A new proposed law to create a statutory framework for regulating persons engaging in virtual-currency business activity, the Uniform Regulation of Virtual-Currency Businesses Act (URVCBA), has been approved by the Uniform Law Commission (ULC) and officially promulgated for consideration and adoption by state legislatures. Fred H. Miller, Ballard Spahr Special Counsel, chaired the URVCBA drafting committee.
"Virtual-currency business activity" essentially means exchanging, transferring, or storing virtual currency; holding electronic precious metals or certificates of electronic precious metals; or exchanging digital representations of value used in online games for virtual currency, legal tender, or bank credit outside the game, on behalf of a resident of the enacting state.
The definition excludes a person using a virtual currency solely on its own behalf, or for personal, family, household, or academic purposes. It also generally excludes merchants’ affinity or rewards programs where value cannot be taken from the program and digital representations of value used only on online game platforms. Other exclusions include activity by a government, a bank, and a person whose activity is expected to be $5,000 or less on an annual basis.
To encompass as many types of virtual currency as possible, the URVCBA uses a technology-neutral definition of "virtual currency." Virtual currency, of which "bitcoin" is one well known type, is defined as a digital representation of value that is used as a medium of exchange, unit of account, or store of value—but is not legal tender. The URVCBA only applies to companies engaged in "virtual-currency business activity" that assume or maintain "control" over a client's virtual currency. "Control" means the power to execute unilaterally or prevent indefinitely a virtual currency transaction.
The URVCBA contains a three-tiered regulatory structure that is designed to provide legal stability to virtual currency transactions while accommodating innovation:
Tier two: Businesses with annual virtual-currency activity of more than $5,000 but not in excess of $35,000 must register with the state and meet reduced regulatory requirements. Tier two businesses may operate as registrants for up to two years, so long as they remain within the $35,000 threshold. This tier is intended to function as a "regulatory on-ramp" by allowing companies to focus on innovation and experimentation while they are in the early stages of business development.
The information an applicant for a URVCBA license must provide includes:
other relevant information, including any license revocation or suspension, any criminal conviction or pending proceeding, and information about insurance.
The URVCBA creates two methods for a multistate business to use for reciprocal licensing. These methods are intended to encourage reciprocal licensing, thereby conserving state resources and reducing regulatory burdens on businesses. An enacting state can choose to participate in the Nationwide Multistate Licensing System and Registry or it can authorize reciprocity on a bilateral or multilateral basis.
The URVCBA contains numerous consumer/user protections designed to assure persons of the safety and security of their virtual currency transactions. Such protections include requirements for licensees and registrants to provide disclosures to potential customers about their products and services, such as any fees charged or whether there is insurance coverage, and to establish specific policies and compliance programs to guard against fraud, cyberthreats, and terrorist activity. The URVCBA prohibits a licensee or registrant from transferring a client's currency or using it as collateral for a loan to the licensee or registrant without prior consent.
The URVCBA does not include any commercial law rules addressing how a creditor can take and perfect a security interest in virtual currency as collateral, or the nature of the legal title that someone purchasing virtual currency from a company that holds the currency for its owner can expect to receive. The absence of clear rules addressing such issues has been an impediment for virtual currency businesses seeking to raise capital. To create rules to fill this gap, the ULC is currently drafting a companion act that is expected to be ready for states to enact in early fall 2018. In the interim, lenders can seek to incorporate already existing legal principles in loan agreements.
The ULC (also known as the National Conference of Commissioners on Uniform State Laws) comprises more than 350 practicing lawyers, government lawyers, judges, law professors and lawyer-legislators, who are appointed by each state, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The ULC's task is to research, draft, and promote enactment by the legislatures of uniform state laws in areas of state laws where uniformity is desirable and practical.
Now in its 126th year, the ULC provides states with non-partisan, well-conceived, and well-drafted legislation that brings clarity and stability to critical areas of state law and thus bolsters the federal system. Since its inception in 1892, the group has promulgated more than 200 acts, among them such bulwarks of state statutory law as the Uniform Commercial Code, the Uniform Probate Code, and the Uniform Partnership Act. The URVCBA was drafted by the ULC in collaboration with representatives of the virtual currency industry, state and federal government representatives, trade associations, and financial services providers, among others.