The Texas Department of Banking issued a supervisory memorandum clarifying the applicability of the Texas Money Services Act to various activities involving virtual currencies. The Department of Banking determined that exchanging virtual currency for sovereign currency is not currency exchange under the Act (because the definition of “currency” in the Act does not encompass virtual currencies) and that no currency exchange license is therefore required in Texas to conduct any type of transaction exchanging virtual with sovereign currencies.
The Department of Banking also analyzed whether the state’s licensing requirements for money transmitters applied to cryptocurrencies—currencies based on a cryptographic protocol that manages the creation of new units of the currency through a peer-to-peer network. The Department of Banking determined that because cryptocurrencies cannot be considered “money or monetary value” under the Act, in the absence of the involvement of sovereign currency in a transaction (e.g., when receiving cryptocurrency in exchange for a promise to make it available at a later time or different location), no money transmission can occur. However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled. To provide further guidance, the Department of Banking analyzed five fact patterns and made the following corresponding determinations as to whether money transmission had occurred:
- The exchange of cryptocurrency for sovereign currency between two parties. The Department of Banking stated that such exchange, essentially a sale of goods between two parties, is not money transmission.
- The exchange of one cryptocurrency for another cryptocurrency. Such exchange is not money transmission because there is no receipt of “money.”
- The transfer of cryptocurrency by itself. Such transfer is not money transmission because cryptocurrency is not “money or monetary value.” Such transfer would include intermediaries who receive cryptocurrency for transfer to a third party, and entities who hold cryptocurrency on behalf of customers.
- The exchange of cryptocurrency for sovereign currency through a third party exchanger. Using Mt. Gox as an example, the Department of Banking determined that irrespective of its handling of the cryptocurrency, the exchanger conducts money transmission by receiving the buyer’s sovereign currency in exchange for a promise to make it available to the seller.
- The exchange of cryptocurrency for sovereign currency through an automated machine. The Department of Banking determined that when a third party is involved, the exchange is money transmission. For further clarification, when a machine acts as an intermediary between a buyer and seller, the operator of the machine receives the buyer’s sovereign currency in exchange for a promise to make it available to the seller and, according to the memorandum, is engaged in money transmission. If, however, the machine is configured to only conduct transactions between the customer and the machine’s operator, with no third parties involved, there is no money transmission because at no time is money received in exchange for a promise to make it available at a later time or different location.