The United States offers an innovative and diverse marketplace along with a sound infrastructure for new cryptocurrency and digital asset businesses.  However, the U.S. regulatory framework for digital asset businesses creates significant barriers to innovation and risks frittering away the potential benefits of the U.S. markets’ creativity. One of the chief challenges for today’s cryptocurrency businesses, especially those offering exchange, trading, or custody services, is the fragmented and inconsistent state law framework currently applied to many of those businesses. 

Most states regulate these businesses under money transmitter laws that, with some notable exceptions, have not been amended to clarify how, if at all, the laws should apply to different cryptocurrency businesses. State regulators are doing their best to respond to a rapidly evolving digital marketplace oftentimes having to apply outdated laws, while being given insufficient resources. Even where state legislators have responded to the advent of cryptocurrencies, there has been little, if any, coordination between states and, as a result, in many cases state laws remain fragmented in purpose, in relationship to other laws within as well as outside the state, and in application.

In this environment, many cryptocurrency companies have looked outside the U.S. for more comprehensive and comprehensible legal frameworks, while those seeking to tap the valuable U.S. market are faced with hurdles that seem to have little to do with consumer protection or safe business operations.


Generally speaking, nonbank financial services—consumer lending, payments and money transmission, etc.—are licensed at the state, not federal, level, typically under the jurisdiction of a state’s banking supervisor, money transmitter regulator, or equivalent.  Today, securing state regulatory approvals necessary to operate nationwide can be an expensive and time-consuming exercise, and state-by-state supervision often creates redundancies and inconsistent requirements. In the cryptocurrency space, these challenges are magnified by the ambiguity created from generally applying 20th century laws and regulations to novel 21st century technologies.

Federal regulators generally have more limited statutory jurisdiction.  To date, federal oversight over cryptocurrency businesses has closely followed current federal jurisdictional limits over securities, commodities, anti-money laundering, bank secrecy, and sanctions requirements. For example, the Securities and Exchange Commission (“SEC”) has concluded that some cryptocurrencies, such as bitcoin, are not securities under federal law and are therefore outside of the SEC’s jurisdiction, while other digital assets such as initial coin offering tokens generally are securities and within its jurisdiction.  The Commodities Futures Trading Commission has taken the view that certain cryptocurrencies are commodities, but its jurisdiction is limited to the regulation of sales and trading of derivatives on cryptocurrencies, as well as policing for fraud and manipulation in cryptocurrency spot transactions.[1]  The Financial Crimes Enforcement Network (“FinCEN”) regulates money services businesses, and has defined the activities of issuers, administrators, and exchanges as coming within the definition of such businesses requiring registration with FinCEN.   None of these federal regulators police the general buying and selling of cryptocurrencies through businesses offering exchange, trading, or custody services.

As a result, most cryptocurrency businesses are licensed at the state, not federal, level.  A few states have sought to extend their money transmitter laws, in particular, to regulate cryptocurrency businesses operating in their states.  But many more states have yet to amend their laws or even release clear guidance on how they intend to apply their laws to cryptocurrency businesses.  As a result, it is often difficult for a firm seeking to provide cryptocurrency services to determine where licensing is required and what state laws will apply to its activities.  Further, inconsistent regulation does little to reassure the public about the operational or financial soundness of these companies.

CSBS Efforts to Harmonize State Approaches to Nonbank FinTech Companies

Against this backdrop, the Conference of State Bank Supervisors (“CSBS”) recently announced it would support 14 specific recommendations from its FinTech Industry Advisory Panel  (“Panel”) in an effort to streamline and harmonize state FinTech regulation.  The Panel, comprised of 33 different FinTech companies, including cryptocurrency firms like BitPay, LibertyX, and Ripple Labs, was formed to “identify and remove unnecessary pain points” for FinTech nonbank companies operating nationwide.

Among other things, the CSBS stated it would:

  1. Develop a fifty state model money services business law (“Model Act”) that would standardize the definitions and interpretations of activities that would require licensing.
  2. Launch a State Examination System (“SES”) pilot with certain states in 2019. SES would streamline multi-state examinations by improving collaboration and exam sharing between regulators.
  3. Establish quantitative targets for multi-state exams.
  4. Expand the use of the Nationwide Multistate Licensing System (“NMLS”), which permits applicants to create and file a universal application as well as submit required reports with participating states, for all nonbank financial service licenses by every state.
  5. Develop additional features in NMLS to encourage NMLS adoption and multi-state consistency by regulators.
  6. Establish a working group of regulators and industry members to develop a standardized approach to requirements regarding “changes of control” and “control persons.”
  7. Build an online database of FinTech-related, state regulatory guidance and state licensing requirements and exemptions, while encouraging adoption of common standards.
  8. Create a single consumer finance call report for multi-state companies engaged in consumer finance (such as online lenders).

To help develop the Model Act, the CSBS has asked for information on several topics, such as the scope of money transmission and applicable exemptions, change of control processes and definitions of control, prudential regulations (e.g., permissible investment, net worth and surety bond requirements), supervision processes and coordination (e.g., how states can ensure policies are consistently implemented across states without needless duplication of effort).

Potential Benefits for Cryptocurrency Businesses

Although CSBS’s proposals are focused on improving state regulation of FinTech companies generally, these proposals, if pursued to completion, could be particularly beneficial to companies providing cryptocurrency services (such as exchanges and custody firms) where the applicable regulatory landscape is even more uncertain.

A Model Act could help clarify whether state laws apply to these cryptocurrency activities by harmonizing state interpretations of money transmission regarding cryptocurrency and the availability of certain exemptions (such as exemptions for out-of-state trust companies). Of course, model laws provide national consistency only when the same or very similar statutory language is adopted in all states.  As a result, it will be important to limit the possible options offered to states for their legislation.  While allowing optionality is often viewed as a positive feature of some model laws, by allowing individual states to tailor the requirements to their preferences, it can be a significant problem in achieving a common marketplace.  Similarly, it will be important to offer consistent guidance on interpretative issues, as has often been done with the Uniform Commercial Code.  Without such consistent guidance, different states are likely to interpret the identical statutory language in different ways and thereby introduce new complications into the regulatory process.

Additionally, in circumstances where a firm requires a license, consistent licensing requirements and broader NMLS adoption could streamline the application process nationwide. Currently, even states that have adopted NMLS generally require additional state-specific information or certain material be provided outside NMLS. As a result, an applicant is forced to continually update its universal application and provide duplicative materials outside NMLS, diminishing the intended efficiencies of a universal application.

Further, expanding and encouraging NMLS for state reporting requirements (such as by developing unified report formats), could also simplify multi-state reporting for licensed firms. As noted by the Panel, regulators frequently fail to utilize reports made through NMLS as currently designed, requesting the same information during exams or through different reports. However, a better designed platform could encourage regulator adoption and reliance on NMLS-uploaded reports.

Likewise, an examination system that coordinates state exams and exam sharing could reduce burdensome redundancies. States often have similar exam focuses and questions regarding how to properly examine aspects of a cryptocurrency firm’s business. Establishing quantitative targets (as a kind of best practice) for multi-state exams would also give both industry and regulators guideposts for approaching exams.

Although most of these proposals are still in an early, conceptual phase, the CSBS has already had some success in encouraging states to harmonize and streamline money transmitter laws.  In January 2019, the CSBS started a “one company – one exam” pilot program where a money transmitter operating nationwide will only be examined once in 2019 using criteria derived from multiple state examinations. Additionally, on February 6, 2018, the CSBS announced that seven states would take part in a pilot program whereby the states would honor each other’s approvals of certain parts of a money transmitter application. As a result, the bulk of an application would be reviewed once by a single state. As of January 26, 2019, twenty-one states have signed onto the agreement.

Key Takeaways

The current state-by-state approach leads to inconsistencies in statutory and regulatory requirements, ambiguity in which laws are applicable in different states, excessive and unnecessary application and licensing burdens, and uncertainty on reciprocity or other potentially available authorities for cryptocurrency companies.

States could more effectively regulate cryptocurrency companies by adopting consistent frameworks designed around what these customer-facing businesses actually do (such as providing platforms for investment in, trading, and custody of cryptocurrencies) instead of trying to apply existing, but frequently dated, frameworks to new technologies. A vital interim step would be for states to adopt consistent approaches to licensing, supervision and exemptions for licensed companies, as proposed by the CSBS, in order to avoid stifling innovation and development. Although the CSBS initiatives are still in their preliminary stage of development, they are a welcome sign that regulators are working to resolve these challenges.

Nonetheless, while the efforts by CSBS deserve recognition, many questions remain. At the outset, analytically, a question can be raised about whether money transmitter laws are the appropriate state statutory and regulatory framework for all of the digital asset businesses to which some states apply them. After all, the novelty of a digital asset is that it may be used for a variety of purposes that have little to do with the transfer of money or payments between parties. Finally, given some states’ resistance to uniform or consistent laws with other states, it may take a considerable period of time to achieve relative consistency across states.  The markets are moving rapidly, and delays in adopting the model law may make it outdated or drive market participants to other jurisdictions.

In a subsequent article, we will more fully analyze whether money transmitter laws serve as an appropriate regulatory regime for many digital asset activities and the factors that would encourage state adoption of the CSBS’s proposals.

[1] For further discussion of the CFTC’s jurisdictional reach, see our Cleary Fintech Update articles covering the recent court decisions upholding the CFTC’s authority to regulate cryptocurrency spot transactions under its anti-fraud enforcement authority and CFTC Chairman Giancarlo’s February 2018 testimony before the Senate Banking Committee.