On April 3, 2014, The Texas Department of Banking issued a supervisory memorandum interpreting how virtual currencies, including cryptocurrencies, will be regulated under the Texas Money Services Act. Virtual currencies have increased rapidly in recent years and, particularly with the advent of cryptocurrencies like Bitcoin, have raised novel questions in relation to money transmission and currency exchange. Due to this advent and rapid growth, the policy expresses the Department’s interpretation of the Texas Money Services Act, the application of its interpretation to various activities involving virtual currencies, and the regulatory treatment of virtual currencies under existing statutory definitions.
After discussing types of virtual currencies, the Department of Banking determines that for purposes of currency exchange under the Texas Finance Code, cryptocurrencies are not considered currencies under statute as they are not “coin and paper money issued by the government of a country.” Therefore absent a legislative change to the statute, no currency exchange license is required in Texas to conduct any type of transaction exchanging virtual with sovereign currencies.
In regards to money transmission, the Department of Banking declines to offer generalized guidance on centralized virtual currency under the Texas Money Service Act because such schemes require individual analysis. As to whether transactions in cryptocurrency should be considered money transmission, the Department of Banking indicates that the determination turns on the single question of whether they are “money or monetary value.” The Texas Finance Code defines the terms for “money” and “monetary value” to mean “currency or a claim that can be converted into currency through a financial institution, electronic payments network, or other formal or informal payment system.” As noted in the currency exchange analysis, cryptocurrencies are not issued by a government as legal tender and thus are not “currency”. The Department of Banking reasons that because owners of cryptocurrency do not have a guaranteed right to convert their cryptocurrency into sovereign currency, cryptocurrencies are also not a “claim” within the meaning of the statute. Cryptocurrency is therefore not considered “money or monetary value” under the Money Service Act.
Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission. Consequently, absent the involvement of sovereign currency in a transaction, no money transmission can occur. However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled. To provide further guidance, the regulatory treatment of some common types of transactions involving cryptocurrency can be determined as follows.
- Exchange of cryptocurrency for sovereign currency between two parties is not money transmission. This is essentially a sale of goods between two parties. The seller gives units of cryptocurrency to the buyer, who pays the seller directly with sovereign currency. The seller does not receive the sovereign currency in exchange for a promise tomake it available at a later time or different location.
- Exchange of one cryptocurrency for another cryptocurrency is not money transmission (regardless of how many parties are involved).
- Transfer of cryptocurrency by itself is not money transmission.
- Exchange of cryptocurrency for sovereign currency through a third party exchanger is generally money transmission.
- Exchange of cryptocurrency for sovereign currency through an automated machine is usually but not always money transmission.
Lastly, the Department of Banking highlights three considerations that cryptocurrency businesses that conduct money transmission must comply with for licenses in Texas: (1) because a money transmitter conducting virtual currency transactions conducts business through the Internet, the minimum net worth requirement is $500,000 (and possibly up to $1,000,000), (2) a license holder may not include virtual currency assets in calculations for its permissible investments, and (3) applicants must provide a third party security audit of their computer systems in order to ensure the virtual currency is safeguarded for consumers.
Read more of Supervisory Memorandum – 1037.