economic growth and improve the financial system, while remembering the Federal Reserve’s commitment to protecting the public’s right to keep their money safe. Governor Powell March 3, 2017 Federal Reserve Board Speech
International Developments
The EU Imposes the Same Obligations on Virtual Currencies as other Payment Institutions
European Union regulators proposed a set of rules aimed at standardizing the appointment and duties of anti-money laundering officers required to cooperate with authorities. The European Parliament proposed adding virtual currency platforms to the scope of its amended anti-money laundering directive, which passed committee this week by 92 votes to 1. Under this amendment, “virtual currency platforms would have the same obligation as banks and other payment institutions to scrutinise their customers. This includes verifying identity details and monitoring their financial transactions, to reduce the risk of virtual currencies being used to launder criminal proceeds.” Parliament as a whole must now approve the proposal in the March plenary session. European Parliament 2.28.2017 Press Release
For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.