In Money Transmitter Licensing, Is It Better to Own — or to Rent?

Several money transmitters are offering their state licensing portfolio to emerging payments agents, allowing them to get to market quicker — but startups lose some autonomy if they go this route.

These arrangements look attractive to companies that handle bitcoins and other virtual currencies as they navigate the fragmented and costly process of obtaining 48 separate state and regional licenses in the U.S. Montana, South Carolina and New Mexico do not require a license, but Washington D.C. does.

The Financial Crimes Enforcement Network issued guidance in March that clearly categorizes virtual-currency exchangers and administrators as money services businesses (MSBs). The New York State Department of Financial Services' recent moves indicate that virtual currency companies may face further regulatory action.

“It’s less expensive to be an agent than it is to go state by state obtaining your own licenses,” says Linda Remsberg, CEO of Meracord, which recently announced plans to leverage its state license portfolio for other companies.

Because Meracord will be a principal for many agents, it can mitigate the costs of licensing, Remsberg says. Meracord’s fees are based on how risky the agent company is. Meracord is also a payment processor.

“I feel their pain…it took five years to get licensed in every state,” Remsberg says. But “depending on how strong the [agent] company is, they can get to market in 30 days,” although the average is closer to 90 days, she says.

CoinX, a virtual currency exchange, is obtaining licensing on its own, says Megan Burton, founder of CoinX. It registered with Fincen in May and has been working to obtain the proper licenses in each state. The company works with a legal counsel, third-party consulting firms and regulatory firms for help, and Burton says she isn’t ruling out partnering in the future.

Whether this approach is practical "all depends on the company and their level of expertise with the process,” Burton says. “It doesn’t stop there, as you have to be comfortable with the ongoing management, maintenance and audits.”

The risk management requirements, capital constraints and delayed time to market are all deterrents to the do-it-yourself approach, Burton says.

But by obtaining licenses on its own, CoinX will be able to make lasting relationships with regulators and government agencies that could help it avoid future misunderstandings. At the recent Virtual Currency Compliance conference in New York, Burton said direct licensing is advantageous because it keeps CoinX in control of a critical business need.

However, despite the long-term advantages of direct licensing, many virtual currency companies “are desperate to get access to the market and that’s what this licensing [agency relationship] provides today,” says Juan Llanos, executive vice president of operations and compliance officer at Unidos Financial Services Inc.

Even when using another company's licensing, most control remains with the agents, although both companies share the risk, he says. Agents will have to split revenue with the principal and pay compliance fees, which are probably higher than most startups assume, he says.

Several Bitcoin businesses have made proposals to Unidos to become authorized agents of the company and take advantage of its licensing, he says. Unidos is considering it.

“None of us in the money transmitter world were thinking about Bitcoin before…now there’s an opportunity to execute payments much more swiftly,” Llanos says. “Any company would be interested in interacting with Bitcoin…to overcome banking fees and be innovative. I want to be a pioneer in the industry.”

When Meracord evaluates a potential agent, it makes sure the company is registered with Fincen and has the equity necessary to continue operations. The prospective agent company's officers must also be able to pass background tests, plus its technology must meet daily transaction monitoring requirements, Remsberg says.

Agents still have to register as an MSB with Fincen and have their own compliance program with written processes and procedures, a designated compliance officer and an ongoing training program.

If the company becomes an agent it will be immediately licensed in every state that requires a license and will not have to worry about the annual renewal process, she adds.  Agent companies can also use Meracord’s existing surety bonds, which many states require with a money transmitter license.

As the principal, Meracord has the right to shut down an agent that isn’t complying with its standards or is harboring fraudulent transactions. Meracord gets audited about 20 times a year, Remsberg says.

“We didn’t know how critical it was going to become” to need a compliant payment services provider, Remsberg says. The company’s pipeline is very full, she says, but “we’re only entering [Bitcoin] on a very cautious basis.”

Other companies that offer licensing services include Obopay and BTC Global. In May 2012, Obopay began offering its white-label Licensed Payment Service. And more recently, BTC Global launched to create a network of locally licensed companies for Bitcoin startups to route transfers through.

Some have suggested a single, uniform federal license, but states have pushed back against this proposal.