The Texas Department of Banking has published new guidance regarding the regulatory treatment of virtual currencies under the Texas Money Services Act. The document states that most transactions involving cryptocurrencies will not be considered a transfer of “monetary value” but the exchange of virtual currencies for fiat will likely be recognized as a “money transmission.”
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Texas Department of Banking Updates Regulatory Position on Crypto Transactions
On Jan. 2, the Texas Department of Banking published a supervisory memorandum providing updated regulatory guidance regarding the treatment of cryptocurrencies under state law.
While the memorandum notes that bitcoin and cryptocurrencies have “sparked new discourse on the nature of money” and the “transferability of value,” the document emphasizes that it seeks only to express the department’s interpretation of the Texas Money Services Act as it pertains to activities involving cryptocurrencies under existing statutory definitions.
Guidelines Classify Virtual Currencies as ‘Centralized’ or ‘Decentralized’
The guidelines classify cryptocurrency according to their centralization, with decentralized virtual currencies described as not have been “created or issued by a particular person or entity,” in addition to having “no administrator, and no central repository.”
Centralized virtual currencies, the document states, are defined as having been “created 
and issued by a specified source,” adding that “they rely on an entity with some for authority or control over the currency.”
Stablecoins are described as comprising a “subclass” of centralized virtual currencies. With regard to money transmission regulation, the memorandum states that “an important aspect” of stablecoins that are backed by sovereign currencies is the “redemption right that allows the stablecoin holder to redeem the coin for fiat currency from the issuer.”
The memorandum adds that “Some experts consider cryptocurrency to be a new asset class that is neither currency nor commodity, but possessing characteristics of both, as well as characteristics of neither.”
Licensing Considerations Regarding Cryptocurrency Companies
The Texas Department of Banking notes that in many instances, the “factors distinguishing the various centralized virtual currencies can be complicated and nuanced,” and as such the regulator “must individually analyze centralized virtual currency schemes.”
The document states that licensing determinations regarding transactions involving virtual currencies will be decided “on the sole question” of whether the cryptocurrency should be considered “money or monetary value” under the Money Services Act.
The guidelines also state that exchanging virtual currency for sovereign currency is not regarded as comprising “currency exchange” under the Texas Finance Code, adding that the code defines currency for the purpose of currency exchange as “the coin and paper money of the United States or any country that is designated as legal tender.”
Policy Implications of Texas’ New Guidelines
While the document states that it “does not offer generalized guidance on the treatment of centralized virtual currencies, other than sovereign-backed stablecoins,” a number of general policy assertions are made with regard to cryptocurrency activities.
Broadly speaking, the memorandum states that without the involvement of fiat currency in a transaction, no money transmission has occurred under the existing statutes. However, cryptocurrency transactions involving sovereign currency “may” comprise money transmissions “depending on how the sovereign currency is handled.” The document adds that “A licensing analysis will be based on the handling of the sovereign currency.”
The guidelines note that the exchange of cryptocurrency in exchange for fiat currency between two parties is not money transmission, but rather comprises “a sale of goods between two parties.” The exchange of cryptocurrency in exchange for another cryptocurrency, in addition to the “transfer of cryptocurrency by itself” also falls outside of the legal definition of money transmission.
However, the “exchange of cryptocurrency for sovereign currency through a third-party exchanger” is generally considered money transmission. Additionally, the “exchange of cryptocurrency for sovereign currency through an automated machine” is “usually but not always” deemed to comprise money transmission.
What is your response to the Texas Department of Banking’s updated interpretation of the state’s Money Services Act regarding virtual currencies? Share your thoughts in the comments section below!
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