In our previous articles, we explained how cryptocurrency-dealing businesses in the United States are required to register at a federal level with FinCEN as a Money Service Business (MSB) and be licensed at a state level as a money transmitter.
While Federal registration with FinCEN is a reasonably straightforward and quick online process, getting licensed in the USA’s various states can be a prolonged and costly bureaucratic nightmare, even more so if you handle virtual currencies as a business activity.
Fortunately, there are some general commonalities between states’ licensing requirements of money transmitters to consider. While each state may demand different paperwork, you can expect at a minimum to be asked to complete the following 7 tasks prior to sending in your licensing application.
1. Identification documents
To start things off, MTL applicants can begin to collect documentation that validates their personal and corporate identities.
Among the documents and information that will likely be required are papers that prove your address, IRS tax number, social security number, registered address and the business owner’s name.
2. Detailed financial statements
Proving your good financial standing is an important prerequisite in almost all state licensing applications. Considering the frequency of crypto-related scams and other financial crimes happening, it’s not surprising that state legislators want to verify that your business has the necessary assets, funds and experience to professionally handle other people’s hard-earned money and funds.
Applicants can therefore expect to submit statements that detail their net worth (total assets after debt has been deducted) and good standing, proving you’re a registered business and up to date with your financial obligations as required by your targeted state’s laws.
Be prepared to divulge hard evidence both your business and personal assets and liabilities, net worth, company cash flow and access to funding. You’ll also need to detail shareholder details and share the same information about them.
3. Comprehensive business plans
Proving you have the financial resources to operate as a money transmitter in a state is a good start, but you’ll also need to demonstrate that you’ve done your homework in terms of your company’s reasons for existing and business goals.
To achieve, money transmitter licensing applicants may have to submit business plans that elaborate on where the company is located, its raison d’etre, the scope of its services and products, and how it is and will be funded.
4. AML compliance program
The first three points can be considered as mere starting points in your money transmitter license. The hard work begins proving that your business is not a front for money laundering or terrorism funding, even more so if you’re involved with cryptocurrency-related activities.
As explained in our previous article, establishing and maintaining a strong anti-money laundering (AML) program is an important requirement for both FinCEN’s federal registration and state-level licensing, and a topic that warrants a discussion on its own.
An AML program is a written policy that contains checks and balances, procedures and protocols to deter possible money laundering (ML) and terrorism financing (TF). It ensures a business’ customers are who they claim to be and act in accordance with federal and state laws.
A cohesive AML program comprises customer due diligence measures like Know-Your-Customer (KYC) onboarding, data records and suspicious transaction reporting.
Your business will also need to employ competent staff such as a compliance officer and train your staff to ensure the company can flag suspicious activity and transactions.
A seasoned compliance officer is essential in keeping your money service business up to speed with evolving laws and regulations, dealing with authorities, identifying weaknesses in your AML regime and updating it accordingly.
Having a strong AML policy in place will pay off in the long run and allow your business to enter new markets faster. While each jurisdiction’s regulatory frameworks are unique, there are several points of overlap in leading global regulations and legislation.
These include the Travel Rule, which features in both the U.S.’ Bank Secrecy Act (BSA) and the Financial Action Task Force’s FATF Standards (guidances for over 200 jurisdictions) and the 5th Anti-Money Laundering Directive (AMLD5), which pertains to European Union member countries.
5. Offering security with a surety bond
To secure a money transmitter’s license, a form of underlying financial security is in most cases required as part of your application. In most cases, MTL applicants will choose to secure a surety bond via a surety agency. This tripartite financial agreement between the principal (money transmitter), obligee (government) and surety (insurance company that covers the bond) ensures that the applicant will comply with state regulations.
After a money transmitter bond has been approved, the principal will need to start paying monthly premiums much like regular insurance and forward their bond details to the state licensing board.
Unfortunately due to the perceived high risk of working with cryptocurrency companies, it can be quite difficult for virtual currency service-offering companies to find a surety provider willing to do business with them.
6. Background check
The cryptocurrency industry is rife with fly-by-nighters and criminals which results in annual investor losses running into billions of dollars each year. This prevalence of criminality in the virtual asset space and the unfettered ability of bad actors to funnel the proceeds of ICO scams, hacks, ponzi schemes and exit scams played a deciding factor in the increasing regulation of the industry.
To help verify that they’re a capable company or person with an uncheckered past, who are trustworthy enough to transmit funds on behalf of others, applicants will need to agree to civil and criminal background checks. State authorities will flag any AML transgressions, like fraud, terrorism ties and suspicious transacting, as well as criminal records. Thanks to the efforts of a new generation of blockchain analytics sleuths such as Chainalysis, Elliptic and Ciphertrace, authorities are also now better equipped to compile accurate blacklists of not only tainted blockchain addresses, but also the real identities behind them. For example, recently the FBI followed the dissemination of the Twitter hack scam funds by using data and technology supplied by top AML risk management firm Elliptic.
7. License application fee
After ticking off all your licencing checklist, you’ve got a couple more checks to make, or in this case, write out.
You’ll need to cover certain fees when sending in your application, such as application, license and investigation fees. These costs may range from $50 up to $1000 in certain states. It really depends on where you want to do business
Doing business in the U.S. doesn’t normally come cheap, and getting that coveted money transmitter license is alas no exception. The spread is wide for each expense, as you can see:
- Surety bond: $1,000 to $500,000
- License fee: maximum of $3,750 per state
- Application fee: Up to $5,000 per state
- Minimum net worth: $5,000 to $2,000,000
For example, In Hawaii you’ll need a net worth and surety bond of $1,000 each, yet Michigan’s going to want to see that you’re worth $100,000 and have a surety bond of $500,000 to be considered for a state license.
While it may seem like a regulatory lottery doing business in the U.S. as a money transmitter, you can save yourself a lot of time, money and frustration by consulting with a legal professional. Kelman Law gives a free 30 minute consultation to potential clients meeting our criteria and will give you the lowdown on how to start operating legally in the U.S. state(s) of your choice.