US California DFPI money transmissions

[congregatio]

Digital currency trading platform

An entity requested an interpretive opinion from the California DFPI regarding the entity’s digital currency trading platform. Customers create accounts with the entity and can transfer in digital currency or fiat currency, which is held in the customer’s wallet issued by the entity. When a customer initiates a buy or sell order, the customer transfers the relevant digital currency or fiat amounts to another wallet held by the entity designated for trading those assets. The entity then matches and fills the order. Customers can only withdraw fiat or digital currency to their own bank account or digital wallet. They cannot send fiat or digital currency to others, except as part of a sale.

The DFPI stated that it has not determined whether trading digital currency or digital currency wallets are money transmission and therefore does not require the entity to obtain a money transmitter license to perform trading services or issues wallets to hold digital currencies. The entity’s wallets that hold fiat currency meet the definition of stored value, but the entity offers such wallets to customers solely to facilitate the trade of digital currency. Based on those facts, the DFPI is not requiring the entity to be licensed as a money transmitter.

Referral of customers to a financial institution

An entity requested an interpretive opinion from the DFPI regarding whether the entity’s referral service whereby it refers customers to financial institutions are licensed as money transmitters or exempt from licensure. Customers visit the entity’s website and are redirected to the financial institution’s website. A customer can fund their account with the financial institution through an Automated Clearing House (ACH) transfer from the customer’s bank account. When a customer wants to buy, sell or exchange cryptocurrency or fiat, the customer logs into the entity’s website and uses a third party’s software platform to input the order information. The platform receives the order information and checks to make sure the customer has sufficient assets in his or her account to purchase the currency. The entity is not involved in this process.

After receiving the order through the platform, the financial institution transmits the fiat or digital currency from a digital wallet or bank account in which it holds the currency to the customer’s account with the financial institution. The financial institution holds the fiat or cryptocurrency in the customer’s account. The financial institution is the only entity that holds, receives or transmits all cryptocurrencies in each customer’s account; the entity never holds, receives or transmits fiat currency or cryptocurrency. The platform also never holds, receives or transmits cryptocurrency or fiat currency.

The DFPI stated the entity’s activities do not meet the definition of money transmission.

Agent of the payee

An entity requested an interpretive opinion from the California DFPI regarding whether the entity’s payment processing activities were exempt from the licensing requirements of the California Money Transmission Act (MTA). Specifically, the entity processed payments regarding a customer’s purchase of software apps. The developers of the apps agree to terms in which the developer authorizes the entity to act as the payment processor and that the entity will be the developer’s agent to collect and hold revenue and remit the amount to the developer’s account.

The MTA stated that, while the activities constitute money transmission under the MTA, they also satisfy the requirements for the agent of the payee exemption, and therefore the entity is exempt from the MTA’s licensure requirement for such activities.

Purchase and sale of digital assets; payment processing services

An entity requested an interpretive opinion from the DFPI regarding two types of transactions that would be conducted on the entity’s trading platform: (1) customers can purchase and sell digital assets from the entity in exchange for fiat currency and (2) merchants can use the platform as a payment processor to allow merchants to accept digital assets from customers in exchange for non-fungible tokens (NFTs).

For the first category, the entity will own the digital assets that the customer purchases; if the entity does not yet own the digital asset, the entity will purchase it using its own funds and then sell it to the customer. The DFPI stated that the purchase and sale of digital assets does not require an MTA license.

For the second category, the entity works with merchants that mint and sell NFTs for digital assets; the merchant will sell the NFTs through the entity’s platform. The entity will have an agreement with each merchant whereby the entity acts the merchant’s authorized agent to accept payments for the merchant for NFTs.

The DFPI stated that, because it has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission, [it] decline to address whether the transactions would qualify for the agent of payee exemption. However, at this time, the [DFPI] does not require licensure under the MTA for the Company to receive fiat currency from the customer for the transfer in the form of digital assets to the merchant.”