US State Bank Supervisors Publish Final Model Regulation

The US Conference of State Bank Supervisors (CSBS) has released the final version of its model regulatory framework for digital currencies.

The organization, comprised of representatives from state-level banking regulatory bodies, released an initial draft version of its proposed digital currency regulations in December. The draft drew from comments made during a subsequent two-month comment period in which both the digital currency ecosystem as well as financial incumbents were able to weigh in on the proposal.

While the framework is only a recommendation – state bank regulators can use it as a basis or to craft rules for the technology – it’s publication will likely play a role in how US states move toward finalizing their approaches to overseeing activities that involve digital currency.

The group recommended that companies involved with third-party exchange or transmission of digital currencies, as well as “services that facilitate the third-party exchange, storage and/or transmission of virtual currency (e.g. wallets, vaults, kiosks, merchant-acquirers, and payment processors)” should fall under the oversight of state bank regulators.

The group wrote:

“It is CSBS policy that entities performing activities involving third-party control of virtual currency should be subject to state licensure and supervision like an entity performing such activities with fiat currencies. Accordingly, activities involving fiat currencies that are otherwise subject to state laws should be covered if undertaken using virtual currency.

The text released by the CSBS also included changes to its initial proposal related to permitted types of investment, anti-money laundering compliance, record keeping, supervision and crisis management.

The latest releasehttps://www.csbs.org/news/press-releases/pr2015/Pages/PR091515.aspx

also offers insight into the responses the CSBS received as well as how changes were made to the previous version of the framework.

Definition for 'virtual currency'

The text includes the organization's definition of a "virtual currency" for use by state regulators, which focuses on the unit of account itself rather than the software enabling its use.

The finalized definition reads:

“Virtual Currency is a digital representation of value used as a medium of exchange, a unit of account or a store of value, but does not have legal tender status as recognized by the United States Government. Virtual Currency does not include the software or protocols governing the transfer of the digital representation of value. Virtual Currency does not include stored value redeemable exclusively in goods or services limited to transactions involving a defined merchant, such as rewards programs.”

The CSBS noted that one commenter said regulators should adopt common language for this definition "rather than engaging in haphazard reinterpretation of existing laws".

Additional proposals

The framework includes recommendations for a nationwide data sharing system based on the Nationwide Multistate Licensing System, a network used for financial institution licensing.

The American Bankers Association

indicated its support for this approach earlier this year, and according to the CSBS, several unidentified companies in the digital currency space have voiced support for the proposal.

The CSBS stated:

“...the Framework recommends the use of a robust licensing system which supports regulators’ ability to share information in real time or close to real time and offers the potential of streamlining all technical aspects of licensing, including application processing, background check processing, reporting and complaint management.”

The group said that it had altered its previous call for third-party cybersecurity audits to allow for flexibility at the discretion of state regulators.

“CSBS originally drafted a cybersecurity audit requirement, including a provision that the audit be performed by a third party. CSBS recognizes this can be costly and potentially premature for startups. CSBS also recognizes a third party audit is important for riskier institutions. Accordingly, the final framework was modified to provide more flexibility,” the group wrote.

Now, the model suggests that regulators decide on a case-by-case basis whether a third party audit is required or if an internal audit prepared by the licensee would be sufficient.

The CSBS also indicated that it had received support from comment submitters for a regulatory “onramp” that would allow certain entities to receive provisional approval, an approach adopted by New York in its BitLicense framework.

In its final regulation model, the CSBS declined to include such language, stating that “state regulators understand the argument in favor of legal and regulatory incubation”.

The final version of the CSBS Model Regulatory Framework can be found below:

CSBS Model Regulatory Framework

Paperwork image via Shutterstock