CSBS Releases Money Transmission Model Law

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On September 9, the Conference of State Bank Supervisors (CSBS) released the Model Transmission Modernization Act (model law) in efforts to replace the 50 state-specific money transmitter laws with a nationwide standard. Unless the states adopt the model law, no change will occur to any existing state money transmission laws.

If enacted by the states, the law will create a common regulatory regime for money transmission, including stored value, sale of payment instruments, and transmission of fiat and virtual currency. The law would require license holders to maintain a tangible net worth of at least $100,000, or a percentage of their total assets. Also, licensees would need to submit audited financial statements for each fiscal year and file all reports required under federal law, such as the Bank Secrecy Act.

Moreover, the model law includes an agent of the payee exemption, which only slightly more than half of the states currently permit. The exemption requires: (1) a written agreement between the payee and the agent directing the agent to collect and process payments from payors on the payee’s behalf; (2) the payee must hold out the agent to the public as accepting payments for goods or services on the payee’s behalf; and (3) payment for the goods and services is treated as received by the payee upon receipt by the agent so that the payor’s obligation is extinguished, and there is no risk of loss to the payor if the agent fails to remit the funds to the payee. Several states currently have specific requirements on language that must be in the agreement, but there is no such requirement in the model law.

Although several states expressly exempt payroll processors from their money transmission laws, and other states implicitly exempt payroll processors, escrow agents, and others who are either not “in the business of” money transmission or engage in money transmission as an incidental part of their primary business, the model law fails to include such an exemption. In fact, payroll processors are expressly required to obtain money transmission licenses under the model law.

The model law does, however, include an exemption for payment processors. This exemption would apply if the payment processor acts as an intermediary by processing payments between an entity that has directly incurred an outstanding money transmission obligation to a sender and the sender’s designated recipient if the entity: (1) is properly licensed or exempt from licensing under the model law; (2) provides a receipt, electronic record, or other written confirmation to the sender identifying the entity as the provider of money transmission in the transaction; and (3) bears sole responsibility to satisfy the outstanding money transmission obligation to the sender, including the obligation to make the sender whole with any failure to transmit the funds to the sender’s designated recipient. The model law is unclear on whether multiple payment processors within a chain will be exempt (i.e., an agent of the agent of the payee or a nested relationship).

As state and federal laws struggle to keep up with innovation in payments, a glaring problem — uniformity — exists amongst the states and federal law about the definition of money transmission and the exemptions to licensure or registration. Companies within the payments ecosphere should proactively lobby their state regulators for uniformity that will not take away any exemptions in current state laws. Troutman Pepper works to find exemptions in federal and state money transmission laws for its clients. Please contact us with any questions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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