CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency


On December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.

The Policy As a result of its work to date, the Policy recommends that “activities involving third party control of virtual currency, including for the purposes of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.” The Policy states that state regulators have determined certain activities involving virtual currency raise concerns in three areas: consumer protection, marketplace stability, and law enforcement. The Task Force’s intentional technology-neutral approach targets “licensable activities” – activities performed by one party, in a position of trust, acting on behalf of another. It recommends that such licensable activities be regulated by amending current laws, or when necessary, enacting new legislation to cover the transmission, exchanging, and holding of value of currencies. The Policy recommends that those who service these transactions through mobile wallets, vaults, payment processors, and others should be appropriately licensed. The Policy targets certain activities:

  • Transmission
  • Exchange (e.g., sovereign to virtual, virtual to sovereign, or virtual to virtual)
  • Services that facilitate third-party exchange, storage, and/or transmission of virtual currency through any medium (e.g., wallets, vaults, kiosks, merchant-acquirers, and payment processors).

The Task Force notes that the Policy explicitly does not cover either merchants or consumers whose use of virtual currencies is solely to purchase goods or services; or for activities that utilize similar technologies, such as cryptography-based ledger systems, but are not financial in nature nor used for financial recordkeeping.

The Draft Model Regulatory Framework The Draft Model Regulatory Framework proposes a system for state licensing and supervision of certain virtual currency activities. The Draft Model Regulatory Framework addresses the following areas of concern regarding businesses engaged in virtual currency activities: licensing requirements and systems, financial strength and stability, consumer protection issues, cybersecurity, compliance with Bank Secrecy Act and Anti-Money Laundering, recordkeeping, and regulatory supervision. Request For Public Comment The CSBS is looking for public comment on the Draft Model Regulatory Framework in two main areas:

  1. The Licensing Regime for the Virtual Currency Business. What should such a regime look like? How can states best streamline the process? How should laws that apply to regular money transmitters, such as escheatment or funds availability, be applied to the virtual currency business?
  2. Risk Management. What is an appropriate level of identification for customers? How should BSA/AML regulations change to address virtual currencies? What role should cyber risk insurance play? What sorts of consumer protections will be necessary?

The specific questions posed by the CSBS are found here. The creation of a new licensing regime, in addition to laws that will govern future litigation structure, will influence the direction states take in regulating virtual currencies.

Members of the industry have until February 16, 2015 to respond to the RFC.