The Case for a Safe Harbor Money Transmitter License
Updated: Oct 29, 2021
PROBLEM 1: Financial exclusion creates environments favorable to violence and poverty.
Financial exclusion is a serious problem I first encountered in 2003 during my time as a public defender in Fort Myers, Florida. In this position, I represented a Guatemalan migrant farm-worker who was stopped by police under pretext while on his way to Western Union. During the search made pursuant to arrest, the officer confiscated my client’s moldy wad of bills he had carefully saved for remittance to his wife and children who remained in Guatemala. While interviewing my client in preparation of his defense, I learned about the appalling practice of “guatto-lotto” hits. Because my client didn’t have the proper identification required to open a bank account, he had to carry his money on him at all times, making him a vulnerable target for violent robbery especially when headed to Western Union. If the hit is successful, it’s like winning a small lottery – hence, a “guatto-lotto”. Although I successfully argued for dismissal of the criminal charges, as a public defender, I was prohibited from pursuing the return of his money taken under the rules of criminal forfeiture. My client, and countless other migrant workers just like him, was targeted because he was financially excluded. This situation he suffered through no fault of his own made him vulnerable to violence and poverty – a problem I didn’t know how to fix – until now.
When I could no longer defer on my law school loans, I left the practice of criminal defense to join the corporate world of emerging technology, but I could never shake the disturbing problem of my former Guatemalan client. Several years ago, while preparing a lecture on blockchain to deliver to the Florida Bar for CLE credit, I learned that blockchain and related technology had the potential to solve financial exclusion. Back then, unaware of KYC/AML regulations, I naïvely thought I could install a bitcoin ATM near central Florida commercial farms so migrant workers could convert their cash to crypto for easy remittance to their families back home. When I discussed this with a FinCEN registered crypto-kiosk company, I learned that the Bank Secrecy Act and related KYC/AML rules strictly apply to such operations, ultimately resulting in financial exclusion again. Frustrated but undeterred, I embarked on a course of study at Oxford Saïd designed to help me better understand and solve this problem. Several years have since passed, and my law practice is now almost entirely dedicated to blockchain and fintech companies and cases. Consequently, my familiarity with the BSA framework has substantially grown, leading me to develop an alternate solution for financial exclusion.
PROBLEM 2: Complex regulations for money transmission discourages new market entrants.
The current framework for money transmission is not unlike that governing small business capital formation activities prior to the enactment of Regulation D under the Securities Act of 1933. Prior to Reg. D, the cost of compliance with disparate exemptive rules and concepts of federal and state securities regulations often resulted in the exclusion of small business participation in capital growth activities. In 1982, the SEC promulgated Reg. D as a safe harbor in a successful effort to reduce regulatory constraints on capital formation, resulting in issuers large and small raising billions of dollars in securities offerings while still protecting the interests of investors.
Federal regulations require all money transmitters to register with FinCEN as a money services business (MSB) and to comply with growing BSA reporting and recordkeeping requirements. To this, I do not object. However, there is no safe harbor for compliance with these regulations. Rather, MSBs must still comply with state regulations that are repetitive to federal regulations, resulting in unnecessary cost barriers for MSBs. Consequently, new market entrants are deterred from entering the financial services industry in America similar to how small businesses were discouraged from raising capital prior to Reg. D. Moreover, the dizzying pace at which federal and individual state regulators are issuing new regulations and bringing criminal enforcement actions strongly discourages innovation in this industry. In other words, America’s increasingly complex regulatory environment has become notoriously hostile to new money transmitters. Consequently, many innovative start-ups in this industry are starting up somewhere else, a burden disproportionately carried most by America’s poorest.
SOLUTION: America needs a safe harbor money transmitter license to encourage innovation.
The solution I propose is a federal money transmitters license that provides safe harbor from state financial regulators in the same way that Reg. D provides securities issuers safe harbor from state securities regulators. Pursuant to Treasury Order 180-01, the Financial Crimes Enforcement Network (FinCEN) is the administrator of the Bank Secrecy Act and may issue binding rules imposing obligations on the public to the extent authorized by statute. Although the SEC possessed the requisite authority to issue Reg. D without an act of Congress, I am uncertain whether the Department of the Treasury, or its enforcement arm – FinCEN, enjoys the same authority to issue a safe harbor money transmitters license. Of particular relevance to this inquiry is 31 U.S.C. §5330(a) that mandates all MSBs to register with the Secretary of the Treasury who shall prescribe, by regulation, the form and manner for such registration. Notably, this section expressly denies safe harbor from State regulators to MSBs. It is precisely this language I seek to change by passing new legislation promulgated either through the Department of Treasury, or by an Act of Congress, as appropriate.
As a friend and ally in the campaign for a more inclusive financial ecosystem, I argue for a regulatory framework that supports innovative financial solutions while combatting money laundering and terrorist financing. While this approach may not resolve every aspect of the problem of financial exclusion, it will foster a more open environment that flattens the cost of compliance and evens the playing-field for new market entrants. The BSA Timeline  made available by FinCEN demonstrates the speed and intensity at which regulations were issued after the PATRIOT Act in 2001 governing a variety of activities involving MSBs and money transmission. In contrast, MSBs who launched prior to the PATRIOT ACT, or shortly thereafter, were able to gain significant market traction before increased compliance measures and associated costs were implemented, e.g. PayPal. This new environment of heightened regulation and enforcement not only disadvantages new market entrants from launching innovative financial solutions to American consumers, but it also secures industry monopoly by existing titans.
Contrary to the general belief that regulation always stifles innovation, I think that the right regulation can encourage market expansion by providing a clear path for compliance that is both accessible and affordable. If the industry can pull together in a cohesive effort, I believe we can propose a regulatory environment that is more hospitable to companies offering creative financial products and services to the financially excluded. If you would like to join my effort to develop a successful approach for the implementation of a safe harbor money transmitter license, please contact me.
 Mark Sargent, The New Regulation D: Deregulation, Federalism and the Dynamics of Regulatory Reform, 68 Washington University Law Review 227 (1990), https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=1944&context=law_lawreview (last visited Sep 18, 2021).