Business owners with an understanding of the cryptocurrency market are taking advantage of the ongoing interest in virtual currencies by creating platforms and companies to help customers manage and transfer money. Operating a cryptocurrency business may come in the form of an online transfer service, a physical ATM, or another service that provides a way to transfer or exchange virtual currencies.
While the increasing popularity of cryptocurrencies has paved the way for a new crop of business owners, there are several requirements which may need to be met in order to operate a legal business.
Companies that exchange fiat currency for virtual currency, or vice versa, or those that provide other transfer services for cryptocurrencies may be operating as a money transmitter under federal or state laws. A money transmitter business is required to follow a handful of licensing processes, including complying with federal regulations, meeting state criteria, and obtaining a money transmitter bond. Here’s how to go about getting a money transmitter license as a cryptocurrency business.
Comply with Federal Regulations
Although the federal government does not define cryptocurrency as a legal tender, it is considered a commodity and therefore falls under certain regulations. Businesses helping transact cryptocurrency exchanges or transfers for fiat currency may need to register with the Financial Crimes Enforcement Network (FinCEN) as a money service business. This registration process is completed online and only takes a few moments to finish, but it is an important requirement for money transmitters to complete.
In addition to FinCEN registration, money transmitters may also need to develop an anti-money laundering policy to comply with federal laws. An AML program needs to provide direction on how the business will capture and monitor customer transaction details, and how those may be reported to prevent money laundering over time. As it currently stands, the FinCEN registration and AML program requirements are the only federal regulations in place for cryptocurrency businesses. However, there are state requirements that must also be met, and these often take more time and effort to complete.
Check State Guidelines
All but two states require money transmitters to hold a valid license. However, not every state has defined a virtual currency for the purpose of determining whether or not a money transmitter license is required. To be sure, businesses should check with the state’s licensing or financial department where operations will take place to see if a money transmitter license is necessary.
In states that require a money transmitter license for cryptocurrency businesses, the application process often involves the following:
- A formal application that includes a tax identification number, social security number of owner and shareholders, and location of the business
- Submitting to a criminal background check
- Paying a licensing fee
- Providing detailed information about the business or personal financials, such as net worth, assets, and liabilities
Once the state guidelines are known, the forms and fees for a money transmitter license are submitted to the state licensing or financial department. There may also be an inspection required as part of the process, which involves an in-depth review of the business by a state regulator. These requirements can take time to complete, so it is helpful to know what they are up front.
Meet Application Requirements
Above and beyond the formal application process for a cryptocurrency money transmitter license, businesses operating in the industry may also be required to meet certain criteria from a financial perspective. Many states impose a minimum net worth requirement, ranging from $10,000 up to $500,000. This is often the most challenging criteria to meet for new money transmitter businesses, but a license cannot be granted until it is met.
Also, nearly all states that require cryptocurrency businesses to hold a valid money transmitter license also state a form of security is needed. This often comes in the form of a surety bond that works to protect customers from bad business practices or non-compliance with state or federal laws. If a money transmitter working in cryptocurrency does not comply with regulations, a claim may be made against the bond. Money transmitter license bond requirements may range from $5,000 up to $500,000, but businesses only pay a percentage of the total bond amount needed.
Getting a cryptocurrency license as a business can be a strenuous, costly process. However, understanding the various requirements as well as which businesses qualify as a money transmitter helps make the process less daunting. Being compliant with federal and state regulations is also necessary to run a profitable, legal business over time.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.