Transaction in virtual currency and not transmission of money

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Strong points

  • Certain virtual currency and digital asset exchange services were not considered money transfers in the State of California

  • Without transmission to a third party, transactions in fiat and virtual currency were not considered as transmission of money

  • Closed-loop transactions within the digital asset platform were not money transmissions under the MTA

  • Uncertainty Remains Regarding Digital Asset Wallets and Custody Accounts as “Claims Against Issuer” Under MTA

Reply to a orientation request regarding California money transfer laws, the California Department of Financial Protection and Innovation (DFPI) has determined that a digital asset exchange that supports both the purchase and the sale of digital assets as well as the exchange of cryptocurrencies was not a transmitter of money under the California Money Transmission Act (MTA).

The applicant platform offers retail and institutional investors the ability to buy and sell digital assets, including cryptocurrencies and stablecoins, and access related products and services through a web interface and app. mobile.

The DFPI provided an interpretative opinion concluding that, on the facts presented, the MTA license is not required because:

  • The sale and purchase of cryptocurrency and digital assets directly between the Platform and the client, where the Platform does not facilitate the exchange of fiat currency or cryptocurrency with a third party, does not meet the definition of money transmission as it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or the receipt of money for transmission.

  • The customer can only redeem the monetary value stored in their fiat account for digital currency sold by the platform, making the platform a closed-loop transaction that does not constitute regulated money transmission under the MTA.

The status under the MTA of certain wallets storing cryptocurrency on or on digital asset platforms is still unclear. DFPI has made no determination as to the status of such wallets and deposit accounts as “claims on issuer” accepted for use as a means of reimbursement for monetary value or payment for goods or services.

The interpretive notice emphasizes the importance of a carefully designed flow of funds and transactional platforms for virtual currencies and digital assets. Like many other U.S. money services and money transfer regulatory regimes, account structures, counterparties, and the flow of assets into, within, and out of certain technology platforms may define applicable licensing requirements. under the California MTA and applicable DFPI interpretations.

Money sender determinations for any digital asset, cryptocurrency, non-fungible token (NFT), or virtual currency activity under the California MTA are fact- and circumstance-dependent analyses. Similar virtual asset platform and digital asset exchange services may be interpreted differently to the extent that their operations, products, services and/or the structure of their transaction mechanisms differ from the facts presented to DFPI in the letter referenced above.

© 2022 BARNES & THORNBURG LLPNational Law Review, Volume XII, Number 111

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