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In August 2020, Louisiana passed the Virtual Currency Businesses Act (VCBA) to regulate virtual currency activities in the state. It became only the second U.S. state, alongside New York, to establish a separate regulatory system for virtual currency payments, although other states that have explicitly addressed virtual currency regulation have generally done so through their existing money transmission laws.
Implementation of the Louisiana statute was pending the promulgation of final rules by the state’s Office of Financial Institutions (OFI). These regulations were formally adopted by an emergency rule last month. As a result, the virtual currency regulatory system in Louisiana will become final on January 1, 2023, and license applications are scheduled to be available through the Nationwide Multistate Licensing System (NMLS) from that date. A license or other equivalent authorization is required for an affected entity to continue conducting virtual currency operations in Louisiana after June 30, 2023.
Louisiana Virtual Currency Business Act
The standalone virtual currency regime established by the VCBA and implemented by OFI rulemaking is more detailed than most government approaches to regulating virtual currencies. In this regard, the structure and requirements of the VCBA are broadly similar to New York’s longstanding BitLicense regulations. Like New York law, the VCBA requires a license to engage in “virtual currency business activities” with or on behalf of a Louisiana resident. (A “resident” includes a person who is a resident or has an office in the state, and a “person” is defined as “an individual, partnership, estate, corporation or non-profit organization, or other legal entity “).
The VCBA defines “virtual currency” as “a digital representation of value used as a medium of exchange, a unit of account, or a store of value that is not legal tender, whether denominated in legal tender or not.” It defines “virtual currency business” as “exchanging, transferring or storing virtual currency or engaging in the management of virtual currency”. This definition
excludesinter alia, a “digital representation of value issued by or on behalf of a publisher and used solely within an online game, gaming platform or game family sold by the same publisher or offered on the same gaming platform”.
Virtual currency management constitutes “the issuance of virtual currency with the authority to redeem the currency for legal tender, bank loans, or other virtual currency,” suggesting that “stablecoins” are also likely to be subject to regulation under the regime. The “transfer” of virtual currency that is subject to regulation is also broadly defined to include taking control of virtual currency from or on behalf of a resident and performing any of the following actions: “(a) credit[ing] the Virtual Currency to another person’s account; (b) movement[ing] the virtual currency from one account of a resident to another account of the same resident; [and] (c) Waiver[ing] control of the virtual currency to another person.”
The license requirements for the Virtual Currency license are similar to those for a “standard” fiat currency money transfer license – and to some extent similar to the requirements for the New York Virtual Currency license application. The application, which must be submitted through the NMLS, requires background information on the applicant, a business plan, information on Financial Crimes Enforcement Network registration and related compliance matters, biographical information and criminal background checks for screeners, and a surety bond and a wealth needs. The sponsorship requirement is based on the volume of virtual currency activity (up to a volume-based sponsorship limit of $1 million), but the banking department reserves the discretion to increase the requirement to $7 million. The net worth requirement is the greater of $100,000 or 3% of total assets. The calculation of Net Assets may include Virtual Currency “as measured by the average value of Virtual Currency in US Dollar equivalents over the past six months”, subject to certain limitations.
Bylaws and schedule
The OFI will start accepting applications for approval via the NMLS from January 1, 2023. Under the regulations, completed regulatory applications submitted on or before April 1, 2023 will receive an approval, conditional approval, or denial by the end of June 2023. (There is also a separate “Registration” for individuals dealing with a de minimis Scope of virtual currency operations in the US, but the regulations do not elaborate on the registration process, such as B. how it would be handled by the NMLS.)
Bylaws were published in the Louisiana Register on October 20, 2022. The filing of the regulations is somewhat unusual as, for administrative reasons, OFI published the unmodified draft regulations as the final regulation, but immediately issued an emergency regulation, deleting the inserted text with the “final” regulation and replacing it with the informed updated regulations through public comment . Therefore, the rule actually in force is not the final rule, but the “emergency rule”, currently at 10:I §1901-1937.
In particular, the implementing rules contain additional definitions that are not contained in the VCBA. Among other things, these definitions establish the triggers for “control” of a regulated entity and provide that failure to comply with withdrawal requests constitutes an unsafe or unsound act.
Regulation of virtual currency under government payment regulations
Although Louisiana is the second state alongside New York to have a separate regulatory system for virtual currency payments, a number of states have already looked into regulating such activities under their money transfer laws. Almost all US jurisdictions regulate money transfer under state-specific licensing regimes, and a license may be required before an individual can engage in certain types of virtual currency activities in a particular jurisdiction. As a result, any company looking to launch new virtual currency products and services in the United States must generally consider the potential applicability of state money transfer license laws.
Despite decades of experience with virtual currency, money transfer regulators have not found a consistent way to apply their laws to virtual currency activity (although each state’s law generally applies to the same type of money movement activity). About 13 states — except Louisiana and New York — have specifically addressed virtual currency regulation through changes to their money transfer laws, while many others have issued some interpretive guidance. A significant number of states still have not taken a formal, public position on regulating virtual currency activities.
As a result, determining whether a particular virtual currency activity is subject to state licensing can require analysis from state to state – and often involves significant uncertainty. Broadly speaking, however, states’ approaches to regulating the transfer of virtual currencies fall into four categories:
1. States that regulate both virtual currency activities and related fiat activities
These states have specifically addressed crypto by changing money transfer laws or regulations or issuing guidance, and have activities such as enabling crypto trading, crypto custody and crypto transfers (as well as entry and exit ramps for fiat currencies ) incorporated existing money transfer regimes into cryptography.
2. States that have indicated that they do not regulate virtual currency activities but have specifically stated that they may regulate certain fiat currency activities related to virtual currency activities
For example, facilitating the transfer of fiat currency in connection with the purchase of virtual currency through an exchange or the custody of fiat to facilitate the trading of crypto may require a license in those jurisdictions.
3. States that have specifically stated that they do not currently regulate virtual currency activities (in some cases even certain related fiat currency activities)
These states have also specifically addressed crypto by changing money transfer laws or regulations or issuing guidance, but have done so explicitly excludedcrypto-related activities from the Money Transfer Act, including related fiat currency activities.
4. States that have not taken a formal, public position regarding the applicability of their money transfer laws to virtual currency activities
In these states, virtual currency activity (and related fiat currency activity) generally could still be subject to regulation as a transfer of funds if the law were construed to include virtual currency as “money” or “monetary value,” as the case may be .
At least two states — Kansas and Texas — have issued guidance that certain stablecoin activities are subject to fund transfer regulation, although activities involving other virtual currencies (e.g., bitcoin) are not necessarily so.
Notably, despite this inconsistent and unclear regulatory regime across US states regarding virtual currency activities, a number of well-known exchanges and trading platforms have been able to obtain money transfer licenses and are therefore subject to security and soundness testing and oversight in most states.
Given the recent and ongoing volatility in the digital asset space, the trend toward crypto-specific state laws is likely to continue, even as calls for federal regulation mount. In the near term, however, any company involved in virtual currency must evaluate whether the Louisiana VCBA applies, and if so, begin the application process soon to remain in the state when the law finally goes into effect in late June 2023.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.