The Evolution of Bitcoin Money Transmission Regulation in Florida

If you’re a cryptocurrency company in America, chances are you have sought, or should seek, guidance on the Florida Money Transmission License (“MTL”) requirements. Most companies look to avoid this license, as it’s costly, time consuming, and for many cryptocurrency companies, it’s been considered unnecessary. Yet, failure to apply for the license when it is required, can prove to be a costly mistake. Just ask Mr. Espinoza.

Federal Registration as a Money Transmitter. Cryptocurrency companies are often required to register at the federal level, through FinCEN, as a Money Service Business (MSB) under the category of Money Transmitter — because of their service as an exchanger. This registration is normally required of Bitcoin ATM companies, Exchanges, Over the Counter trading desks, and even individuals in the business of selling bitcoin in a peer to peer fashion. The determining factor is usually whether the company exchanges one type of money/currency/virtual currency for another. Banks, non-custodial wallets, and persons registered with the SEC or CFTC are exempt.

The tangible costs of federal registration include primarily the legal and compliance staff’s billable time to prepare the registration documents, and the accompanying required compliance package. The intangible costs include the risk of a Title 31 audit, the requirement to have an MSB bank account, and the social cost of requiring users to provide their personal identity so the company can comply with the Know Your Customer requirements.

Florida Money Transmitter License. At the state level, there are approximately ten states that require a Money Transmitter License (MTL) for cryptocurrency companies who exchange traditional fiat/government backed currency for cryptocurrency in a two-party transaction. Of those ten, some can be applied for on the Nationwide Multistate Licensing (NMLS) System, and others require mailing the application package directly to the state.

If a company determines they do require a Florida MTL, the application must be done directly to Florida, and not through the streamlined NMLS system. The Company must pay the application fee, obtain a surety bond based on the amount of money transmitted in a year, submit their fingerprints and disclosures pertaining to criminal, civil, and regulatory enforcement litigation, and fill out an Attestation form.

Once licensed by Florida, a licensee must submit certain notices to the Florida Office of Financial Regulation, (OFR) including quarterly reports, audited annual financial statements, a securities device calculation form, and a documentation to increase collateral device (if applicable).[1] The Licensees are also required to maintain a minimum net worth of $100,000, as shown on the financial statements.

2005 FL MTL Enactment. The Florida Money Transmission license, which came into effect in 2005, authorizes the holder to “transmit currency, monetary value,[2] or payment instruments,[3] either by wire, facsimile, electronic transfer, courier, the internet, or through bill payment services or other businesses that facilitate such transfer, within this country or to or from locations outside this country.”[4]

FL MTL Purpose. The stated purpose behind the license is to provide general regulatory powers to the OFR, maintain public confidence in the money transmitter industry, and to deter the use of money transmitters as vehicles for money laundering. Additionally, it was thought that this license would provide an opportunity for money transmitters to effectively serve the convenience and needs of the public and promote economic progress.[5] The OFR creates rules intended to increase efficiency and clarity, and to reduce regulatory costs.

Current Regulatory Understanding. The OFR issued a declaratory statement in 2018 to a Bitcoin ATM provider, where they stated that a license is not required in order to operate a Bitcoin ATM in Florida. The OFR said that Bitcoin ATMs facilitate transfers of cryptocurrency for immediate cash, with no third party involved.

Because Petitioner’s transactions occur directly between Petitioner and a customer, with no third parties involved, and Petitioner has complete control over the transactions, Petitioner is never receiving, “currency, monetary value, or payment instruments for the purpose of transmitting the same”. Consequently, Petitioner is not acting as a “money transmitter”, and licensure for these activities is not required under Chapter 560, Florida Statutes.[6]

This conclusion, however, is a stark contrast to the Espinoza case, which was re-opened by Florida’s Third District Court of Appeal, on January 30, 2019 and found the very same activity does require an MTL.

Florida Blockchain Business Association. In June 2018, Florida appointed a Crypto Czar, tasked with enforcing regulations to protect investors. The Florida Blockchain Business Association (FBBA) was also established in 2018 with the intent to educate public officials and institutions, organize the blockchain and cryptocurrency communities and businesses in Florida, and to ensure smart, industry led regulation is heard in Tallahassee. The FBBA was instrumental in the passing of SB1024 which established the Florida Blockchain Task Force within the Florida Department of Financial Services to explore and develop a master plan for fostering the expansion of the blockchain industry in the state, to recommend policies and state investments to help make this state a leader in blockchain technology, and to issue a report to the Governor and the Legislature. As of this writing, the Task Force has not yet submitted their report as defined and required by the Bill. The FBBA also advocated for HB 1391 which was signed by the Governor in July 2020 and supports the launch of a Fintech sandbox within the Office of Financial Regulation for supporting innovative technology projects, including cryptocurrency and blockchain focused initiatives.[7]

The Espinoza Case. In State of Florida v. Michell Abner Espinoza, in 2014, Count 1 charged Espinoza with unlicensed transmission of money when he sold his own Bitcoin to an undercover officer.[8] Espinoza’s argument centered on the notion that Bitcoin is not money under section 560.125, Florida Statutes (2013). The trial court found that neither Bitcoin, nor Espinoza’s conduct required him to register with the State as a money services business.

The State of Florida appealed and lost again, Judge Pooler said, “This court is unwilling to punish a man for selling his property to another,” she explained, “his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”[9] The criminal case was reinstated on January 30, 2019, and the third district court determined that even a person in the business of selling his own Bitcoin for cash is a “money transmitter” and “payment instrument seller” under Florida law and is therefore required to be licensed as a “money services business.”[10]

To reach this conclusion, the Florida appellate court distinguished the text of Florida’s money service business statute from the federal statute because the federal statute includes a third-party requirement, “acceptance of currency, funds or other value that substitutes as 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.”[11] The Florida statute says “. . . for the purpose of transmitting the same by any means . . .” The third district court of appeals interpreted that to mean no third-party transmission is required. The appellate court appears to have overlooked the plain meaning of the word “transmit” which is defined by Merriam-Webster as “to send or convey from one person or place to another.”

The Updated Money Laundering Act Language. In response to the 2016 Espinoza case, Governor Rick Scott signed House Bill 1379 in June 2017 and expanded the Florida Money Laundering Act, Fla. Stat. § 896.101, to expressly include the laundering of virtual currency, defined as “a medium of exchange in electronic or virtual format that is not a coin or currency of the United States or any other country.”[12] The bill took effect July 1, 2017.

Had Florida intended to regulate virtual currency for the purposes of Money Transmission, it could have updated the language to include explicit reference to virtual currency, as it did with the Money Laundering Act.

Fintech Sandbox. On July 1, 2020, a bill was enacted that created a Financial Technology Sandbox within the OFR. The purpose is stated as a way for a sandbox licensee to make an innovative financial product or service available to consumers as a money transmitter, payment instrument seller, or lender of consumer finance loans. The license process is supposed to be more streamlined compared with the traditional license application.

Conclusion. While Florida has made many attempts to streamline or clarify its Money Transmitter License, as it applies to Bitcoin, there is still a hefty distinction between the OFR’s opinion on the subject, and that of the third district court of appeals. While the OFR has jurisdiction over the MTL, they have not issued any new Declaratory Statements since the 2019 Espinoza case.

If Florida were to actually enforce the Espinoza interpretation, Florida would become one of the few states that requires a company to obtain a separate and costly state license in addition to the FinCEN registration in order to operate as a money service business. Florida could probably look to some other, more favorable regulatory interpretations, like those of Wyoming or Texas.

Wyoming enacted 18 virtual currency and blockchain friendly regulations, including creating its own Chancery Court to hear cases on the matter.[13] The Chancery Court’s primary purpose is to provide a forum for streamlined resolution of commercial, business, and trust cases.

Texas crafted a strong distinction between virtual currency and sovereign currency under the Texas Finance Code, stating, “because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the statute.”[14]

When creating thoughtful regulation around this new technology it is important to balance the benefits of fostering innovation against the challenges of adequately protecting consumers. I believe the OFR got it right in their 2018 Final Order to the Bitcoin ATM Company. It would also be great to see Florida enact its own Court of Chancery that could be dedicated to hearing matters related to cryptocurrency.

[1] FLORIDA OFFICE OF FINANCIAL REGULATION https://www.flofr.com/sitePages/MoneyTransmitters.htm

[2]Monetary value” means “a medium of exchange, whether or not redeemable in currency.” See FLA STAT § 560.103(21). https://www.flsenate.gov/Laws/Statutes/2017/Chapter560/All,

[3] A “payment instrument” is a “check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money, or monetary value whether or not negotiable.” See FLA. STAT. § 560.103(29). https://www.flsenate.gov/Laws/Statutes/2017/Chapter560/All

[4] FLORIDA OFFICE OF FINANCIAL REGULATION https://www.flofr.com/sitePages/MoneyTransmitters.htm

[5] DREW BREAKSPEAR — Office of Financial Regulation 2017–18 Regulatory Plan https://www.flofr.com/sitePages/documents/2017OFRAnnualRegulatoryPlan.pdf

[6] FLORIDA OFFICE OF FINANCIAL REGULATION Final Order on Petition for Declaratory Statement OFR 2018–480.

[7] FLORIDA SENATE 2019 Legislature https://www.flsenate.gov/Session/Bill/2019/1024/BillText/er/PDF.

[8] See Florida v. Espinoza Case No. F14–2923 (Fla. 11th Cir. July 22, 2016).

[9] Id.

[10] See State v. Espinoza, №3D16–1860 (Fla. 3rd DCA. Jan. 30, 2019).

[11] 31 C.F.R. § 1010.100(ff)(5(i)(A (2014).

[12] H.B. 1379, 119th Reg. Sess. (Fla. 2017).

[13] WYOMING JUDICIAL BRANCH Specialized Business Court https://www.courts.state.wy.us/chancery-court/

[14] Texas Dept. of Banking, Supervisory Memorandum 1037, https://www.dob.texas.gov/public/uploads/files/Laws-Regulations/New-Actions/sm1037.pdf (April 1, 2019, rev.)

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Sasha Hodder

Sasha Hodder

Crypto Attorney; Former Trader; Host of the Hodlcast Podcast; Freedom Enthusiast; www.sashahodler.com; @sashahodler