Olympia – This year the Legislature passed Substitute Senate Bill 5031, amending Washington’s money transmission laws to address changes and innovations in the industry — including key provisions related to the use of virtual currency in money transmission. With the passage of this bill, Washington joins only a handful of states that have succeeded in clarifying how companies offering virtual currency wallet services and other virtual currency services will be regulated.
Virtual currency, also known as digital currency, is a medium of exchange not authorized or adopted by a government. There are many different digital currencies being used over the internet. The most commonly known virtual currency is named Bitcoin. The Washington Department of Financial Institutions (DFI) began regulating virtual currency businesses in April 2014. On Dec.8, 2014, DFI issued interim regulatory guidance setting forth the business models that triggered a license requirement under Washington’s Uniform Money Services Act (UMSA). Recently, DFI sought to amend UMSA to incorporate its interim guidance and to fix some areas of the existing law that did not accommodate the virtual currency technology.
Substitute Senate Bill 5031 passed the legislature and was signed by Governor Jay Inslee April 17, 2017. The agency worked extensively with industry crafting this legislation, incorporating many changes requested by industry based on their experience with the technology.
“Washington is a magnet for innovation and companies offering new technology,” DFI’s Director Gloria Papiez said. “With this new law, emerging companies offering virtual currency will have much greater clarity as to what the law requires.
“We are always evaluating new innovative business models in connection with our existing regulatory structure," Papiez added. "Sometimes clarifications or updates to regulations are required as laws are applied in connection with new technology that was likely not contemplated when the law was originally enacted.”
In part, the new law provides detailed definitions as to what activities involving virtual currency are considered “money transmission” triggering a license requirement.
“In drafting the proposed legislation, we received considerable input from industry experts familiar with emerging technologies involving various uses of virtual distributed ledger systems," DFI’s Director of Consumer Services Charlie Clark noted. "This law strikes the right balance as to which activities involving virtual currency are truly money transmission, thereby requiring a license, and which activities should not be subject to our regulation.”
The bill also includes important consumer protections, including requiring a third party security audit for companies that store virtual currency on behalf of others, and requiring that companies providing virtual currency products or services provide consumer disclosures. The new law goes into effect July 23, 2017.
Recently, DFI had the opportunity to work with another type of regulated entity in the virtual currency space. In concert with the New York Department of Financial Services (NYDFS), DFI granted authority to Gemini Trust Company, LLC, a New York virtual currency exchange company to do business in the State of Washington. Such authority was permitted through a multi-state reciprocity agreement for trust companies. The company is regulated by the NYDFS and was chartered as a limited purpose trust company by the NYDFS on Oct. 2, 2015. DFI approved the authority June 9, 2017.
“This is an example of responding innovatively within our existing Washington laws in partnership with other state regulators,” Director Papiez said, adding, “in this case New York State, using the Conference of State Bank Supervisors’ uniform application process which provides for reciprocity for trust institutions.”