Virtual Currencies and Licensing

Last month, we explored the area of law surrounding blockchain technology.  Last week, we focused on a narrower realm of blockchain technology – i.e., virtual currencies.  Today, we delve further into digital currencies that are adding so much value to the modern economy.  Because the technology is so innovative and new, its legal landscape remains hazy and nuanced.  Today, we explore the legal interplay between virtual currencies and money-transmittal licensure.

At this time, state, federal, and international laws require that individuals and companies obtain licenses to engage in activity that involves the acceptance of funds coupled with the agreement to transfer or pay them to another party. In some circumstances, the law even requires special registration.  The only exception to this typically is when the recipient of the funds uses them to pay directly for goods and services offered by someone else. This has a close bearing on virtual currencies because they are often considered to be funds themselves. Depending on the exchange, such currencies may be considered merely placeholders for an asset, rather than assets or funds themselves.  This means, however, for exchanges in which virtual currencies are considered funds, licensure laws apply.

Although, the word “funds” is used often in this regulatory sphere, it might not be in the traditional sense.  As it is applied in licensure law, funds do not require real cash or money to be involved.  Really, most any type of monetary value is covered within the language of these laws. This includes, but is not limited to, electronic value.

This is to say that most any type of virtual currency that can be transferred to another party for any reason other than a direct exchange for a good or service can trigger the need for a license.  Unfortunately, this market barrier can result in quite a bit of deadweight loss economically, as licenses typically do. The aim is to increase trust in the virtual currency market.  Many laissez-faire advocates rail against the intrusion of the state, or against ineffective, inefficient government intervention to solve such issues they say the market itself can equilibrate.  In fact, one of the very points of virtual currency is that its value is determined directly from the market. The argument is that this helps consumers know exactlywhat they are getting—there are no smoke and mirrors, in other words, a sensation that is actually diffused into the population by arbitrary, politically driven constructs. So, they argue licensure is just such a construct.  This argument has analogues in other spheres of politics as well (free speech is often defended on the grounds that it is the most efficient way to arrive at the truth).  That free-floating currencies in a marketplace of currencies must necessarily display their attributes—reliability and versatility—or fail which seems to be the premise of virtual currency in the first place.  Opponents of licensure would say that requiring it would be the equivalent of licensing speech in a liberal democracy.  It would completely undermine the value of the technology.  Advocates for it have concerns about brokerage and credibility.

Whatever may be the underlying policy debate, licensure remains an issue at the federal and state levels.  Depending on how an exchange takes place, parties must be licensed. If the exchange involves an agreement to transfer the currency at a later time for another good or service, then the parties might incur penalties for not being licensed, and should research which licensing institutions can help them.

At our law firm, we help clients navigate through the legal obstacles.  Please do not hesitate to contact our virtual currency attorneys for any questions.