The State of Illinois has sought comment on a guidance document it has released on whether a money transmitter license is needed to engage in selling decentralized digital currencies. The document says the department does not require such a license since virtual currencies have not been adopted by governments as currency.
The document outlines the Department of Financial and Professional Regulation (IDFPR) interpretation of the state’s Transmitters of Money Act (TOMA) and seeks to establish the regulatory treatment of decentralized digital currencies.
The department is not aware of any jurisdiction in which digital currency has status as legal tender, or of any such currency issued by a government’s central bank. As such, digital currencies exist beyond the recognition of established financial institutions.
The document addressed the difference between centralized and non-centralized digital currencies. Centralized currencies are created and issued by a specified source and rely on an authority.
Centralized digital currencies can be non-convertible; they can be bought with sovereign currency, but they cannot be exchanged back to sovereign currency.
Centralized digital currencies can also be convertible, meaning they can be converted back to sovereign currency. Some centralized digital currencies can be used only for buying goods from a closed universe of merchants, are specific to a particular virtual domain, or have an open universe of merchants.
Decentralized digital currencies are not issued by a particular entity, have no administrator and no central repository. While decentralized digital currency is not classified as a legal tender, it is convertible. Hence, it has an equivalent value in sovereign currency and can be exchanged for sovereign currency.
Most decentralized digital currencies are cryptocurrencies. A cryptocurrency has a cryptographic protocol that manages the creation of new units on a shared ledger through a peer-to-peer network.
Because users’ wallets serve as the connection points of the peer-to-peer network, transfers of decentralized digital currency are made directly from wallet to wallet. Transmissions of sovereign currencies, by contrast, must be made through intermediaries like a financial institution or money transmitter.
Where centralized digital currency can have an intrinsic value from a sovereign currency or precious metals, decentralized currency does not have intrinsic value. A decentralized digital currency unit does not represent a claim on a commodity, and is not convertible by law. The value of a unit of decentralized digital currency is only what a buyer is willing to pay for it.
While decentralized digital currencies represent a value that can function as a medium of exchange, they are not considered money for the purposes of TOMA. Decentralized currencies have not been “authorized or adopted by a domestic or foreign government as a part of its currency.”
An entity engaged in the transmission of decentralized currencies would not be required to obtain a TOMA license. Should transmission of decentralized digital currencies involve “money” in a transaction, however, that transaction can be considered a money transmission depending on how the transaction is organized.
The document gives several examples of common types of digital currency transactions. It also gives examples of activities that don’t qualify as money transmissions.
The department director has not approved virtual currency as a permissible investment under this section. However, the director can approve or limit the extent to which other products are considered a permissible investment.
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