Washington State Updates Money Services Rules

On June 19, 2018, the Washington State Department of Financial Institutions (the "DFI") amended the DFI's money services rules to conform to updates to the Washington Uniform Money Services Act signed into law last year. According to the DFI, the changes are intended to, among other things, "take into account innovations in technology used by the regulated industry." The DFI's amendments reflect federal regulators' and states' growing interest in and regulation of virtual currencies.

While the DFI's amended rules do not seek to regulate virtual currency activity to the degree of other states, such as New York with its BitLicense, the DFI's amended rules may indicate an intent to regulate virtual currency activities more closely and provide the DFI the latitude to bring enforcement actions against persons engaging in virtual currency activities. Such state enforcement powers are gaining increased industry focus as federal financial services regulators, namely the Consumer Financial Protection Bureau (the "Bureau"), begin to decrease their enforcement activities. We believe Kathy Kraninger's nomination to lead the Bureau may signal that the Bureau will continue its current policy trajectory of decreased enforcement and regulatory activity over the near-to-medium term.

Of note among the numerous changes, the DFI's amended rules:

1. Clarify exemptions to Washington's money transmitter licensing requirement, particularly as to payment processors. The DFI's amended rules provide that a person engaging in payment processing who satisfies certain statutory requirements (e.g., facilitates payment of goods or services subject to a consumer's instruction to pay a payee) are exempt from the DFI's money transmitter licensing requirements. The exemption does not extend to persons who engage in payment processing activities utilizing virtual currency, related to the marijuana industry, or holding consumer funds without a consumer's instruction to pay the funds to a payee. This last exclusion appears to reflect Washington's "agent of a payee" statutory exemption.
2. Replace the concept of "stored value" with "prepaid access," aligning the DFI's rules with federal law concerning prepaid access. The DFI has revised its rules to refer to "prepaid access" in lieu of "stored value." Many state money transmitter licensing laws use the term "stored value" while federal financial regulators, namely the Financial Crimes Enforcement Network, use the term "prepaid access" to refer to similar financial services and products offering consumers "open loop" and "closed loop" payment options. By incorporating the term "prepaid access," the DFI brings Washington State into alignment with federal money services business regulations with which state-licensed money transmitters usually must comply. This change may encourage persons to refer to federal guidance regarding prepaid access to better interpret the DFI's rules.

3. Address the transmission and storage of virtual currency. The amended rules introduce the concepts of "virtual currency storage" and "online currency exchanger." The amended rules define "online currency exchanger" as "a currency exchanger who transacts business over the internet or other electronic medium, regardless of whether the currency exchanger also has a physical location in Washington state." "Virtual currency storage" means "storing access to virtual currency owned by another person." The DFI has confirmed that engaging in virtual currency storage does not require a money transmitter license so long as another person owns the stored virtual currency and the person storing the virtual currency does not have the "unilateral ability" to transmit the stored virtual currency.

4. Outline requirements regarding consumer disclosures. The DFI's amended rules include a new section addressing required consumer disclosures. Under the amended rules, a money transmitter must provide a consumer with an electronic disclosure notifying the consumer that a fraudulent transfer may result in a loss of money without recourse. Additional disclosures must be provided to a consumer conducting a virtual currency transaction, including information regarding fees, any insurance or guarantee of the virtual currency product or service, the irrevocability of the transaction and any exceptions to such irrevocability that may exist.