egislation for the past few sessions of the California Assembly but has yet to adopt specific licensing requirements. California has provided guidance on virtual currency transactions but on a case-by-case basis and has explicitly provided that these transactions are considered money transmission.
At the other end of the spectrum, in some other states, virtual currencies are not yet regulated because they have not been determined to fit within the parameters of the state money transmitter statutes. Many states, including Illinois, Tennessee, and Texas, have issued formal guidance that virtual currency transactions which do not implicate fiat currency (e.g. an exchange) are not considered money transmission. Additionally, Wyoming does not consider crypto currencies to be currencies and Montana does not regulate money transmission.
Additional comments regarding the legal situation for financial services using crypto currencies or what FinTech’s must be aware of in this business area
In March 2022, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets. The Executive Order provides a government-wide strategy to regulate crypto currencies and details the administration’s policy efforts and regulatory objectives. While the Executive Order references regulatory issues like anti-money laundering (AML), the administration emphasised the importance of reinforcing the United States’ influence and competitiveness in global crypto currency market through “the responsible development of payment innovations and digital assets” and the need to “promote access to safe and affordable financial services.”
There is growing evidence that the SEC intends to further regulate crypto currency exchanges. For example, in early 2022 the SEC proposed a rule change that would expand the definition of “exchange” in a way that many believe to be an effort by the SEC to make it easier to argue that crypto currency exchange platforms, decentralised exchanges, and even developers might be required to register as securities exchanges or operate as alternative trading systems. The SEC proposed to treat any system performing the function of a marketplace as an “exchange” by including “Communication Protocol Systems” in the definition of exchange. Some developers and platforms that operate in the digital asset space, including automated market makers, could be viewed as falling within the proposed definition of “Communication Protocol Systems.” Then, in April 2022, SEC Chairman Gary Gensler announced several initiatives during a speech to expand investor protections in the crypto currency market. As part of that he stated that the SEC plans to register and regulate crypto currency exchanges and will explore separating out asset custody to minimise investor risk.
FinCEN has outlined the extent to which its regulations have jurisdiction over persons who, among other things, create, transmit, or otherwise transact with virtual currencies. FinCEN’s guidance notes that although “virtual currency” does not have legal tender status in any jurisdiction, it does operate as a “medium of exchange” (a significant attribute of real currency) in certain specified environments. In its guidance, FinCEN limits its focus on “convertible” virtual currency, which means that the virtual currency has an equivalent value in real currency or can function as a substitute for real currency, as opposed to non-convertible or closed virtual currency, which has no currency equivalent and is not convertible into fiat currency or other virtual currencies.
The guidance divides the participants in “generic virtual currency arrangements” into three (3) categories: “users,” &l