Secretary Bryan A. Schneider with the Illinois Department of Financial and Professional Regulation (IDFPR) has announced the issuance of guidance to establish the regulatory treatment of digital currency under the Illinois Transmitters of Money Act (205 ILCS 657) (TOMA). IDFPR’s guidance focuses on decentralized digital currencies, which are considered electronic mediums of exchange that are not created or issued by a central authority, are not legal tender, and can be used to purchase goods and services or to exchange for other currencies. IDFPR’s guidance follows a commentary period that concluded in January 2017 and takes into account responses received from the public.
The guidance notes, “Digital currencies such as Bitcoin, Dogecoin, Ethereum, Litecoin, and ZCash have raised questions with respect to money transmission and exchange of currency. This guidance outlines the policy of the Department with regards to digital currencies. This guidance expresses the Department's interpretation of TOMA and its application to various activities involving digital currencies. This guidance seeks to establish the regulatory treatment of digital currencies under TOMA as it currently exists.”
It also noted that as the date of the guidance “the Department is not aware of any jurisdiction in which digital currency has status as legal tender or of any digital currency issued by a government’s central bank. As such, digital currencies exist outside the recognition of established financial institutions.”
It further noted that despite being a digital representation of value used as a medium of exchange, digital currencies are not considered money under TOMA because “digital currencies have not been authorized or adopted by a domestic or foreign government as a part of its currency.” A person or entity engaged in the transmission of solely digital currencies, as defined, would not be required to obtain a TOMA license. However, should transmission of digital currencies involve money in a transaction, that transaction may be considered money transmission depending on how the transaction is organized. Any person or entity engaging in a transaction involving both digital currencies and money should request a determination from the Department on whether or not such activity will require a TOMA license.”
One of the activities generally qualifying as money transmission is an exchange involving both digital currency and money through a third party exchanger. The guidance gives the example of a digital currency exchange site that facilitates exchanges by acting as an escrow-like intermediary. The guidance states, “In a typical transaction, the buyer of digital currency sends money to the exchanger who holds the funds until it determines that the terms of the sale have been satisfied before transmitting the funds to the seller. Irrespective of its handling of the digital currency, the exchanger conducts money transmission by receiving the buyer's money in exchange for a promise to make it available to the seller.”
The following are some of the activities that do not qualify as money transmission:
- “Exchange of digital currency for money directly between two parties does not qualify as money transmission. This is essentially a sale of goods between two parties. The seller gives units of digital currency to the buyer, who pays the seller directly with money. The seller does not receive money with the intent to transmit it to another entity or ‘engage in the business of exchanging, for compensation, money of the United States Government or a foreign government to or from money of another government.’”
- “Multi-signature software allows users to distribute authority over his or her digital currency among multiple different actors. This software requires multiple actors to authorize a digital currency transaction before the transaction can be consummated. Specifically, a multisignature provider holds one of two or more private keys needed to authorize transactions. Regardless of how many parties are involved, no money is involved at any point in this transaction, so ‘transmitting money’ does not occur.”
- “Blockchain 2.0 technologies refer to the use of a digital currency’s decentralized or distributed ledger system for non-monetary purposes such as verifying ownership or authenticity in a digital capacity. This technology includes software innovations such as colored coins (i.e. coins that are marked specifically to represent a non-monetary asset), smart contracts (i.e. agreements implemented on a distributed ledger), and smart property (i.e. property that is titled using a decentralized distributed ledger). These uses for nonmonetary purposes may use digital currency as a medium of exchange, but do not involve the exchange or transmission of money or the sale or issuance of a ‘payment instrument’ and as a result ‘transmitting money’ does not occur.”