California Department of Financial Protection and Innovation (DFPI) Provides Narrow Interpretation of State Virtual Currency License Requirements

Practical Law Legal Update w-035-3289 (Approx. 5 pages)

California Department of Financial Protection and Innovation (DFPI) Provides Narrow Interpretation of State Virtual Currency License Requirements

by Practical Law Finance

March 23, 2022 Interpretive Opinion

On March 23, 2022, DFPI issued an interpretive opinion stating that a license under California's Money Transmission Act (MTA) was not required for a California software platform providing retail and institutional investors with the ability to buy and sell digital assets, including cryptocurrency, and to access related products and services. DFPI concluded a license was not required under these facts because:

The platform does not facilitate the exchange of fiat currency or cryptocurrency with a third party and transactions on the platform do not meet the definition of "money transmission" under the MTA because they do not involve:
- the sale or issuance of a payment instrument;
- the sale or issuance of stored value; or
- the receipt of money for transmission.
The transactions are "closed loop," meaning customers can only use the company's platform to:
- redeem the monetary value stored in their accounts for digital currency sold by the company; or
- have the company return the monetary value stored in their accounts to the customer's bank account.
The exchange of one cryptocurrency for another directly between two parties does not meet the definition of money transmission under the MTA.
The DFPI has not concluded whether a wallet storing cryptocurrency constitutes monetary value representing a claim against the issuer and which should be accepted as a means of redemption for money or monetary value or payment for goods and services.

April 8, 2022 Interpretive Opinion

On April 8, 2022, DFPI issued an interpretive opinion addressing whether a license was required by a platform that allows the deposit of fiat currency into company accounts to purchase VC, which may then be transferred to a VC wallet issued by the platform and then later transferred to an external VC wallet or sold for fiat currency. The platform then purchases the VC from a third party.

The DFPI found the MTA licensure requirements inapplicable because:

The company's purchase and sale of digital assets does not involve the sale or issuance of stored value or receipt of money for transmission because the purchases and sales are conducted directly between the platform and the customer.
The customer's fiat currency balance results from a closed loop (see March 23, 2022 Interpretive Opinion for explanation of "closed loop"), and does not meet the MTA definition of "stored value," which is monetary value:
- representing a claim against the issuer;
- that is stored on an electronic or digital medium as demonstrated by an electronic or digital record; and
- that is intended and accepted as a means of redemption for money or monetary value or payment for goods or services.
DFPI has not concluded whether the issuance of a wallet storing VC is money transmission activity that is subject to state regulation.

For more information about VC regulation, see Cryptocurrency and Virtual Currency Regulatory Tracker.

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