On June 26, the Conference of State Bank Supervisors (CSBS) released new guidance regarding the treatment of virtual currency in the calculation of a licensee’s tangible net worth under the Money Transmission Modernization Act (MTMA). In the press release announcing the new guidance, Brandon Milhorn, CSBS President and CEO, expressed enthusiasm for the new guidance: “We are very pleased to issue the first CSBS advisory guidance to support the consistent, effective, and transparent implementation of the MTMA. The advisory guidance process will help the MTMA evolve and grow as money transmitters deploy new technologies and develop new products and services to support their customers.”
The MTMA was crafted by state supervisors and industry experts to establish uniform standards nationwide for tangible net worth, surety bonds, permissible investments, and other regulatory requirements for money transmitters. Initiated by the CSBS Board of Directors in December, the process for issuing non-binding, advisory guidance is designed to support the MTMA’s evolution as money transmitters adopt new technologies and develop innovative products and services.
Scope of the Guidance
This guidance is limited to the implementation of specific sections of the MTMA:
- Section 2.01(bb): Defines “tangible net worth” as the aggregate assets of a licensee excluding all intangible assets, less liabilities, in accordance with United States generally accepted accounting principles.
- Section 10.01 Net Worth: Requires licensees to maintain a tangible net worth of the greater of $100,000 or 3% of total assets for the first $100 million, 2% of additional assets for $100 million to $1 billion, and 0.5% of additional assets for over $1 billion.
States that have passed the MTMA should utilize the Broad Administrative Authority provision in § 4.01(b) to interpret their law in accordance with this guidance. Notably, this guidance does not apply to fiat-backed payment stablecoins.
Policy Positions
The CSBS has outlined several policy positions to inform all model guidance:
- Capital Commensurate with Total Assets: Money transmitters must have capital proportional to total assets to absorb losses, enhancing public confidence and protecting customers.
- Earnings and Asset Quality: As money transmitters grow, their tangible shareholder’s equity should keep pace with increased customer funds.
- Intangible Assets: These are deemed insufficient sources of capital.
Questions Presented and Brief Answers
- How is the minimum Tangible Net Worth (TNW) Requirement calculated?
- Apply tiered percentages to a company’s total assets to determine the TNW Requirement.
- How is tangible net worth calculated?
- Subtract intangible assets and total liabilities from total assets.
- What is the appropriate accounting for virtual currency in the TNW Requirement?
- Virtual currency assets are intangible and must be included in total assets for TNW calculation.
- Under what circumstances should virtual currency be subtracted from Total Assets when calculating TNW?
- Virtual currency held to satisfy corresponding customer liabilities in the same currency should not be subtracted.
Example
The following simplified example outlines the application of the policies in the guidance:
- Assets: Cash ($8,500,000), Bitcoin ($25,000,000), Litecoin ($5,000,000), Goodwill ($500,000)
- Liabilities: Payment Instrument Obligations ($7,500,000), Bitcoin Obligations ($2,500,000), Litecoin Obligations ($5,000,000), Intercompany Payables ($100,000)
Tangible Net Worth Requirements = $39,000,000 * .03 = $1,170,000
Tangible Net Worth = Total Assets – Total Liabilities – Goodwill – Intangible Crypto Assets = $39,000,000 – $15,100,000 – $500,000 – ($25,000,000 BTC assets – $2,500,000 BTC liabilities) = $900,000
In the example, $2,500,000 of bitcoin is held to satisfy corresponding obligations to customers and should not be subtracted from Total Assets when calculating the TNW. The remaining $22,500,000 of bitcoin assets does not have corresponding liabilities to customers and must be subtracted from total assets when calculating TNW.
Adoption and Impact
To date, 27 states have adopted the MTMA, meaning its requirements apply to 99% of the nation’s money transmission activity licensed in the Nationwide Multistate Licensing System. The guidance was developed under the supervision of the CSBS Nondepository Supervisory Committee, a group of state supervisors dedicated to forming consistent policy and supervisory practices. CSBS also collaborated with the Money Transmitter Regulators Association to ensure comprehensive and effective guidance.
