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Connecticut Department of Banking Issues Advisory on Money Transmission

The Connecticut State Capitol Building

On July 20, 2022, the Connecticut Department of Banking (the “Department”) issued a Consumer and Industry Advisory on Money Transmission (the “Advisory”).  The Department believes the Advisory was necessary for two reasons.  First, the Department notes the “significant disruption to traditional money transmission systems” caused by the “increased use of technology to enable immediate payment mechanisms” and “the explosion of virtual currency.”  Second, the Department acknowledges that many consumers do “not realize or understand the regulatory landscape that applies” to using money transmitters.

Although the Department cautions that “[e]ach circumstance is unique,” the Advisory provides general guidance on what types of activities and entities must be licensed.  The Advisory lists entities that traditionally provide transmission services like bill payers, payroll processors, and issuers and sellers of prepaid cards and money orders.  It also explains that transmission can occur whenever “a person takes possession or control of monetary value belonging to another person” and either holds it for “a period of time” or transmits it to a third party.  In other words, unless a company falls within an exemption or exception, if it engages in the above activity in Connecticut or with Connecticut companies or individuals, it may need to first obtain a license.

The definition of money transmission was further broadened in 2018 when Connecticut amended its money transmitter statute to encompass transmission activities involving virtual currency.  In the advisory, the Department emphasizes that these statutory amendments cover all types of virtual currencies, stablecoins, and “any other digital asset that is used as a medium of exchange.”  Moreover, the Department points out that providing a virtual currency custodial wallet (i.e., holding virtual currency on behalf of another) or virtual currency ATMs that serve as an intermediary between a buyer or seller are also engaging in money transmission.

Finally, the Department discusses Connecticut’s license application and penalties for unlicensed transmission.  Like many states, licensure goes through the Nationwide Mortgage Licensing System, NMLS, and involves submitting applications for both the entity seeking licensure and all “control persons.”  Beyond these applications and related fees, Connecticut also requires submission of financials, a business plan, the proposed flow of funds, and an Anti-Money Laundering and Bank Secrecy Act (“BSA”) policy, among other documents.  Posting of a surety bond valued at between $300,000 and $1 million is also required.

Seemingly in response to a noted uptick “in the number of entities engaged in unlicensed money transmission activity”—especially Internet transmission services and virtual currency companies—the Advisory ends with a warning: unlicensed transmission brings with it the risk of a $100,000 fine per violation and a felony charge.  And, of course, operating as an unlicensed money transmitter is a federal felony and a violation of the BSA. Companies based in Connecticut or serving customers in Connecticut should be careful to examine this Advisory and their activities to ensure that they are not engaging in money transmission activities that would require licensure.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

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