Supervisory Memorandum 1037 — Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act (rev., superseded)
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TEXAS DEPARTMENT OF BANKING
Dedicated to Excellence in Texas Banking
SUPERVISORY MEMORANDUM – 1037
April 1, 2019 (rev.)
TO: All Virtual Currency Companies Operating or Desiring to Operate in Texas
FROM: Charles G. Cooper, Banking Commissioner
SUBJECT: Regulatory Treatment of Virtual Currencies Under the Texas Money Services
Act 1
PURPOSE
Virtual currencies have proliferated in recent years and, particularly with the advent of
cryptocurrencies like Bitcoin, have raised novel questions in relation to money transmission and
currency exchange. This supervisory memorandum outlines the policy of the Texas Department
of Banking (Department) with regard to virtual currencies. This policy expresses the Department's
interpretation of the Texas Money Services Act, 2 and the application of its interpretation to various
activities involving virtual currencies. While the popularity of Bitcoin has sparked new discourse
on the nature of money and transferability of value, this memorandum seeks only to establish the
regulatory treatment of virtual currencies under existing statutory definitions.
TYPES OF VIRTUAL CURRENCY
In broad terms, a virtual currency is an electronic medium of exchange typically used to purchase
goods and services from certain merchants or to exchange for other currencies, either virtual or
sovereign. 3 As of the date of this memorandum the Department is not aware of any virtual currency
that has legal tender status in any jurisdiction, nor of any virtual currency issued by a governmental
central bank. As such, virtual currencies exist outside established financial institution systems.
There are many different virtual currency schemes, and it is not easy to classify all of them, but
1
This memorandum revises and supersedes the policy issued on January 2, 2019 which addressed current trends in
the Virtual Currency field, including the widespread introduction of stablecoins to the market. Current revisions to
this memorandum are non-substantive.
2
Texas Finance Code Chapter 151.
3
In this memorandum the term sovereign currency will be used to mean government-issued currencies with legal
tender status in the country of issuance. In most of the literature pertaining to virtual currency, the term fiat currency
is used to refer to government-issued legal tender. Technically, fiat currency is a subset of government-issued legal
tender. Fiat currency has no intrinsic value; its value is established by law. By contrast, commodity-backed currency
has intrinsic value insofar as it represents a claim on a commodity such as gold or silver. Here, sovereign currency
means both commodity-backed and fiat currency issued by a government and designated as legal tender.
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Supervisory Memorandum 1037 Texas Department of Banking
for purposes of this memorandum, they can generally be divided into two basic types: centralized
and decentralized.
Centralized Virtual Currency
Centralized virtual currencies are created and issued by a specified source. They rely on an entity
with some form of authority or control over the currency. Typically, the authority behind a
centralized virtual currency is also the creator. Centralized virtual currencies can be further divided
into subclassifications that in some cases, become too complex to apply a universal policy. Some
can be purchased with sovereign currency but cannot be exchanged back to sovereign currency;
some can be converted back to sovereign currency; some are used only for purchase of goods and
services from a closed universe of merchants, while others may have a theoretically open universe
of merchants.
One particular subclass of centralized virtual currencies is stablecoin. Stablecoins are a form of
centralized virtual currencies that is backed by the issuer with sovereign currency, precious metals,
or cryptocurrency and therefore hold intrinsic value. By pegging these coins to an underlying asset,
the intent is to create a less volatile virtual currency that retains a stable value. The most popular
form of stablecoins is backed by a sovereign currency of which the issuer keeps a reserve in an
amount equal to or greater than the amount of issued stablecoin. As it pertains to money
transmission regulation, an important aspect of these sovereign-backed stablecoins is the
“redemption right” allowing the stablecoin holder to redeem the coin for sovereign currency from
the issuer. This redemption right may be explicitly granted to a stablecoin holder through a user
agreement with the issuer or it may be an inherent right granted to the coin holder by the issuer
guaranteeing it will buy back coins to keep the value stable. The most popular sovereign-backed
stablecoin at the time of this writing is Tether, a coin backed 1-to-1 by U.S. Dollars so one Tether
coin is the equivalent value of one USD at all times.
Decentralized Virtual Currency
Decentralized virtual currencies are not created or issued by a particular person or entity, have no
administrator, and have no central repository. Thus far, decentralized currencies are all
cryptocurrencies. A cryptocurrency is based on a cryptographic protocol that manages the creation
of new units of the currency through a peer-to-peer network. The creation of cryptocurrency
happens through a process called mining that basically involves running an application on a
computer that performs proof-of-work calculations. When the computer performs a sufficient
amount of these calculations, the cryptocurrency's underlying protocol essentially generates a new
unit of the currency that can be delivered to the miner's wallet. Because users' wallets act as the
connection points of the cryptocurrency's peer-to-peer network, transfers of cryptocurrency are
made directly from wallet to wallet, without any intermediary, whereas digital transfers of
sovereign currencies must be made through one or more intermediaries such as a financial
institution or money transmitter.
One important characteristic of cryptocurrency is its lack of intrinsic value. A unit of
cryptocurrency does not represent a claim on a commodity and is not convertible by law. And
unlike fiat currencies, there is no governmental authority or central bank establishing its value
through law or regulation. Its value is only what a buyer is willing to pay for it. Most
cryptocurrencies are traded on third party exchange sites, where the exchange rates with sovereign
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Supervisory Memorandum 1037 Texas Department of Banking
currencies are determined by averaging the transactions that occur. Some experts consider
cryptocurrency to be a new asset class that is neither currency nor commodity, but possessing
characteristics of both, as well as characteristics of neither.
ANALYSIS
Currency Exchange
Exchanging virtual currency for sovereign currency is not currency exchange under the Texas
Finance Code. Finance Code § 151.501(b)(1) defines currency for purposes of currency exchange
as "the coin and paper money of the United States or any country that is designated as legal tender
and circulates and is customarily used and accepted as a medium of exchange in the country of
issuance." 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. Therefore, absent a legislative change to the statute, no currency exchange license is
required in Texas to conduct any type of transaction exchanging virtual with sovereign currencies.
Money Transmission
In many instances, factors distinguishing the various centralized virtual currencies are complicated
and nuanced, and to make money transmission licensing determinations the Department must
individually analyze centralized virtual currency schemes. Accordingly, this memorandum does
not offer generalized guidance on the treatment of centralized virtual currencies, other than
sovereign-backed stablecoins, by the Money Services Act's money transmission provisions.
Money transmission licensing determinations regarding transactions with cryptocurrency and
sovereign-backed stablecoins turn on the single question of whether either should be considered
"money or monetary value" under the Money Services Act. Under Finance Code §151.301, money
transmission is "the receipt of money or monetary value by any means in exchange for a promise
to make the money or monetary value available at a later time or different location." Although
there is a great amount of discussion over whether cryptocurrencies should be considered money,
for purposes of money transmission regulation in Texas the term is defined by statute. Finance
Code § 151.301(b)(3) provides that "'money' or 'monetary value' means currency or a claim that
can be converted into currency through a financial institution, electronic payments network, or
other formal or informal payment system." As already stated, a cryptocurrency is not currency as
that word is defined in the Money Services Act. A unit of cryptocurrency is also not a claim. 4 It
does not entitle its owner to anything and creates no duties or obligations in a person who gives,
sells, or transfers it. There is no entity that must honor the value of a cryptocurrency or exchange
any given unit of a cryptocurrency for sovereign currency. For comparison, under federal law U.S.
coin and paper currency must be honored for payment of all debts, public charges, taxes, and dues,
and the U.S. Treasury Department must redeem it for “lawful money.” 5 But the owner of a unit of
a cryptocurrency has no right or guaranteed ability to convert that unit to sovereign currency. The
4
The legal definition of a claim can essentially be stated as a right enforceable by a court. See Black's Law Dictionary
264 (8th ed. 2004).
5
31 U.S.C. §5103; 12 U.S.C. §411 (“The said notes shall be obligations of the United States and shall be receivable
by all national and member banks and Federal Reserve banks and for all taxes, customs, and other public dues. They
shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of
Washington, District of Columbia, or at any Federal Reserve bank.”).
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Supervisory Memorandum 1037 Texas Department of Banking
only way to convert a unit of cryptocurrency to sovereign currency is to find a willing buyer.
Therefore, cryptocurrencies as currently implemented cannot be considered money or monetary
value under the Money Services Act.
On the other hand, stablecoins that are pegged to sovereign currency may be considered a claim
that can be converted into currency and thus fall within the definition of money or monetary value
under Finance Code § 151.301(b)(3). In those instances where the stablecoin is backed by a
sovereign currency reserve and a redemption right exists to the holder of the stablecoin, the holder
has a claim to the sovereign backing the coin because the issuer has taken on the obligation to
provide sovereign currency in exchange for the stablecoin at a later time (upon the holder’s
request).
STATEMENT OF POLICY
Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for
a promise to make it available at a later time or different location is not money transmission.
Consequently, absent the involvement of sovereign currency in a transaction, no money
transmission can occur. However, when a cryptocurrency transaction does include sovereign
currency, it may be money transmission depending on how the sovereign currency is handled. A
licensing analysis will be based on the handling of the sovereign currency.
To provide further guidance, the regulatory treatment of some common types of transactions
involving cryptocurrency can be determined as follows.
• Exchange of cryptocurrency for sovereign currency between two parties is not money
transmission. This is essentially a sale of goods between two parties. The seller gives units
of cryptocurrency to the buyer, who pays the seller directly with sovereign currency. The
seller does not receive the sovereign currency in exchange for a promise to make it
available at a later time or different location.
• Exchange of one cryptocurrency for another cryptocurrency is not money transmission.
Regardless of how many parties are involved, there is no receipt of money, and therefore
no money transmission occurs.
• Transfer of cryptocurrency by itself is not money transmission. Because cryptocurrency is
not money or monetary value, the receipt of it in exchange for a promise to make it
available at a later time or different location is not money transmission. This includes
intermediaries who receive cryptocurrency for transfer to a third party, and entities who,
akin to depositories, hold cryptocurrency on behalf of customers.
• Exchange of cryptocurrency for sovereign currency through a third-party exchanger is
generally money transmission. For example, most Bitcoin exchange sites, such as the failed
Mt. Gox, facilitate exchanges by acting as an escrow-like intermediary. In a typical
transaction, the buyer of cryptocurrency sends sovereign currency to the exchanger who
holds the funds until it determines that the terms of the sale have been satisfied before
remitting the funds to the seller. Irrespective of its handling of the cryptocurrency, the
exchanger conducts money transmission by receiving the buyer's sovereign currency in
exchange for a promise to make it available to the seller.
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Supervisory Memorandum 1037 Texas Department of Banking
• Exchange of cryptocurrency for sovereign currency through an automated machine is
usually but not always money transmission. For example, several companies have begun
selling automated machines commonly called “Bitcoin ATMs” that facilitate
contemporaneous exchanges of bitcoins for sovereign currency. Most such machines
currently available, when operating in their default mode act as an intermediary between a
buyer and seller, typically connecting through one of the established exchange sites. When
a customer buys or sells bitcoins through a machine configured this way, the operator of
the machine receives the buyer's sovereign currency in exchange for a promise to make it
available to the seller. However, it is worth noting that at least some Bitcoin ATMs can be
configured to conduct transactions only between the customer and the machine's operator,
with no third parties involved. If the machine never involves a third party, and only
facilitates a sale or purchase of Bitcoins by the machine's operator directly with the
customer, there is no money transmission because at no time is money received in exchange
for a promise to make it available at a later time or different location.
In contrast, because a sovereign-backed stablecoin may be considered money or monetary value
under the Money Services Act, receiving it in exchange for a promise to make it available at a later
time or different location may be money transmission. A licensing analysis will turn on whether
the stablecoin provides the holder with a redemption right for sovereign currency thus creating a
claim that can be converted into money or monetary value. This is true regardless whether the
redemption right is expressly granted or implied by the issuer.
A virtual currency business that conducts money transmission must comply with all applicable
licensing provisions of Finance Code Chapter 151 and of Title 7, Texas Administrative Code,
Chapter 33. In addition, several considerations should be highlighted. First, because a money
transmitter conducting virtual currency transactions conducts business through the Internet, the
minimum net worth requirement under Finance Code §151.307 is $500,000. 6 Be advised that the
Commissioner may increase the required net worth up to a maximum of $1,000,000 based on the
factors set out in §151.307(b). Second, a license holder may not include virtual currency assets in
calculations for its permissible investments under Finance Code §151.309. Lastly, pursuant to
Finance Code §151.203(a)(3) the Commissioner requires that license applicants who handle virtual
currencies in the course of their money transmission activities must submit a current third-party
security assessment of their relevant computer systems. Because the new technological paradigm
created by cryptocurrencies has brought with it new risks for the consumer, it is incumbent on a
license applicant to demonstrate that all virtual currency is secure while controlled by the applicant.
Since security of a company’s virtual currency operation is dependent upon the integrated
components of its operations, the scope of the required independent third-party assessment, audit,
test or combination of a license applicant must include:
• Network security;
• Website and web application security;
• Application server security;
• Virtual currency wallet infrastructure security and controls;
6
Under §151.307(a), a minimum net worth of $500,000 is required if a business operates through five or more
locations. It has been the Department's policy that license holders operating through the Internet are considered to be
in more than five locations. See https://www.dob.texas.gov/applications-forms-publications/notice-applicants#netw.
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Supervisory Memorandum 1037 Texas Department of Banking
• Information security policy assessment; and
• Application development controls and policy assessment.
6