In the rapidly evolving world of digital finance, the lines between traditional financial institutions and crypto-focused entities are increasingly blurred. This article aims to clarify the distinctions between licensed money transmitters, Money Services Businesses (MSBs), trust companies, and banks, with a particular focus on how these classifications apply to businesses dealing with both cryptocurrencies and fiat currencies.

Licensed Money Transmitters

Licensed money transmitters are entities authorized to transfer funds, including fiat currencies and cryptocurrencies, from one party to another. Key points include:

• State-level licensing: In the U.S., money transmitters must obtain licenses from each state in which they operate. This process can be complex and time-consuming, often requiring substantial legal and compliance resources.
• Varying definitions: The definition of "money transmission" varies significantly by state, particularly in regard to cryptocurrency. Some states explicitly include cryptocurrency activities, while others only consider it money transmission if fiat currency is involved at any point in the transaction.
• Compliance requirements: Money transmitters must adhere to strict AML/KYC regulations, maintain certain capital reserves, and often post surety bonds. The specific requirements vary by state.
• Cryptocurrency inclusion: Many states have expanded their definitions to include cryptocurrency transfers, but the approach is not uniform. Some states have explicitly included virtual currency in their money transmission laws, while others do not regulate money transmission at all.
• Regulatory reporting: Money transmitters typically must file regular reports with state regulators, including transaction volumes, financial statements, and any material changes to their business.

Example: A crypto exchange allowing users to send cryptocurrencies to other users would likely need money transmitter licenses in the states it serves. However, if the same exchange only facilitated crypto-to-crypto transactions without touching fiat, it might be exempt from money transmission requirements in some states but not others.

Money Services Businesses (MSBs)

MSBs encompass a broader category of financial services providers, including:

• Currency dealers or exchangers
• Check cashers
• Issuers of traveler's checks or money orders
• Providers of prepaid access
• Money transmitters

Key differences from money transmitters:

• Federal registration: MSBs must register with FinCEN at the federal level within a specified timeframe of starting operations. This is separate from state-level money transmitter licensing.
• Broader scope: Not all MSBs are money transmitters, but all money transmitters are MSBs. For example, a check-cashing business is an MSB but not necessarily a money transmitter.
• Cryptocurrency consideration: FinCEN guidance clarifies that businesses dealing primarily in cryptocurrencies may still be classified as MSBs if they accept and transmit "value that substitutes for currency."
• Regulatory reporting: MSBs must file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) with FinCEN, in addition to maintaining robust AML programs.
• International operations: MSBs operating internationally must comply with the FinCEN "Travel Rule," requiring the collection and transmission of certain information for transactions over a specified threshold.

Example: A Bitcoin ATM operator would likely be classified as an MSB, even if it doesn't facilitate direct transfers between users. It would need to register with FinCEN and comply with federal MSB regulations, in addition to potentially needing state money transmitter licenses.

Trust Companies

Trust companies play a unique role in the crypto space:

• State-chartered: Unlike federal banks, trust companies are chartered at the state level. This can provide more flexibility in some cases, particularly for crypto-focused businesses.
• Custody services: Many offer cryptocurrency custody solutions for institutional clients. This has become a significant area of growth as institutional investors enter the crypto space.
• Regulatory flexibility: Some states have created special-purpose trust charters for crypto businesses. These charters are designed to accommodate the unique aspects of cryptocurrency businesses.
• Limited services: Trust companies typically can't offer lending or take deposits like full-service banks. However, they can often provide a wider range of services than money transmitters.
• Asset protection: They often provide enhanced legal protections for held assets, which can be particularly attractive for large cryptocurrency holdings.
• Capital requirements: Trust companies generally have higher capital requirements than money transmitters but lower than full-service banks.
• Regulatory oversight: Trust companies are subject to regular examinations by state banking regulators, which can be more intensive than the oversight of money transmitters.

Example: A company offering cold storage solutions for large cryptocurrency holdings might operate as a trust company. This would allow them to serve institutional clients and potentially offer additional services like staking or governance participation for held assets.

Banks

Traditional banks are entering the crypto space, but with important distinctions:

• Federal oversight: Banks are primarily regulated at the federal level by agencies like the OCC, FDIC, and Federal Reserve. This can provide more regulatory certainty but also comes with intense scrutiny.
• Full-service capabilities: Banks can offer a wide range of services, including deposits, loans, and investments. This allows for more comprehensive financial services offerings that incorporate cryptocurrencies.
• Cryptocurrency approach: Many banks are cautiously exploring crypto services, often through partnerships or subsidiaries. Regulatory guidance has clarified that national banks may provide cryptocurrency custody services and hold stablecoin reserves under certain conditions.
• Regulatory hurdles: Banks face significant scrutiny when dealing with cryptocurrencies. They are typically required to notify their supervisors before engaging in crypto-related activities.
• Custody and trading: Some banks are beginning to offer cryptocurrency custody and trading services.
• Stablecoin initiatives: Several banks are exploring or launching their own stablecoins.
• Deposit insurance: Currently, government deposit insurance programs typically do not cover cryptocurrencies held by banks. This creates challenges for banks looking to offer crypto services alongside traditional banking products.
• Capital requirements: Banks have the highest capital requirements of the entities discussed here, which can impact their ability to scale crypto services quickly.

Example: A national bank offering cryptocurrency custody services to its wealth management clients would operate under its existing banking charter, with additional regulatory considerations for the crypto offerings. It would need to demonstrate robust risk management practices and may need to hold additional capital against these activities.

Regulatory Overlap and Challenges

The cryptocurrency industry often blurs the lines between these categories:

• Hybrid models: Some entities may qualify as multiple types, such as an MSB that also operates as a trust company. This can lead to complex compliance requirements.
• Evolving regulations: State and federal regulators are continually updating guidelines, sometimes leading to conflicting requirements. For example, there are ongoing debates about whether certain cryptocurrencies should be classified as securities or commodities. The answer to this and other questions, has significant impacts to a cryptocurrency business.
• International considerations: Businesses operating globally must navigate varying classifications and requirements across jurisdictions. A business might be considered a Virtual Asset Service Provider (VASP) under FATF guidelines, an MSB in the U.S., and an Electronic Money Institution in the EU.
• Emerging categories: New regulatory classifications are being developed to address the unique aspects of cryptocurrency businesses. These include special-purpose state charters and proposed federal categories for certain types of stablecoin issuers.
• Regulatory arbitrage: The varying requirements across different classifications and jurisdictions can lead to regulatory arbitrage, where businesses choose particular structures or locations to minimize regulatory burden. This usually leads to issues as seen with FTX and other platforms that have optimized for the least restrictive regulatory frameworks.
• Enforcement actions: Recent enforcement actions highlight the regulatory risks faced by cryptocurrency businesses operating in uncertain regulatory environments.

Regulatory Reporting

The reporting requirements vary significantly across these categories:

• Money Transmitters: Must typically file regular reports with state regulators, including transaction volumes and financial statements.
• MSBs: Required to file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) under certain conditions.
• Trust Companies: Often required to submit detailed financial reports and undergo regular examinations by state banking regulators.
• Banks: Subject to the most comprehensive reporting requirements, including regular financial reports, stress tests (for larger institutions), and immediate notification of certain material events.

Capital Requirements

Capital requirements also vary widely:

• Money Transmitters: Requirements vary by state but are typically the lowest of the four categories.
• MSBs: Federal MSB registration doesn't impose specific capital requirements, but state-level requirements may apply if the MSB is also a licensed money transmitter.
• Trust Companies: Generally have higher capital requirements than money transmitters.
• Banks: Have the highest capital requirements, determined by complex formulas based on risk-weighted assets.

Consumer Protection

Consumer protection regulations differ across these categories, particularly in relation to cryptocurrency activities:

• Money Transmitters: Often required to maintain surety bonds to protect consumer funds. Disclosure requirements vary by state.
• MSBs: Subject to federal consumer protection laws, but these laws may not fully address cryptocurrency-specific issues.
• Trust Companies: Often have fiduciary duties to their clients, which can provide strong consumer protections. However, these protections may not explicitly cover cryptocurrency activities in all cases.
• Banks: Subject to the most comprehensive consumer protection regulations. However, these regulations are still being adapted to fully address cryptocurrency services.

Conclusion

The regulatory landscape for cryptocurrency businesses in the United States is complex and rapidly evolving. The classifications of money transmitter, MSB, trust company, and bank each come with their own set of regulations, capital requirements, and operational constraints.

For businesses operating in this space, careful consideration of the regulatory landscape is crucial. The appropriate classification can impact everything from compliance costs to the range of services offered. Moreover, as regulations continue to evolve, staying informed and adaptable will be key to success.

Looking ahead, we can expect to see further regulatory developments as lawmakers and regulators grapple with the unique challenges posed by cryptocurrencies. This may include new categories of regulated entities specifically designed for cryptocurrency businesses, as well as updates to existing regulations to more explicitly address cryptocurrency activities.

For now, businesses in this space must navigate a complex web of state and federal regulations, often falling into multiple categories simultaneously. As the industry matures, we may see a more streamlined and cohesive regulatory approach emerge, but until then, robust legal and compliance resources will remain essential for any business operating at the intersection of traditional finance and the crypto economy.