Cumbersome and numerous, financial regulations in the United States have proven to be a daunting task for FinTech firms to navigate. The U.S. banking sector has a significant regulatory structure that can vary from state to state. This makes things difficult for FinTech firms because there is persistent confusion about what regulations apply to FinTech.1
These companies and their investors are walking into a thicket of laws and regulations that ostensibly touch their businesses, and regulators are struggling to determine how these new companies fit into existing legal and regulatory regimes, most of which were designed for a totally different world.2.
State money transmitter laws are a perfect example of the confusion presented by a lack of streamlined regulation.
The main issue with state money transmitter laws is the fact that transmitting money, selling, or issuing “open-loop” payment instruments requires a license in every state that the activity is conducted.3 One of the supposed primary benefits of FinTech firms is easy money transmission. State by state money transmitter laws put that transmission process in jeopardy. An example of the complicated nature of money transmitter laws can be seen in the different approaches the State of Washington and the State of Texas take to digital currency.
In the State of Washington, exchanges that involve virtual currency – such as bitcoins – are considered a “money transmission” according to the state’s Uniform Money Services Act.4 Yet Texas issued guidance taking the position “that virtual currency is not considered a currency or monetary value under the Texas Money Services Act, and therefore receiving virtual currency in exchange for a promise to make it available at a later time or different location is not a money transmission.”5 States across the country vary in their definition of “money transmission.” FinTech firms aiming to be compliant will need to file applications to transmit virtual currency in states where they could be potentially be bound by money transmission laws. Having to identify individual state laws and fill out money transmission applications is likely to be extremely burdensome.
There are time and cost components to complying with the varied and occasionally conflicting state laws. An entity attempting to operate on a nationwide basis may find that obtaining necessary state licenses can take one to two years or more.6 In addition, licensing and compliance may cost millions of dollars in legal, consulting, and other fees, not to mention the opportunity cost of having management’s focus diverted away from building the business.7
The need for regulation and providing safeguards to consumers across states is understandable, but at what cost? The complications of applying for and being approved as a licensed “money transmitter” under individual state laws is pushing some FinTech firms to operate illegally or find a establish themselves in a different jurisdiction altogether.8 These regulatory burdens run the risk of discouraging FinTech development in the U.S. and hindering the the nation’s opportunity to be a leading FinTech hub.
John L. Douglas, New Wine into Old Bottles: Fintech Meets the Bank Regulatory World, 20 N.C. Banking Inst. 17, 22 (2016), http://scholarship.law.unc.edu/cgi/viewcontent.cgi?article=1391&context=ncbi. ↩
FinTech Regulations and What You Need to Know, Commerce.Innovated., SVB Financial Group, 11. ↩
Supra note 2, at 46. ↩
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