Reforming Money Transmission Laws for Digital Asset Businesses: Part II
· Congress should amend Section 803 of the Lummis-Gillibrand bill to establish a federal money transmission license for digital asset businesses that provide payments services.
· Congress should either clarify or expressly grant authority to the Office of the Comptroller of the Currency (OCC) or the Federal Reserve (Fed) to oversee the federal license program.
· The federal money transmission law should be an alternative not a replacement for state money transmission laws.
· In light of an alternative federal money transmission license, Congress should remove 18 U.S.C. § 1960, which imposes criminal penalties, including felony liability, on firms and entrepreneurs that operate money transmission businesses without a compulsory state license. Striking this provision may lead to increased economic activity and innovation in the payments space.
Section 803 of the Lummis-Gillibrand Responsible Financial Innovation Act directs the states to establish a uniform money transmission law for digital asset businesses. As a reminder, Part I of Reforming Money Transmission Laws for Digital Asset Businesses explains why Section 803 is a great idea but susceptible to constitutional challenges due to the anti-commandeering doctrine.
If anti-commandeering challenges prevail, digital asset businesses still need a uniform money transmission law. Uniformity would reduce the regulatory burden that these companies face when complying with an overly complicated 50 state system. One recommended solution is for Congress to grant authority to a federal regulator to establish a federal money transmission license as an alternative way for digital asset businesses to comply with money transmission laws. In doing so, companies that facilitate digital payment transactions on a national basis would only have to comply with the fees, application process, and licensing requirements of a single regulator.
Scholars have recommended different models of what a federal money transmission license scheme might look like. (See here, here, and here.) One of those models — an alternative federal money transmission law and licensing regime — would allow for Congress to respect the sovereignty of the states by avoiding full preemption of state money transmission laws while still providing digital asset businesses with relief from unworkable compliance burdens. Such a dual structure regime would mean that digital asset businesses could choose between complying with a single federal license or several state-specific licenses.
In 2020, the Office of the Comptroller of the Currency (OCC) also proposed a federal money transmission license. While the OCC’s proposal is an unusual example of government efficiency, the proposed license may not see the light of day due to potential pushback from state regulators who allege that the OCC does not have the authority to create such a license.
This is where the Lummis-Gillibrand bill can play an influential role. By amending Section 803, Congress could, depending on how you view it, either clarify or expressly grant authority to a federal agency, such as the OCC or the Federal Reserve, to establish a federal money transmission license. Congress would have the constitutional authority to do so because of their right to regulate interstate commerce pursuant to the Commerce Clause. Digital asset payment transactions are typically conducted using the internet, and since the internet can be used as an instrumentality and channel of interstate commerce, modern Commerce Clause doctrine underpinned by Supreme Court decisions such as Wickard and Raich suggests that the interstate internet activity of digital asset businesses falls squarely under Congress’ authority.
When amending Section 803, Congress should carefully consider the best home for a federal money transmission law. Some may argue that the Consumer Financial Protection Bureau (CFPB) is the most fitting agency to oversee this federal licensing scheme. After all, the CFPB is the federal agency responsible for consumer protection in the financial sector, and consumer protection is one of the main reasons why money transmission laws exist. Furthermore, in Section 803(b), Congress already grants authority to the CFPB to adopt rules for states that have not enacted a uniform money transmission law. As previously noted in Part I of Reforming Money Transmission Laws for Digital Asset Businesses, the CFPB’s mandate is problematic and may potentially lead to bias, politicization, and capriciousness.
The CFPB has also been criticized in the past because of certain statutory restrictions on the President’s ability to remove the director from office and the fact that the CFPB’s budget comes from the Federal Reserve rather than Congressional appropriations. These circumstances create a scenario where the director of the CFPB is insulated from Congressional bipartisan checks and presidential control. In 2020, the Supreme Court somewhat resolved the removal issue by ensuring that the CFPB director could be removed “at will” by the president. The long history of constitutional challenges that the CFPB has faced since its inception may make the agency more prone to issues of trust and questions of legitimacy.
There have also been informal comments from the Department of the Treasury concerning the creation of a new federal payments regulator to tackle stablecoin regulation as well as other payments-related issues. It’s possible that a new payments regulator could also oversee a new federal money transmission law, but this expansion of federal government is unnecessary. For example, the OCC is an existing option where oversight of a federal money transmission law could be housed. As previously mentioned, the OCC has already proposed a framework for a federal money transmission law and has a licensing department that might perform a similar function for administering a federal money transmitter licensing program. The OCC has also been around since the mid-1800s and therefore is unlikely to experience instability in mission and governance compared to a newer agency.
One pitfall to this choice, however, is that the OCC deals with banks and federal savings associations, rather than nonbank financial institutions, which make up a large cross-section of the digital asset ecosystem. The Dodd-Frank Act assigned oversight of certain types of “nonbank” entities to the supervision of the Federal Reserve Board of Governors (Fed), but these are limited to “systematically important financial institutions (SIFIs).”
Many digital asset money transmitters, including startups, would not meet the “SIFI” definition of having more than $50 billion in assets and would therefore be outside the scope of the Fed’s regulatory authority. Theoretically, the Fed could be granted narrow authority by Congress to regulate money transmitters of any size within the ambit of a federal money transmission law. This legislative action would make sense as the Fed already has oversight of the U.S. payments system. One argument against the Fed’s role as regulator of a federal money transmission regime would be that it further expands the Fed’s regulatory authority, which was initiated by the Dodd-Frank Act. Furthermore, unlike the OCC, the Fed does not have a champion at its helm to negotiate a federal money transmission framework.
Another option would be to create a small division within the OCC that administers a federal money transmission license program for both bank and nonbank entities. Since regulation of nonbank entities falls outside the OCC’s jurisdiction, Congress could consider granting express authority to the OCC that would allow the agency to oversee nonbank entities within the context of a federal money transmission license program. This narrowly defined, expressly granted authority may preempt litigation issues over the OCC’s authority to regulate nonbanks.
If the OCC is selected to oversee this regulatory framework, Congress should also ensure that nonbanks with monoline businesses are not classified or regulated as banks. When the OCC sought to create special purpose national bank charters for nonbank fintech companies in its original “fintech charter” proposal, this introduced complex questions about the definition of a bank and whether it applies to nonbank entities, such as payment providers. In designing a federal license, Congress should avoid classifying nonbanks as banks in the legislative language to prevent any confusion as to whether nonbanks under the new federal money transmission scheme are also subject to other banking regulations or bank-related compliance requirements. This narrow construction would also prevent an expansion of what a federal money transmission license seeks to accomplish.
The location of a new division within the OCC or the Federal Reserve would be strategic given that FinCEN (also in the Department of Treasury) manages Bank Secrecy Act (BSA) enforcement of financial institutions, including money transmitters. This agency alignment would reduce information silos and encourage intra-agency information sharing and decision making. Intra-agency oversight of a federal money transmission law could also spell the end of 18 U.S.C. § 1960, which imposes criminal penalties, including felony liability, on firms and entrepreneurs that operate money transmission businesses without a compulsory state license. Furthermore, with an alternative federal license option, the existence of this statutory provision is unnecessary and counterintuitive. The combined effects of 18 U.S.C. § 1960’s felony liability and the mandatory 50 state compliance obligations for digital asset money transmitters act as a deterrent for legitimate economic activity and innovation. Thus, removal of this statutory provision should be given serious consideration.
Money transmission activity is critical to the transformation and evolution of the digital asset ecosystem. In addition to capital formation and the creation of new forms of payment and payment channels, money transmission activity may also be a critical component to helping certain digital asset businesses establish sufficient decentralization for blockchain networks. Amending Section 803 of the Responsible Financial Innovation Act to provide for an alternative federal money transmission law would be a productive and timely regulatory reform for digital asset businesses.