The first step in obtaining a crypto licence in the U.S. – MSB registration

Is registration as an MSB required?

In our recent article: “Overview of regulatory requirements for cryptocurrency companies in the U.S.” we discussed the general requirements for obtaining a cryptocurrency license in the United States. Today we are going to talk about the first step on the way to a legal crypto business in the U.S. – registering as a Money Services Business; (“MSB“).

MSB is a type of Money Services Business, which includes a large category of activity, specifically money transfers (most states require a Money Transfer Licence (“MTL“) to provide cryptocurrency services). Under the MSB activity type, multiple licences can be obtained depending on the services potentially offered, including MTL. 

Financial Crimes Enforcement Network (“FinCEN“) is the primary US AML/CFT regulator (the primary AML/CFT law is the US Bank Secrecy Act (“BSA“)). FinCEN exercises its regulatory functions primarily within the AML/CFT framework and regulates all MSBs. It is FinCEN that, through its regulations, treats most cryptocurrency-related companies in the United States as money transmitters and requires such companies to register as MSBs.

On 16 March 2013, FinCEN issued Guidance FIN-2013-G001 in response to questions regarding what constitutes MSBs and, in particular, cryptocurrency transfer entities. This guidance clarifies the application of FinCEN’s rules to persons managing, exchanging, or using virtual currencies.  In this guidance, FinCEN stated that virtual currencies are similar to traditional currencies. MSBs that engage in virtual currency activities are defined as money transmitters and must register with FinCEN as MSBs and comply with all relevant AML/CFT regulations.

Section 18 of the US federal law USC § 1960 prohibits conducting a money transfer business without a licence. A violation can occur if an MSB company fails to register with FinCEN as an MSB. By the way, Binance recently agreed to this very violation in a lawsuit with US federal agencies, which you can read about here: “The biggest corporate fine in history – what’s next for Binance“.

Thus, all cryptocurrency companies that operate in the U.S. or provide services to U.S. citizens should first register as MSBs with FinCEN.

Who is also an MSB?

According to FinCEN, an institution that provides the following goods or services will be considered an MSB:

  • Money orders or traveler’s cheques: in the United States, an institution is considered a provider or seller of money orders or traveler’s cheques; if it is a traveler’s cheque or money order that exceeds $1,000 per day, it will be considered an MSB.
  • Money transfer service: institutions that transfer currency or other monetary units from one person to another.
  • Cheque cashing: a person or entity that accepts a cheque or similar monetary instruments in exchange for currency of at least US$1,000 on behalf of another individual. However, it does not apply to businesses that provide prepaid access in exchange for a cheque or monetary instrument; these businesses use monetary instruments as a form of payment for any goods or services; and entities that hold customer cheques as security for loan repayment.
  • Currency exchange: a forex broker is a person or entity that accepts currencies of other countries that exceed $1,000 on behalf of another individual.
  • Prepaid Access Vendor: this item refers to prepaid access providers and vendors. Typically, this category of the service provider is an organization that receives money from customers. This money can be subsequently redeemed by customers through an electronic device or similar means.

With some exceptions, every money services business (MSB) must register with FinCEN. For more details on who is an MSB, click here.

How do I submit an application?

MSB filings are made through the BSA E-Filing System (“BSAES“). FinCEN maintains the BSAES website, which allows the following types of forms to be filed with FinCEN:

  • FinCEN’s Currency Transaction Report (FinCEN Form 112);
  • FinCEN designation of an exempt person (FinCEN Form 110);
  • FinCEN Suspicious Activity Report (FinCEN Form 111);
  • FinCEN registration of a money services business (FinCEN Form 107);
  • a report of foreign bank and financial accounts (FinCEN Form 114);
  • a report of cash payments in excess of $10,000 received in a trade or business (FinCEN Form 8300).

Accordingly, Form 107 must be completed and filed to register as an MSB.

Requirements for application?

The following requirements must be met in order to successfully register as an MSB:

  • Have a registered account on the BSAES website. Visit the BSA E-Filing System website. Click Become a BSA E-Filer and follow the instructions to register yourself as an individual user or your organisation as a controlling user. The registration process will only take a few minutes.
  • Complete Form 107. To register as an MSB, you must complete Form 107. The form, “Money Services Business Registration, FinCEN Form 107,” must be completed and signed by the business owner or controlling person and filed within 180 days of the MSB’s founding date. It is recommended that the form be reviewed ahead of time and answers prepared for quick completion in the BSAES system.
  • Designate AML Officer. To complete Form 107, designate an officer who will be responsible for compliance.
  • Appoint an agent of the foreign company. The foreign company must appoint an agent to represent the company in the U.S. and keep all records at a physical location in the U.S. The foreign company must appoint an agent to represent the company in the U.S. and keep all records at a physical location in the U.S..
  • Appoint a controlling person for the company. This person can be the agent in the case of a foreign company.
  • Meet the registration deadline. For any person who becomes an MSB after 31 December 2001, the deadline for initial registration is the end of the 180-day period beginning on the day after the date of incorporation. 
  • Cost of Registration. There is no cost to use BSAES, including filing Form 107 to register as an MSB.
  • Have the appropriate AML/KYC documentation. At the time of application, the company should already have documentation developed that meets the AML/KYC standards in the U.S. as reflected in the Bank Secrecy Act, Anti-Money Laundering Act of 2020 and PATRIOT.
  • Provide a list of its agents, if any, at the time of registration. An MSB that is required to register and has agents must prepare and maintain a list of its agents. This list must be updated annually.

What to do next?

FinCEN usually takes 2 weeks to review your application, after which you will become an MSB and will be required to comply with AML/CFT requirements (you will have additional reporting obligations, reporting suspicious transactions, transactions that exceed a certain amount, etc.).

After obtaining MSB registration, you can apply for an MTL license in your chosen state(s) to legally offer your cryptocurrency services in the future. We will talk about the process of obtaining an MTL in the next article!

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.  


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Crypto Licensing in El Salvador: A Pathway to Financial Innovation

El Salvador is a well-known and favorable financial center for cryptocurrencies thanks to its groundbreaking decision:

it became the first country in the world to accept bitcoin as legal tender on June 9, 2021, as stipulated in the Bitcoin Law. This historic decision has attracted global attention and investment, positioning the country as a center for digital innovation and financial technology. The government’s proactive approach to creating a regulatory framework for cryptocurrencies has helped to create an attractive environment for blockchain startups and businesses. In particular, it was a positive step that on January 11, 2023, El Salvador’s Legislative Assembly adopted the Digital Asset Issuance Law (DAI Law) as a significant element of the country’s technological and financial innovation program.

Benefits of obtaining a Crypto License in El Salvador

  1. Pioneering in the crypto landscape: El Salvador stands as a trailblazer in Latin America by setting up a pioneering regulatory structure for cryptocurrencies.
  2. Tax incentives: El Salvador extends a host of tax advantages to crypto-related activities. Notably, the nominal value and earnings derived from digital assets are entirely exempt from taxation. 
  3. Facilitating access to banking services: El Salvador has a unique advantage in this regard, as several crypto banks and financial institutions offer banking services to crypto companies on the condition that they comply with certain conditions and regulations, which is rare on a global scale.
  4. Gateway to a сrypto-friendly market: El Salvador’s groundbreaking move of legitimizing Bitcoin as a legal tender and issuing crypto licenses has paved the way for the crypto industry to flourish, luring new players – crypto exchanges, wallet providers, payment systems.
  5. Navigating cryptocurrency legislation with confidence: Obtaining a cryptocurrency license allows companies to clearly comply with legal requirements including, for example, know-your-customer (KYC) and anti-money laundering (AML) rules. Compliance with these requirements builds trust with customers and partners, and ensures the safety and transparency of the crypto environment.

Types of crypto licenses in El Salvador

There are two types of crypto licenses in El Salvador:

  • Bitcoin Service Provider (BSP) License. The BSP license is required for persons that provide various Bitcoin-related services, such as exchanging Bitcoins for fiat money, making payments in Bitcoins, or storing Bitcoins on behalf of clients. Under the Bitcoin Act, the issuance of a BSP license is handled by the Central Reserve Bank (Banco Central de Reserva; BCR).

The BSP shall maintain:

  • an AML program that complies with the AML Law and international best practices formulated by the FATF;
  • accounting records that fairly reflect the BSP’s assets, liabilities and net worth, as well as customer account records that reflect the data received from each customer and information related to each transaction requested by the customer;
  • a cybersecurity program;
  • a policy of transaction limits within its platforms that is consistent with its user due diligence, comprehensive risk management and money laundering and other financial crime prevention programs.
  • Digital Asset Service Provider (DASP) License. This license is required for persons that provide a variety of services related to other cryptocurrencies. Under the DAI Law, registration of DASPs is handled by the National Digital Assets Commission (Comisión Nacional De Activos Digitales; CNAD).

Requirements for the DASP:

  • Offer and provide digital asset services if it is registered with the CNAD of El Salvador.
  • Any natural person must present their Unique Identity Document or residence card and indicate their place of domicile in the country. Any legal entity must present their legal personality. In the case of foreign legal entities domiciled in another country, jurisdiction or territory, they must form a corporation or branch domiciled in El Salvador and duly registered with the the National Registration Center (Centro Nacional De Registros; CNR) and present the legal personality of that company to the CNAD.
  • Provide a detailed description of its organizational structure, including but not limited to names, positions, and specific functions.
  • Carry out activities with honesty and integrity, according to the guidelines of good commercial conduct and ethical standards established by the CNAD.
  • Implement appropriate cybersecurity standards on its platform.
  • Manage and control activity effectively, and carry it out with due skill, care and diligence, taking into account the risks to its activity and clients.
  • Have systems to prevent, detect and disclose the risks of financial crimes, such as money laundering and terrorist financing.
  • Pay a one-time registration fee and then an annual fee for the renewal of the registration during the first quarter of each year, regardless of the initial registration date.

Registration of a crypto company in El Salvador

The most popular legal form of the company is a Limited Liability Company (Sociedad de Responsabilidad Limitada; SRL). The formation of SRL is regulated by the El Salvador Commercial Code (Código de Comercio).

Requirements for the SRL:

  • Name: The company name is formed from the name of one or more partners. The name must be different from the name of any existing company. It must have the word “Limitada” or its abbreviation “Ltda”.
  • Share capital: The share capital may not be less than 2000 US dollars; 5% of the share capital must be deposited in a corporate account at the time of company incorporation.
  • Minimum amount of shareholders: at least two shareholders must be in the company.

Steps for a SRL formation:

  1. Choosing a company name and registering it with the Commercial Registry of El Salvador.
  2. Preparation of documents (copies of passports of the board of directors, proof of physical address, etc).
  3. Submitting an application for registration to the Commercial Registry of El Salvador. Once the application is submitted, it will be reviewed by the competent authorities, and if the company is registered, you will be issued an official Сertificate of registration.
  4. Opening of a corporate account parallel to the registration. The company needs to contribute at least 5% of the share capital (required share capital is 2000 US dollars).
  5. Additional registration with the public authorities such as the Ministry of Finance (Ministerio de Hacienda), the Salvadoran Social Security Institute (Instituto Salvadoreño del Seguro Social), and the Ministry of Labor (Ministerio De Trabajo Y Previsión Social).
  6. Obtaining a Crypto License in El Salvador.

Conclusions

El Salvador’s innovative approach to cryptocurrency regulation and the introduction of the DAI Law have positioned the country as a favorable destination for crypto-related activities. The benefits of obtaining a Crypto License in El Salvador are varied, making it an attractive prospect for entrepreneurs and businesses looking to participate in the digital financial landscape.

Moreover, El Salvador offers two types of crypto licenses – the BSP License and the DASP License, each with its specific requirements and regulatory oversight. Companies interested in registering in El Salvador generally choose a Limited Liability Company (SRL) as their legal structure. There are a few steps for its formation, including registration and opening a corporate account.

The process of obtaining a Crypto License in El Salvador is part of a broader strategy by the government to encourage technological and financial innovation, making the country a promising hub for the evolving world of digital assets.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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