A&B ABstract: On June 13, Louisiana enacted a comprehensive new law imposing a licensing obligation on entities that engage in virtual currency business activity.
Effective August 1, 2020, House Bill 701 (the “Law”) will require the licensure of entities that engage in virtual currency business activity in Louisiana with Louisiana residents. The Law provides that an application will be provided through the Nationwide Mortgage Licensing System and Registry (“NMLS”), and we have confirmed with the regulator that the application will become live on the NMLS on August 1.
A New Licensing Obligation
The Law provides that “[a] person shall not engage in virtual currency business activity, or hold itself out as being able to engage in virtual currency business activity, with or on behalf of a resident…”
What is Virtual Currency Business Activity?
“Virtual currency business activity” means:
- “Exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly through an agreement with a virtual currency control services vendor.
- Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
- Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
- Virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received.
- Legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.”
Notably, the licensure provision excludes activity governed by the Electronic Fund Transfer Act, the Securities Exchange Act, the Commodities Exchange Act, and the Louisiana securities laws. Regulated financial institutions, attorneys providing escrow services, and title insurance companies providing escrow services are among the entities exempt from licensure.
Additionally, we note that not every virtual currency business may have to obtain a licensure under the Law. A person whose volume of virtual currency business activity in the United States dollar equivalent of virtual currency will not exceed $35,000 annually may engage in business without a license provided that they meet the statutory requirements and notify the Louisiana Office of Financial Institutions.
The Law grants the Office of Financial Institutions (“Office”) enforcement authority against licensees, registrants, and unlicensed persons.
First, the Office may bring an enforcement action against any such person who “materially violates any provision of this [Law], a rule adopted pursuant to the [Law], or any other law of [Louisiana] which applies to virtual currency business activity of a violator with, or on behalf of, a resident.”
Second, the Office may bring an enforcement action against such a person who “does not cooperate substantially with an investigation by the [Office], fails to pay a fee, or fails to submit a report or documentation.”
Third, the Office may bring an enforcement action against any such person who “in the conduct of its virtual currency business activity with, or on behalf, of a resident” engages in an unsafe or unsound act or practice, an unfair or deceptive act or practice, fraud or intentional misrepresentation, or misappropriation of legal tender, virtual currency, or other value held by a fiduciary, among other conduct.
Fourth, the Office may take enforcement action if a federal or state agency takes an action against the licensee, registrant, or person that would constitute an enforcement measure if the Office had taken the action.
Finally, a licensee. registrant, or unlicensed person may be subject to enforcement action for being “convicted of a crime related to its virtual currency business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by [the Office], makes the licensee, registrant, or person unsuitable to engage in virtual currency business activity.”
We do not note any private right of action under the Law or any remedies for consumers for a licensee that has violated any provisions of the Law.
Louisiana’s passage of the Law is a state’s latest foray into cryptocurrency licensing, and signals the state’s willingness to continue to regulate cryptocurrency businesses.
Entities that will be required to obtain a license under the Law should be ready to apply on August 1, 2020, when the application becomes live on the NMLS.