On February 27, 2015, California Assemblyman Matt Dababneh, chairman of the state’s Banking and Finance Committee, introduced Assembly Bill 1326, which would prohibit a person from engaging in California in the business of “virtual currency” without a license from the California Department of Business Oversight, unless such person otherwise qualifies for one of a limited number of exemptions. The Department of Business Oversight is the state agency that regulates a variety of financial services, products, and professionals, including money transmitters.
In response to the growing popularity of Bitcoin and other virtual currencies, many states, such as California, have been contemplating whether Bitcoin and other virtual currency activities are subject to licensure and regulation under their respective money transmitter laws. On January 27, 2015, the Commissioner of the Department of Business Oversight issued a statement that it “has not decided whether to regulate virtual currency transactions, or the businesses that arrange such transactions, under the state’s Money Transmission Act.” This statement was issued in response to the January 26th announcement by Coinbase, a bitcoin wallet and platform, that it launched Coinbase Exchange, the first regulated Bitcoin exchange based in the U.S. The Department of Business Oversight warned California consumers that Coinbase Exchange is not regulated or licensed by California.
Other states, such as New York, have proposed regulations that would require a license to engage in virtual currency business activity, and some states, such as Kansas and Texas, have issued formal guidance to clarify the application of their money transmitter laws to virtual currency activities. On June 28, 2014, California passed Assembly Bill 129 to permit the issuance and use of alternative currencies by repealing an existing law that prohibited issuing or putting in circulation, as money, anything but the lawful money of the United States. Bill 129, however, did not prescribe regulations for such alternative currencies. The recent introduction of Bill 1326 could signal the beginning of California’s formal regulation of virtual currency business activity.
The licensure requirements imposed by Bill 1326 are similar to the licensure requirements imposed on businesses engaging in money transmission in California by the Money Transmission Act. For example, Bill 1326 requires each licensee to maintain certain high-quality, investment-grade permissible investments, such as U.S. government securities, state or municipal bonds, and money market funds, equal to the amount of the value of the virtual currency that the licensee has on deposit for its customers.
Bill 1326 defines “virtual currency” broadly to mean “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology,” including digital units of exchange that have a centralized repository or administrator, are decentralized and have no centralized repository or administrator, or may be created or obtained by computing or manufacturing effort. Thus, Bill 1326’s licensure requirements may apply to virtual currency exchanges and issuers, unless an exemption applies. Bill 1326, however, clarifies that the term “virtual currency” should not be construed to include “digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms, nor shall virtual currency be construed to include digital units that are used exclusively as part of a customer affinity or rewards program, and can be applied solely as payment for purchases with the issuer or other designated merchants, but cannot be converted into, or redeemed for, fiat currency.”
Bill 1326 also provides a limited number of exemptions from licensure. Similar to the Money Transmission Act, Bill 1326 would exempt certain banks and other financial institutions from licensure. It would also exempt entities that are licensed under the Money Transmission Act and merchants and consumers that utilize virtual currency solely for the purchase or sale of goods or services. However, unlike the Money Transmission Act, agents of licensed virtual currency businesses would not be exempt from licensure.
While Bill 1326 is being heard by the California Assembly, the Department of Business Oversight is also undertaking its own efforts to address whether virtual currency businesses are subject to licensure under the Money Transmission Act. Thus, virtual currency businesses and enthusiasts should stay tuned in California and many other states as regulators try to determine what, if any, regulation is appropriate.