Recognizing the evolving landscape of digital finance, the Conference of State Bank Supervisors (CSBS), an association of state financial regulators, issued advisory guidance on the treatment of virtual currency held on a licensed money transmitter’s balance sheet when calculating the licensee’s tangible net worth under the model law known as the Money Transmission Modernization Act (MTMA). The guidance is the first to be issued under the CSBS’s new process for issuing guidance designed to encourage transparency and consistency in the implementation of the MTMA, which has been adopted by 27 states, including Texas, Indiana, Tennessee, Nevada, and Minnesota.
This development is noteworthy in that it formally recognizes that virtual currency serves as “acceptable capital” for the purpose of satisfying customer obligations, which contributes to the safe and sound operation of money transmitters. However, the guidance by its terms does not apply to U.S. dollar and other fiat-backed payment stablecoins.
Specifically, the guidance clarifies the treatment of virtual currency with respect to the licensee’s tangible net worth requirements under Section 10.01 of the MTMA. Such statutory requirements are intended to ensure that licensees can absorb losses, enhancing public confidence in money transmission and protecting consumers from losses.
The MTMA defines “tangible net worth” as follows: the aggregate assets of a licensee excluding all intangible assets, less liabilities, as determined in accordance with U.S. generally accepted accounting principles. As the guidance explains, intangible assets are subtracted from aggregate assets for purposes of this calculation because the CSBS has taken the policy position that such assets are generally insufficient sources of capital. Under the MTMA, licensees must maintain a minimum tangible net worth in an amount that is the greater of $100,000 or a tiered percentage of the licensee’s aggregate assets.1
If a licensee holds virtual currencies on its balance sheet, the guidance clarifies that the licensee’s calculations with respect to the tangible net worth requirement are impacted in two ways. First, the licensee must include such virtual currency assets in calculating its aggregate assets, which is relevant to the licensee’s tangible net worth and the tiering that determines the minimum tangible net worth that applies. Second, when calculating its tangible net worth, the licensee generally must include such virtual currency assets as intangible assets and therefore subtract them from aggregate assets—except if the licensee has a corresponding customer liability denominated in the same virtual currency.2
Examples of businesses that may meet the above criteria generally include crypto exchanges or custodians, where the business commonly holds virtual currencies on behalf of its customers as assets and records a liability to a given customer for each such asset it holds. The guidance recognizes that for these businesses, the virtual currency held on their balance sheet takes on characteristics that are different from other intangible assets, such as patents, licensing agreements, or software, which do not typically have corresponding liabilities.
Wilson Sonsini advises fintech companies on how to strategically navigate state money transmission licensing and the novel, evolving legal issues raised by crypto. Please do not hesitate to contact Jess Cheng, or any member of the firm’s Fintech and Financial Services practice for more information.
[1] The MTMA requires licensees to “maintain at all times a tangible net worth of the greater of $100,000 or 3 percent of total assets for the first $100 million, 2 percent of additional assets for $100 million to $1 billion, and 0.5 percent of additional assets for over $1 billion.”
[2] Specifically, the guidance states that the following four criteria must be met for a licensee’s virtual currency to not be subtracted from total assets in the calculation of tangible net worth:
“1. A licensee’s day-to-day business includes incurring obligations to customers denominated in the virtual currency,
2. The virtual currency asset has a corresponding liability denominated in the virtual currency,
3. The virtual currency is unencumbered, and
4. The virtual currency assets that are not subtracted from total assets are limited to those that have a corresponding liability denominated in the same virtual currency.”