The State of Texas is the most recent state to announce a formal policy with regard to virtual currencies. The Texas Department of Banking (DOB) issued a supervisory memorandum on April 3, 2014, interpreting how virtual currencies, including cryptocurrencies, will be regulated under the Texas Money Services Act. You can find the memorandum here.
After discussing the characteristics of virtual currency, the DOB determines that for purposes of currency exchange under the Texas Finance Code, cryptocurrencies are not considered currencies under the Texas Finance Code as they are not “coin and paper money issued by the government of a country.” Thus, exchanging cryptocurrency with fiat currency does not require a currency exchange license in Texas under the current legislation.
Turning to money transmission, the DOB declines to offer generalized guidance on centralized virtual currency under the Texas Money Service Act because such schemes require individual analysis. As to whether transactions in cryptocurrency should be considered money transmission, however, the DOB indicates that the determination turns on the single question of whether they are “money or monetary value.” The Texas Finance Code defines the terms for “money” and “monetary value” to mean “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 noted in the currency exchange analysis, cryptocurrencies are not issued by a government as legal tender and thus are not “currency”. Moreover, the DOB reasons that because owners of cryptocurrency do not have a guaranteed right to convert their cryptocurrency into fiat currency, cryptocurrencies are also not a “claim” within the meaning of the statute. Cryptocurrency thus is not considered “money or monetary value” under Texas state law.
Accordingly, the DOB concludes that transactions in cryptocurrency will not be treated as money transmission in Texas, unless sovereign currency is involved. (The DOB prefers the term “sovereign” to the term “fiat” currency since certain government-issued currencies are backed by a commodity (such as gold)). Whether or not the transaction is considered money transmission will be evaluated based on the treatment of the sovereign currency in that transaction. The memorandum provides examples of transactions that could be considered money transmission, including (1) the exchange of cryptocurrency for sovereign currency through a third party exchange acting as an intermediary (such as the failed Mt. Gox) and (2) the exchange of cryptocurrency for sovereign currency through an automated machine or “Bitcoin ATM” that is operating as an intermediary. By contrast, some ATMs only facilitate the purchase or sale of Bitcoins by the machine’s operator, which will not be considered money transmission.
Lastly, the DOB highlights three considerations for cryptocurrency businesses applying for money transmission licenses in Texas: (1) the business must have a minimum net worth of $500,000 (and possibly up to $1,000,000), (2) virtual currency assets may not be included in the calculation of permissible investments, and (3) applicants must provide a third party security audit of their computer systems in order to ensure the virtual currency is safeguarded for consumers.