[Taler] USA regulatory thread part 1

[Ryan Stewart]

Well, here goes..

First, a bit about myself & my approach to this topic:

First off, I am not a lawyer and have no formal legal training. I have been reading the papers & presentations on the Taler
site, and I think Taler is conceptually sound. I also think it's a good idea. I am also a fan and user of GNU & Linux for over
20 years. I like the "freedom" philosophy that underlies GNU. I also appreciate the privacy aspects of the Taler system (especially
considering the society & country I live in)  I couldn't be Stallman or do his job with the same panache that he does it with, but
I appreciate his ideals & philosophy and I think they are important in the grand scheme of human affairs.

I live in the USA, specifically in California. The State of California is often styled "The 6th Largest Economy in the World", whether accurately
or not. Population approx. 41 million people. The first thought that came to my mind after I got a basic understanding of Taler, was, "Ok, now what about regulations & laws", of which we have quite a few in this State. Having lived in Europe as well (pre-EU era) I know that the way banking is done in the USA is a bit different that the way it is commonly done in Europe.  In the late 90's I had an electronic cash card, or paper
cash in my wallet. Check writing was not really a part of European banking culture. Cash cards filled the space that paper checks
seemed to fill in the USA. Cash cards as they are known & used in Europe are slowly catching on here, but people still largely use cash,
credit cards, and paper checks. That left me curious what the American equivalent of a SEPA transfer would be. Was there even
infrastructure in the US banking industry for this? At what level?  I can see how Taler is designed (by Europeans) to drop-in, and integrate
nicely with European/EU banking systems using practices & structures that largely already exist in the EU banking system (and have existed
for many years). In many regards banking is more evolved in the EU. The US has it's own histories, peculiar customs and laws. Mostly I am interested in learning the legal/regulatory details involved in operating an exchange while staying on the right side of the various layers of
law that regulate it in the USA. Specifically in the State of California where I live. Each state in the US has its own set of regulations, some
more complex, others far less. Smaller states with under 1 million population tend to have looser or simplified regulations, but at the same
time, also less economic activity, in proportion to their low populations.

I don't really see any significant regulatory issues on the user end of Taler. Many payment systems exist already. The public is generally aware of them and what they do and how they are supposed to work. Adoption by users is the biggest issue, which I am sure will occur in the fullness of
time as it has with the many other payment systems which have come before Taler.

But first some regulatory stuff....

So, in any discussion of regulations in the USA there are 2 different layers of regulation to consider- Federal (aka covering all 50 states, national
in scope) and State.  At the federal level in the USA, it appears all you need to do is register yourself or your business operation as a "Money Services Business" with the United States Department of the Treasury, Financial Crimes Enforcement Network (FinCEN). Registration is online, costs nothing, and must be renewed every 2 years.

FinCEN registration page:

https://www.fincen.gov/money-services-business-msb-registration

FinCEN FAQ:

https://www.fincen.gov/am-i-msb

As far as I know thus far, that gets you on the right side of the law as far as the Federal Government is concerned.  Registration is required & mandatory, and obligates you to certain reporting, but nothing that is not considered sensible in this country. in our post 9/11 mindset. I do wonder how the state of US regulations will impact the ultimate anonymity of Taler within the borders of the USA, but I will leave that discussion
and my misgivings about it for another time.

Especially at the State level, at least for California, laws are evolving. Taler occupies a weird gray area in the law. Much like the current legal debates regarding Uber, I could see "entrepreneurs" and "innovators" making similar arguments that Taler belongs to none of the currently
existing categories or classifications covered by existing law. I do not agree with this argument, as I also do not agree with most of the arguments
companies like Uber are trying to make in courts all around the world right now. So the rest of this is going to reflect my basic belief that what Taler does IS currently defined and regulated by current California law.

First of all.. the California State agency that has jurisdictions in these matters-

The California Department of Business Oversight: http://www.dbo.ca.gov/Licensees/money_transmitters/

The link goes directly to their webpage of regulations governing "Money Transmitters" which I believe is the classification you would fall under if you were operating a Taler exchange in California. A very highly regulated industry in this state.

The "TL:DR" version of this is:

1. to do what Taler does, if you wish to operate an exchange within California you need a money transmitters license
2. acquiring the license is expensive, rigorous, and somewhat subjective. Morals clauses abound.
3. you are also obligated to pay regular tax in the form of non refundable (but possibly negotiable) "fees" to the State
at regularly mandated intervals
4. If you operate in CA at all, you must acquire a license and pay. You cannot dodge paying
the State of CA by "offshoring" your exchange to a different low(er) cost state. A lower cost country, perhaps. Don't expect that
loophole to last long though, once there is real revenue to be harvested in State "fees".
5. In other parts of the legal code, what Taler does clearly falls under the jurisdiction of the CA DBO for regulatory purposes,
and is defined as "money transmitting" even though the "money" is "Talers" and the coins reside on the user's device in their
wallet. The laws could be a bit tighter, but as it stands they seem quite tight enough to establish the CA DBO's jurisdiction in this matter, from which all the fees then flow.


On to some of the  finer points of California Law, to acquire a money transmitters license:

Financial Code - FIN

DIVISION 1.2. MONEY TRANSMISSION ACT [2000 - 2176]

  ( Division 1.2 added by Stats. 2011, Ch. 243, Sec. 4. )

2030(a) A: Anyone doing business in California must have a license. Licenses are not transferrable.

2032 (a) An applicant for licensure under this division shall pay to the commissioner a nonrefundable fee of five thousand dollars ($5,000).

A list of questions to answer regarding criminal convictions, personal financial history, with supporting documentation

2033 (a) The commissioner may conduct an examination of the applicant and the applicant shall pay the reasonable cost of the examination.


2035 (b) The commissioner shall not approve the application unless the commissioner finds all of the following:

(1) The applicant and all of the officers and directors of the applicant are of good character and sound financial standing.

(2) The applicant is competent to engage in the business of money transmission.

(3) It is reasonable to believe that, if the applicant acquires control of the licensee, the applicant and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.

(4) The applicant’s plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.

(c) For the purposes of subdivision (b), the commissioner may find an applicant’s plan to make major changes in the management of a licensee is detrimental to the licensee if the plan provides for a person who is not of good character to become a director or officer of the licensee. The grounds specified in this subdivision shall not be deemed to be the only grounds upon which the commissioner may find, for the purposes of subdivision (b), that an applicant’s plan to make a major change in the management of a licensee is detrimental to the licensee.

2036 The commissioner may impose on any authorization, approval, license, or order issued pursuant to this division any conditions that are necessary for the safety and soundness of the licensee, or reasonable or necessary to maintain or enhance consumer protection.

2037 (a) As security, each licensee shall deposit and thereafter maintain on deposit with the Treasurer cash in an amount not less than, or securities having a market value not less than, such amount as the commissioner may find and order from time to time as necessary to secure the faithful performance of the obligations of the licensee with respect to money transmission in California. These securities shall be subject to the approval of the commissioner and shall consist of interest-bearing bonds, notes, or other obligations of the United States or any agency or instrumentality thereof, or of the State of California, or of any city, county, or city and county, political subdivision or district of the State of California, or that are guaranteed by the United States or the State of California.
 
d) A licensee that sells or issues payment instruments or stored value shall maintain securities on deposit or a bond of a surety company in an amount of no less than five hundred thousand dollars ($500,000) or 50 percent of the average daily outstanding payment instrument and stored value obligations in California, whichever is greater; provided that such amount shall not be more than two million dollars ($2,000,000).

(e) A licensee that engages in receiving money for transmission shall maintain securities on deposit or a bond of a surety company in an amount greater than the average daily outstanding obligations for money received for transmission in California, provided that such amount shall not be less than two hundred fifty thousand dollars ($250,000) nor more than seven million dollars ($7,000,000).

(f) The amount of securities on deposit or a bond of a surety company required to be maintained by subdivisions (d) and (e) are cumulative.

(h) Securities on deposit or a bond shall cover claims for so long as the commissioner specifies, but for at least four years after the licensee ceases to provide services under this division in this state. However, the commissioner may permit the amount of the security to be reduced or eliminated before the expiration of that time to the extent the amount of the licensee’s payment instruments or stored value obligations outstanding, or outstanding money or monetary value received for money transmission, is less than the deposit or bond. The commissioner may permit a licensee to substitute another form of security acceptable to the commissioner for the security effective at the time the licensee ceases to provide money transmissions in this state.

2038 Fees shall be paid to, and collected by, the commissioner, as follows:

(a) The fee for filing an application for a license is five thousand dollars ($5,000), as provided in subdivision (a) of Section 2032.
(b) The fee for filing an application for approval to acquire control of a licensee is three thousand five hundred dollars ($3,500).

(c) A licensee shall pay annually on or before July 1, a licensee fee of two thousand five hundred dollars ($2,500).

(d) A licensee shall pay annually on or before July 1, one hundred twenty-five dollars ($125) for each licensee branch office in this state.

(e) A licensee shall pay annually on or before July 1, twenty-five dollars ($25) for each agent branch office in this state.
(f) Whenever the commissioner examines a licensee or any agent of a licensee, the licensee shall pay, within 10 days after receipt of a statement from the commissioner, a fee of seventy-five dollars ($75) per hour for each examiner engaged in the examination plus, if it is necessary for any examiner engaged in the examination to travel outside this state, the travel expenses of the examiner.

(g) Whenever the commissioner examines an applicant, the applicant shall pay, within 10 days after receipt of a statement from the commissioner, a fee of seventy-five dollars ($75) per hour for each examiner engaged in the examination plus, if it is necessary for any examiner engaged in the examination to travel outside this state, the travel expenses of the examiner.

(h) Each fee for filing an application shall be paid at the time the application is filed with the commissioner. No fee for filing an application shall be refundable, regardless of whether the application is approved, denied, or withdrawn.

2039

(a) The commissioner may by order or regulation grant exemptions from this section in cases where the commissioner finds that the requirements of this section are not necessary or may be duplicative.
(b) In addition to any other reports as may be required pursuant to Sections 453, 454, and 455, each licensee shall, within 90 days after the end of each fiscal year, or within any extended time as the commissioner may prescribe, file with the commissioner an audit report for the fiscal year that shall comply with all of the following provisions:

(1) The audit report shall contain audited financial statements of the licensee for or as of the end of the fiscal year prepared in accordance with United States generally accepted accounting principles and any other information as the commissioner may require.

(2) The audit report shall be based upon an audit of the licensee conducted in accordance with United States generally accepted auditing standards and any other requirements as the commissioner may prescribe.

(3) The audit report shall be prepared by an independent certified public accountant or independent public accountant who is not unsatisfactory to the commissioner.

(4) The audit report shall include or be accompanied by a certificate of opinion of the independent certified public accountant or independent public accountant that is satisfactory in form and content to the commissioner. If the certificate or opinion is qualified, the commissioner may order the licensee to take any action as the commissioner may find necessary to enable the independent or certified public accountant or independent public accountant to remove the qualification.

(c) Each licensee shall, not more than 45 days after the end of each calendar year quarter, or within a longer period as the commissioner may by regulation or order specify, file with the commissioner a report containing all of the following:

(1) Financial statements, including balance sheet, income statement, statement of changes in shareholders’ equity, and statement of cashflows, for, or as of the end of, that calendar year quarter, verified by two of the licensee’s principal officers. The verification shall state that each of the officers making the verification has a personal knowledge of the matters in the report and that each of them believes that each statement on the report is true.

(2) For issuers and sellers of payment instruments and stored value, a schedule of eligible securities owned by the licensee pursuant to Section 2081.

(3) Other information as the commissioner may by regulation or order require.

(d) Each licensee, not more than 45 days after the end of each calendar year quarter, shall file with the commissioner a report containing all of the following:

(1) The current address of each branch office of the licensee in this state. If a branch office was opened or closed during the calendar year quarter, the date it was opened or closed. If a branch office was relocated during the calendar year quarter, the addresses of the old and new locations and the date of relocation.

(2) The name of each person who acted as an agent in this state of the licensee during the calendar year quarter and the address for each agent branch office. If a person was appointed or terminated as an agent during the calendar year quarter, the date of appointment or termination. If an agent branch office relocated, the addresses for the old and new locations and the date of relocation.

(3) The total volume of activities, number of transactions conducted, and outstanding money transmission obligations in California under this division and in the United States in the calendar year quarter categorized by type of money transmission, and, if feasible whether the transmission was conducted via a mobile application or an Internet Web site. For money received for transmission, a report of the average daily outstanding transmission liabilities in California, and, if applicable, a schedule of each foreign country to which money was sent, along with the total amount of money sent to that foreign country in that calendar year quarter. For payment instruments and stored value, a report of the average daily outstanding payment instruments and stored value liabilities in California in that calendar year quarter.

(4) Other information as the commissioner may by regulation or order require.

(e) Each licensee shall file with the commissioner other reports as and when the commissioner may by regulation or order require.

2040

(a) An applicant shall possess, and a licensee shall maintain at all times, tangible shareholder’s equity of two hundred fifty thousand dollars ($250,000) to five hundred thousand dollars ($500,000), depending on estimated or actual transaction volume, as determined by the commissioner based on the factors described in subdivision (c).
(b) The commissioner may increase the amount of net worth required of an applicant or licensee if the commissioner determines, with respect to the applicant or licensee, that a higher net worth is necessary to achieve the purposes of this division based on the factors described in subdivision (c).

(c) When making a determination pursuant to subdivision (a) or (b), the commissioner shall consider the following factors:

(1) The nature and volume of the projected or established business.

(2) The number of locations at or through which money transmission is or will be conducted.

(3) The amount, nature, quality, and liquidity of its assets.

(4) The amount and nature of its liabilities.

(5) The history of its operations and prospects for earning and retaining income.

(6) The quality of its operations.

(7) The quality of its management.

(8) The nature and quality of its principals.

(9) The nature and quality of the persons in control.

(10) The history of its compliance with applicable state and federal law.

(11) Any other factor the commissioner considers relevant.

(d) The commissioner at any time may require a licensee to write down any asset held by it to a valuation that will represent its then fair market value. Any receivable or debt due to a licensee that is past due and unpaid for the period of one year shall be charged off, unless it is well secured or is in process of collection.

(e) The aggregate value of a licensee’s accounts receivable, excluding money transmission receivables, loans or extensions of credit to any one person, or that person’s affiliates, cannot exceed 50 percent of the licensee’s tangible shareholders’ equity without the advanced written approval of the commissioner. Whenever such amount equals or exceeds 20 percent of the licensee’s tangible shareholders’ equity, the licensee shall maintain records evidencing such amount and any security or other source of payment for the amount owed, and such other records as the commissioner may require by order or regulation.

(f) The commissioner shall adopt regulations to carry out and implement the factors described in subdivision (c).

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