How Money Transmitter Regulations are Changing with the Market

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Bond expert analyzes impact of recent developments in state money transmitter regulation.

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When you purchase something from an online vendor, you may not realize it, but a money transmitter serves as the middleman and enables the transaction to occur. Regulations on money transmitters are changing rapidly, though, and could change how the market operates.

In a 2013 paper, Kevin V. Tu of the University of New Mexico School of Law, argued for more flexible, fine-tuned regulations. Such improvements, he claimed, were required to foster innovation and make it possible for businesses that are not primarily engaged in the transmission of funds to operate with greater ease.

The gist of Tu’s advice (which was previously highlighted in The Regulatory Review) remains as valid and relevant today as it did in 2013. However, the market has changed as legislators in a number of states – including Utah, New York, Connecticut, North Carolina, and Kansas – introduced amendments to their money transmitter statutes last year.

These amendments have, for the most part, addressed licensing requirements for money transmitter businesses, broadening certain requirements and making others more explicit. Especially notable have been the increases in surety bond requirements for money transmitters in a number of states.

In Kansas, for example, House Bill 2216 passed last year and introduced a number of important changes, such as an increase in the maximum bond amount for money transmitters from $500,000 to $1 million, but left other bonding conditions unchanged. Under the new law, individual bond amounts in the state are to be determined by the State Bank Commissioner. This change indicates that regulations are responding to increased demand for money transmission.

Similar changes were introduced in Utah under Senate Bill 24, where a minimum surety bond requirement of $50,000 was introduced along with stricter conditions, including the maintenance of a bond for three years after a business ceases operations in a particular state.

Both Connecticut and New York have moved towards defining and regulating virtual currencies – a move that seemed impossible only a few years ago. As volatile as the virtual currency market is, more states recognize that it is too influential to be ignored by legislation.

Regulatory responses are almost always geared towards increasing stability and securing vulnerable parties involved in the process of money transmission.

Despite all these recent changes, regulations remain stubbornly rigid when it comes to introducing greater precision concerning who is – or is not – subject to these laws. Neither surety bonds, nor greater licensing requirements are to blame in these cases.

Quite the opposite; surety bonds play vital role in the regulation of a number of industries that require licenses. They secure the interest of states as well as consumers, and they offer a mechanism for financial guarantee to these parties, in case the bond’s principal acts dishonestly.

But what seems to be lacking from the overall vision is an awareness of and interest in the growth of businesses and particularly startups. In this respect, Tu’s article remains relevant.

Starting a company that has anything to do with money transfer, remotely or directly, means having to invest thousands, or even millions, of dollars to meet all the regulatory and licensing requirements. These expenses involve a lot more than just obtaining the relevant surety bonds, and they discourage many innovative business models from even attempting to have a shot at the market. In other words, a general regulatory overreach is still in place, limiting numerous business initiatives. However, as Tu suggested, there also seems to be a model for the right approach in North Carolina.

Last year, North Carolina made amendments to its Money Transmitter Act, but with an eye toward the needs of businesses as well. North Carolina has demonstrated both sensitivity to these needs as well as regulatory flexibility in addressing them.

In a recent article, Austin Mills has explained the main elements of the North Carolina amendments. Quoting the Act, Mills shows that it is largely limited to cases concerned with “sale or issuance of payment instruments or stored value primarily for personal, family, or household purposes.” In other words, business-to-business payments are not within the scope of the regulation as defined here. Instead, it is limited to consumer-facing business.

An exemption for agents of payees is included, making payment to the agent – “the middleman” – the same as payment to the payee (or end recipient) herself. This reduces the agent’s liability because it limits it to the agent’s relationship with the payee.

North Carolina’s recent law also includes regulations on virtual currency, making it a permissible investment “to the extent of outstanding transmission obligations received by the licensee in like-kind virtual currency.” This effectively opens the door for further and more specific regulations.

Finally, the Act includes clauses allowing North Carolina’s Commissioner of Banks to exempt “any person, transaction, or class of persons or transactions if the Commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this Article.”

Although North Carolina has set a promising example, so far few other states have taken similar steps. Greater clarification of the regulatory scope of money transmitter laws is still required in most states, even as other important amendments have been made. With time, the particular needs of different businesses are likely to be increasingly recognized.

Change in the regulation of money transmitters is expected to continue and ultimately should result in laws that are more aligned to the current business climate and the challenges that changing climate places in front of regulators.

Vic Lance

Vic Lance is the founder and president of Lance Surety Bond Associates. He graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.