Many payments companies face challenges from complex money transmitter laws that could be simplified if a pending change in North Carolina is adopted by other states.
Money transfer laws, which exist in 47 states and Washington, D.C., often provide necessary and beneficial, but can also deter innovation and present significant barriers to entry if they are unnecessarily overreaching. Likely due at least in part to most of these statutes being passed prior to the widespread introduction of many of the products, services and technologies currently involved in the payments ecosystem, the laws arguably encompass many more industry participants than necessary or originally intended.
North Carolina recently proposed an amendment to its Money Transmitter Act. While the amendment has not yet passed, it represents perhaps the most significant reform by a state to date and addresses many of the common aspects of existing money transmitter statutes that many industry participants and observers would consider to be overreaching.
Among other things, the proposed amendment provides for the following reforms:
Limitation to Consumer-Facing Products and Services. While existing state money transmitter statutes often purport to be primarily concerned with consumer protection, the statutes and regulations are generally not limited to consumer-facing activities. The proposed North Carolina amendment limits the scope of regulated activities to those that are primarily for personal, family, or household purposes. This would exclude money transmission on behalf of business payers (e.g. B2B bill payment service providers).
Agent of the Payee Exemption. While other states have express agent of the payee exemptions, there are not many. Under this exemption, if the ultimate recipient of funds (payee) contractually agrees that receipt of the payment by the third party in the middle of the transaction is treated as if the payment was received by the payee itself, then the third party is exempt from the law. This makes sense because in this scenario the consumer risk is effectively no greater than had the payer paid the payee directly.
Commercial Purpose Limitation. The proposed statute only applies to persons and entities engaged in the business of money transmission. Engaged in the business of is defined as: For compensation or gain, or in expectation of compensation or gain, either directly or indirectly, to make available monetary transmission services to North Carolina consumers for personal, family, or household purposes. In addition to reiterating the limitation to consumer-facing activities, North Carolina may also be intending to limit the scope of the application of the new law to commercial activities. While it is not clear how North Carolina defines gain," this description of what kind of activity is covered by the statute is arguably narrower than many other statutes.
Virtual Currency. While we are still waiting on final rules for the New York BitLicense, North Carolina has addressed virtual currency regulation under its existing money transmitter framework and has arguably done a better job than some other states that have taken a similar approach, particularly relating to permissible investments. The proposed amendment allows virtual currency to serve as a permissible investment to the extent of outstanding transmission obligations received by the licensee in like-kind virtual currency.
Additionally, the Commissioner of Banks of the State of North Carolina has the discretion (but not the obligation) to require the applicant obtain additional insurance coverage to address related cybersecurity risks inherent in the applicant's business model as it relates to virtual currency transmission and to the extent such risks are not within the scope of the required surety bond. This indicates a willingness to take a more risk-based approach as opposed to relying on universal rules for all virtual currency licensees.
Regulator Flexibility. While not particularly uncommon under state money transmitter and other statutes, the proposed amendment gives the Commissioner the ability, by rule or by order, to exempt from all or part of the new law any person, transaction, or class of persons or transactions if the Commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this Article. Viewed in connection with the other efforts North Carolina has taken to scale back the scope of its Money Transmitter Act, such exemptions may be more available than they have previously been.
North Carolina has clearly taken into account the objective that it believes its money transmitter laws are intended to achieve and has crafted a statute that more appropriately addresses such objective. As other states revisit their own money transmitter laws, the North Carolina proposed amendment should serve as an example of some of the types of issues the states should be considering.
Austin Mills is an associate in the Fintech/Payments Group of Morris, Manning & Martin, LLP.