Uniform Licensing Could Help Bitcoin Businesses Stay Disruptive
Many Bitcoin startups face the expensive and daunting task of obtaining multiple state money transmitter licenses. But these businesses could drum up enough support to create a more streamlined and affordable licensing process.
The federal government plans to regulate Bitcoin businesses the same as other money services businesses. In March, the Federal Crimes and Enforcement Network issued guidance on virtual currency explaining that many businesses dealing in digital currency are considered MSBs and must register as such.
But registering with Fincen isn't the problem.
The guidance also said states should look at certain Bitcoin businesses as money transmitters. These businesses are now required to obtain licensing in all states they service customers in. (South Carolina and Montana are an exception because they don't require a money transmitter license.) These licenses could cost a Bitcoin business more than $10 million, according to one estimate. Because of the expense associated with acquiring these licenses, Bitcoin businesses will likely have to charge customers higher fees.
But is this really necessary? Going state-by-state seems grossly inefficient in today's fast-paced, technologically-powered world.
Why isn't there a single uniform federal filing to work as a money transmitter in all states? A single filing would cut the time, paperwork and expense of operating legally as a money transmitter.
"There is a long history of lobbying to get a federal [money transmitter] license and it has been fruitless," says Juan Llanos, executive vice president of operations and compliance officer at Unidos Financial Services Inc. "The entire money transmitter industry has been trying to do this for decades, to no avail. It's a huge issue that not even Western Union or PayPal or Amazon have been able to change."
Congress has shown support for the idea in the past. The Money Laundering Suppression Act, established in 1994, recommended that states adopt uniform laws for money services businesses. And the Uniform Money Services Act (1998 through 2001) laid the groundwork for a uniform licensing process. While several states have adopted its recommendations, it hasn't seen widespread use.
There's always pushback from states to limit federal intrusion, and this has kept money transmitter laws a patchwork, Llanos says.
Additionally, the revenue from the application process for licenses gives states an incentive to preserve the status quo. Applications for a money transmitter license can cost as much as $5,000 and these applications must be renewed annually for the same price. Add in periodic fees for reporting and examinations and states have a pretty stable revenue stream from money transmitters.
The European Commission took this single filing approach with the Payment Services Directive, says David Landsman, executive director of the National Money Transmitter Association. Once a payment services provider is regulated in one country in the European Union, it can then expand into another country with the existing regulations and supervision. The second country's authorities are notified and, if they choose, have 30 days to investigate further and object to the company doing business in their territory.
Because all records are stored in one computerized, unified system, every country has the same application and transaction records for a company and the business doesn't have to duplicate application processes, Landsman says.
"What the federal government needs to do is to impose minimum standards for all states, and take over if and when the states fail to live up to their obligations, or where the federal government would be a more appropriate regulator, such as licensing foreign entities that have no physical presence in any state," he says.
Bitcoin could be the catalyst for this type of law to pass, Llanos says. Within Bitcoin, "the stakes are so high and there's so much drive to change the world of money," he says.
BTC Global is working to create a network of locally licensed companies for Bitcoin startups to direct transfers through. BTC Global is currently reaching out to small companies with local licenses to join the exchange.
"We found it would be better to spread the work between a lot of small ventures with local licenses, and thus be able to accept payments from customers in their state or country," says Mauro Betschart, cofounder of BTC Global. These small companies will collect and pay funds in customers' licensed states, plus be a part of a large network that allows customers to have an account at the exchange.
OboPay Inc., a provider of mobile payments, launched a similar service last May. Obopay's Licensed Payment Services for Partners allows clients to leverage the company's state money transfer licenses to quickly fall under compliance and bring products to market.
There is growing sympathy for virtual currency businesses, including the recently scandalized Liberty Reserve. In May, the creators of the cross-border digital currency exchange were arrested and charged with conspiring to launder $6 billion and operating as an unlicensed money transmitter. Liberty Reserve dealt in LRs, a proprietary currency.
In light of the Liberty Reserve case, government officials seemed to demonize privacy, but not all private and irreversible payments are nefarious in nature. Compared to the anonymous nature of cash, Bitcoin is pseudonymous. Most states allow for transactions under a certain amount to take place without extensive reporting, and as long as these obligations are kept, the know-your-customer rules seem reasonable for Bitcoin businesses.
Most states also include an obligation for money transmitters to provide a chargeback period to protect consumers from fraud. And even though Bitcoin transactions are irreversible, there is accountability. Bitcoin's blockchain is an open ledger, so if a merchant commits fraud, that merchant's Bitcoin address could be flagged and avoided by the community.
It'll be a tough fight, though. Not only do states support this barrier to entry, but it protects incumbents, including ones such as PayPal, whose president David Marcus has said he is considering whether Bitcoin could be a funding instrument for PayPal accounts. Established payment companies could complain of unfair treatment if Bitcoin businesses are permitted to file a single application instead of the state-by-state licensing that has been required for years.
Since the early days of Bitcoin, its community has demonstrated a strong passion for the digital currency's cause. If any laws are going to be rewritten, the community must hold on to that passion and use it as a force for change.