On March 23, the California Department of Financial Protection and Innovation (DFPI) responded to a request for an interpretative legal opinion as to whether the virtual currency services offered by a company require it to obtain a license under the California Money Transmission Act (MTA).

The company’s software platform allows US customers to access the platform and buy and sell digital assets, including cryptocurrency, and access related services, within the platform.  Each customer must fund an account prior to buying cryptocurrency on the platform with either fiat currency (US dollars) or cryptocurrency.   The company offers three services that they asked the DFPI to examine. First, a customer may purchase cryptocurrency on the platform by sending fiat currency to the customer’s account on the platform. Second, a customer may sell cryptocurrency on the platform by transferring crypto onto its account. Third, a customer can buy crypto on the platform with another crypto in their wallet.  After execution of a purchase, sale, or exchange transaction, a customer may choose to withdraw all, part, or none of their fiat or cryptocurrency from the platform account.

The DFPI found that the company’s activities do not require licensure for several reasons, including the following:

• The company’s activities do not facilitate the exchange of the fiat currency or cryptocurrency with a third party and do not meet the definition of money transmission because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.

• The exchange of one cryptocurrency for another directly between two parties does not meet the definition of money transmission.

• The transactions are “closed-loop” – meaning that customers can only redeem the monetary value stored in their accounts for digital currency sold on the company’s platform – which are excluded from the definition of money transmission under the MTA.

• Finally, the DFPI stated that it “has not concluded whether a wallet storing cryptocurrency constitutes a form of monetary value representing a claim against the issuer and accepted for use as a means of redemption for money or monetary value or payment for goods or services.” Therefore, the DFPI will not require license the company to provide customers with an account to transfer and store cryptocurrency in order to exchange it directly with company

Putting It Into Practice: While the DFPI is not requiring an MTL license in this scenario, this decision is based entirely on the facts presented to the DFPI.  It may be the case in the future that a virtual currency business with similar but not identical facts may need to register pursuant to California’s MTA law.