Does Your Business Need a Cryptocurrency License?

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What Is Cryptocurrency?

A cryptocurrency is an encrypted data string that denotes a unit of currency. It is monitored and organized by a peer-to-peer network called a blockchain, which also serves as a secure ledger of transactions (e.g., buying, selling, and transferring). There are a number of different cryptocurrencies, of which Bitcoin is the most widely traded.

How Is Cryptocurrency Regulated?

In the United States, businesses that want to trade in cryptocurrency must obtain a crypto license from the Financial Crimes Enforcement Network (FinCEN) before they can operate a cryptocurrency exchange or trading platform. Other countries have their own regulatory requirements for businesses trading in cryptocurrency.

Certain states also have state-level regulations governing trading in cryptocurrencies, which require businesses to obtain a state license as a condition for operating a cryptocurrency exchange or trading platform. New York’s regulatory framework is called BitLicense. Some states exempt individuals and small cryptocurrency exchanges from crypto licensing. And some states have not yet established their own cryptocurrency regulations.

Why Is a Crypto License Required?

Cryptocurrency exchanges and trading platforms are involved in the highly regulated money transmission industry. When funds are transferred from one party to another, there is the potential for fraud. Cryptocurrency also has become popular among some criminal elements because of the encryption of transaction data. Licensing cryptocurrency exchanges and trading platforms helps to deter the use of blockchain technology to facilitate illegal activities such as money laundering and terrorist financing.

Cryptocurrency licensing regulations require license applicants to establish anti-money laundering strategies and know-your-customer (KYC) procedures like those required in the banking and securities trading sectors. Licensees must gather and confirm customer information, keep a close eye on transactions to detect suspicious activity and report all suspicious transactions to the regulatory authorities. In short, cryptocurrency regulations are intended to ensure that licensed cryptocurrency businesses operate transparently and in full compliance with the law.

Types of Crypto Licenses

Whether or not your business will need a cryptocurrency license depends on your involvement with cryptocurrency and the laws of the state in which your business is located. If your business only provides cryptocurrency wallet maintenance and storage, you will not need to obtain a license from FinCEN, though there may be some state licensing requirements that apply.

If your business is involved in the exchange of cryptocurrency, FinCEN requires it to be registered with the U.S. Department of Treasury as a money transmitter, a specific type of money service business (MSB). FinCEN defines money transmission services as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” There is no distinction between real currencies and convertible virtual currencies.

If your cryptocurrency business must be registered at the federal level, it most likely will also need to obtain a state money transmitter license as well. Only three states do not treat the exchange of cryptocurrency as a form of money transmission. And as of this writing, only Montana does not require state licensing of money transmitters. If your business has locations in multiple states where it qualifies as a money transmitter, it will need to be licensed in each of those states.

State laws governing money services businesses evolve over time, so be sure to obtain a current legal opinion as to whether or not your cryptocurrency business must be licensed as a money transmitter.

Money Transmitter License Bond Requirements

If your state requires your business to be licensed as a money transmitter, you will need to purchase a money transmitter license bond. In some states, money transmitter license bonds may be called something else, but they all serve the same purpose—to protect the state and the public against financial harm caused by the money transmitter’s unlawful or unethical business practices.

Money transmitter license bonds legally obligate the business owner to pay all valid claims for damages. The typical cost of these bonds is 1.5% to 3% of the bond amount per annum, mainly depending on the financial capacity and credit risk of the principal.