One of the most significant and controversial topics in cryptocurrency today is regulation. While many believe that regulation is necessary for crypto to gain truly widespread adoption, others believe that regulation is the antithesis of everything crypto stands for. One regulatory hurdle for cryptocurrencies in the United States may lie in MTLs.
According to United States law, any money service business (MSB) must obtain a money transmitter license (MTL, for short). MTLs are often overlooked in the cryptocurrency world, but the consequences of overlooking them may be dire.
Are you considering registering for a money transmitter license? Regardless of whether or not your business deals in cryptocurrency, there are 8 things you should know. Let’s start.
1. Who Needs a Money Transmitter License?
Before you go about registering for an MTL, be sure that you actually need one!
As we mentioned in the introduction of this article, United States financial regulations require MSBs to obtain MTLs to operate. Are you running an MSB?
What is an MSB?
You already know now that MSB stands for money service business, but what is that, exactly?
Technically speaking, any business that transmits or converts money qualifies as an MSB. While banks will be the first examples of MSBs that come to mind for most people, the term MSB is actually used mainly to refer to non-bank entities. As listed on the FINCEN (Financial Crimes Enforcement Network) government website, any entity engaging in the one of the following activities is an MSB:
- Money Orders
- Issuer of money orders
- Seller of money orders
- Redeemer of money orders
- Traveler’s Checks
- Issuer of traveler’s checks
- Seller of traveler’s checks
- Redeemer of traveler’s checks
- Money Transmission
- Money transmitter
- Check Cashing
- Check casher
- Currency Exchange
- Dealer in foreign exchange
- Currency Dealing
- Dealer in foreign exchange
- Prepaid Access
- Provider of Prepaid Access
- Seller of Prepaid Access
2. Why are MSBs Regulated?
While regulations can be frustrating and cumbersome, understanding the reason for their existence and what purposes they serve can help.
One of the main purposes of MSB regulation is preventing the financing of criminal activity. Money laundering is another concern that regulation serves to prevent; if left totally unregulated, money transfer services and other similar businesses represent excellent funnels through which criminals can pour cash from accounts linked to illegal activity into cleaner accounts. In fact, this is how cryptocurrency got its shady reputation in its infancy.
3. Are Cryptocurrencies MSBs that Require MTLs?
In 2013, FINCEN published an update to its money transmission and money service business definitions to accommodate virtual currencies. This article, titled Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, deals with cryptocurrencies.
The relevant section of this article, pertaining to cryptocurrencies, is included (verbatim) here for convenience:
“A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.
A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”
The simple rundown of this somewhat technical explanation is that individuals who buy cryptocurrencies are usually not MSBs. Projects that create virtual currencies and sell them to the general public, however, usually are MSBs. In addition, there are a variety of crypto payment services and other related businesses that qualify as MSBs, too.
4. MSBs (that Require MTLs) are Determined on a Case-by-Case Basis
A logical follow-up to the above explanation about cryptocurrencies is the acknowledgement that you may not be able to reach any degree of certainty as to whether or not your business is classified as an MSB by simply reading the available guidelines. There are plenty of shades of gray when it comes to MSBs and MTLs.
Accordingly, it is highly recommended that anyone finding themselves in the position to register for an MTL consult a professional with specialized knowledge in MSBs, MTLs, and related regulations. Any cost associated with consulting a professional in these matters will be greatly outweighed by the threat of potential difficulties down the line.
5. Operating as an MSB with an MTL Involves Both Federal and State Level Considerations
While the classification of MSBs is done with federal level regulations and definitions, acquiring a money transmitter license, itself, is done at the state level.
Note: MTLs are required for MSBs in 49 out of 50 states. Montana is the one state that does not require MSBs to obtain MTLs to operate.
As you’d probably imagine, the steps necessary for acquiring an MTL vary considerably across state lines. This can be especially frustrating for MSBs seeking accreditation in multiple states. It is noteworthy, however, that regulatory bodies are working toward streamlining and flattening these processes for MSBs with this goal of multiple state accreditation..
The MMLA, short for Multistate MSB Licensing Agreement Program, has gained participation from most US states and allows MSBs to seek licensure in one state and then enter an easier process for gaining licensure in subsequent states. It is far simpler and faster than individually applying for licensure in different states all at once.
6. The Process for Acquiring an MTL
Understanding the process ahead for acquiring an MTL may aid you in making your decision as well as planning.
The first step in the process is registering your business as an MSB at the federal level. Compared to the state level process of obtaining an MTL, this federal step is fairly straightforward and easy. Simply access the official registration portal through FINCEN’s government website and complete the required steps.
As mentioned previously, the steps required for obtaining an MTL at the state level will depend on the state in which you’re applying. Across the board, however, certain steps are more or less ubiquitous. Regardless of which state you’re applying for an MTL, you can expect the following hurdles:
- Completion of MTL application form
- Submission of documents
- Business plan
- Financial statements
- AML compliance procedures
- Background check
- Minimum net worth check
- Surety bond
- Application and licensing fees
7. Applying for an MTL Requires Considerable Financial Resources
If finances are a concern for you (as they are for most people) three of the hurdles bulleted above may have stuck out to you: Minimum net worth, surety bond, and licensing fees.
The fees associated with applying for MTLs can be relatively small, depending on the state. Applying for an MTL in Massachusetts, for example, involves paying four fees (License fee, investigation fee, background check fee, and credit report fee) that amount to less than $2,000 total.
Surety bonds are one of the more expensive hurdles in the MTL application process. In New York, for example, the minimum amount for required surety bonds for MSBs to obtain MTLs is $500,000 – and the price could potentially be more depending on circumstances.
Minimum net worth also represents a substantial obstacle for some looking to get an MTL. Once again, this requirement varies depending on state. In California, though, you must have a net worth of at least $500,000 to have a chance at getting an MTL.
8. The Consequences of “Non-Compliance” are Severe
We saved this one until the end just in case you’ve been discouraged by the process of obtaining an MTL and might be considering going ahead without one.
If you were to operate an MSB without appropriate accreditation, you’d be violating statutes with the following verbiage and consequences:
“Any person who fails to comply with any requirement of 31 U.S.C. 5330 or this section [31 CFR 103.41] shall be liable for a civil penalty of $5000 for each violation. BSA registration requirements, in an amount up to $5,000 for each day a registration violation continues.
[31 U.S.C. § 5330(e) and 31 C.F.R. § 103.41(e)]
Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.
[18 U.S.C § 1960(a)]”
It should be abundantly clear that the costs of non-compliance far outweigh the costs of registering as an MBS and obtaining an MTL. To reiterate a point made above, however, the first step should be consulting a qualified professional who can help you determine if you do need to register as an MBS, if you do need an MTL, and then (if applicable) how to go about complying with all relevant regulations.
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