Developments in virtual currency regulation have been top-of-mind with recently announced initiatives from the New York Department of Financial Services. Companies engaging in virtual currency activity should also, however, take note of Louisiana’s enactment of HB701. This law, which takes effect on August 1, 2020, is a broad standalone licensing regime for the regulation of virtual currency activity in the state. While a number of states have addressed virtual currency activity through their money transmission laws, Louisiana now joins New York as the only states to regulate virtual currency activity through a separate licensing law. Taken together, these actions bring some degree of clarity to the regulatory treatment of virtual currency activity—at least in Louisiana and New York.
Background
Though the regulation of issuing, storing, transferring, and redeeming virtual currency activity under state money transmission licensing laws is far from settled, most states that have addressed the activity to date have done so through their existing money transmission licensing laws. Almost all U.S. states regulate money transmitters under state-specific licensing regimes, and statutory definitions of money transmission are quite broad and, with some exceptions, can cover any entity that receives money for transmission. A key question is whether virtual currency activity (including handling fiat currency in connection with facilitating virtual currency exchange or transfers) comes within current definitions of “money” or “monetary value” or otherwise fits within money transmission laws. Some states (such as Alabama and Georgia) have addressed the issue by amending their money transmission laws to incorporate virtual currency activity, while others (such as New Mexico) have issued guidance interpreting their money transmission laws to apply to virtual currency activity.
Up until the present, in order to attempt to bring greater clarity to state virtual currency regulation, a number of state legislatures have introduced legislation to regulate virtual currency activity under standalone virtual currency frameworks (such as Hawaii and Oklahoma). Louisiana is the first state to actually adopt this type of legislation, however.
Louisiana HB701
The new Louisiana law should be familiar to holders of a New York virtual currency license. Similar to the New York regime, HB701 requires a license to engage in “virtual currency business activity” with or on behalf of a Louisiana resident. (A “resident” includes a person domiciled in or who has a place of business in the state, and a “person” is defined as “an individual, partnership, estate, business or nonprofit entity, or other legal entity.”)
Virtual currency business activity includes “exchanging, transferring, or storing virtual currency or engaging in virtual currency administration.” Virtual currency is defined as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender.” This definition excludes, among other things, “digital representation of value issued by or on behalf of a publisher and used solely within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform.”
Virtual currency administration constitutes “issuing virtual currency with the authority to redeem the currency for legal tender, bank credit, or other virtual currency,” which suggests that “stablecoins” could be subject to regulation under the regime. The “transfer” of virtual currency subject to regulation is also broadly defined to include assuming control of virtual currency from, or on behalf of, a resident and doing any of the following: “(a) Credit[ing] the virtual currency to the account of another person; (b) Mov[ing] the virtual currency from one account of a resident to another account of the same resident; [and] (c) Relinquish[ing] control of virtual currency to another person.”
The licensing requirements for the virtual currency license are similar to those for a “standard” fiat currency money transmission license—and, to some degree, track the requirements for the New York virtual currency license application. The application, which must be submitted through the Nationwide Multi-State Licensing System (“NMLS”), requires background information about the applicant, a business plan, information about FinCEN registration and related compliance matters, biographical information and criminal background checks for control persons, and surety bond and net worth requirements. The surety bond requirement is based on the volume of virtual currency activity (up to a $1 million volume-based surety bond maximum), but the banking department maintains the discretion to increase the requirement all the way to $7 million. The net worth requirement is the greater of $100,000 or 3% of total assets. The calculation of net worth can include virtual currency “measured by the average value of the virtual currency in United States dollar equivalent over the prior six months,” subject to certain limitations. (As of the date of this writing, there is no indication of when the new application checklist will be available through NMLS, but readers can review the New York NMLS application checklist here.)
Of note, even though the applicant will be required to include information about any “money service or money transmitter license the applicant holds in” other states, the Louisiana virtual currency licensing regime does not appear to exempt a Louisiana licensed money transmitter (this is also the case with the New York regime). As a result, companies engaging in virtual currency activity under a Louisiana money transmitter license today will need to consider whether the new law requires a separate Louisiana license. In addition, payments companies seeking to engage in virtual currency activity in Louisiana will need to determine whether they need both a virtual currency license and a money transmission license in the state.
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