How to create open lines of dialog with state regulators

May 16, 2022
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If you’re new to the cryptocurrency industry, it may be tempting to see state regulators as adversaries. But your company’s success or failure rests on your ability to see them for who they are — potential allies. 

The learning curve for those entering cryptocurrency business ownership is steep. While there are so many aspects of the business to tackle, regulatory compliance is arguably the most vital, and the most challenging. 

While compliance can be difficult to sort through, there’s one proactive choice that businesses can choose that certainly makes things a bit easier — developing positive relationships with regulators.

Let’s explore.

Why regulations are a genuine challenge

Because the U.S. lacks a cohesive regulatory structure for cryptocurrency, crypto money services businesses (MSBs) must adhere to federal regulations and laws in the states in which they do business. 

At the federal level, the three key cryptocurrency regulators are:

  • Commodities Futures Trading Commission (CFTC): Responsible for regulating commodities. In certain circumstances, crypto may be considered a commodity.
  • U.S. Securities and Exchange Commission (SEC): Responsible for regulating securities, including initial coin offerings (ICOs).
  • Financial Crimes Enforcement Network (FinCEN): Responsible for anti-money laundering enforcement and Bank Secrecy Act (BSA) compliance.

The compliance picture is fuzzier when it comes to state regulatory compliance.

State regulations are tricky

MSBs are required to obtain a Money Transmitter license (MTL) in many states in which they conduct business (in most states, anyone receiving the money to transmit to another location by any means is a money transmitter). State licensure is also a condition of keeping in good standing with FinCEN.

Since there is no overarching license enabling money transmitters to operate in all states, MSBs need to understand their compliance obligations in individual states. In fact, because cryptocurrency has no borders, many crypto MSBs find themselves having to deal with laws and regulators in almost all 50 states. 

This is an arduous task, especially since regulatory interpretation at the state level is subject to change, often without formal notice. Indeed, several states that previously extended so-called “no action” or “no opinion” determinations to certain crypto businesses have since begun requiring them to obtain a money transmitter license. One method of staying current on changes to existing rules and forthcoming legislation is to review FinCEN notices, the Nationwide Multistate Licensing System (NMLS), and state-specific websites. 

But even with all of that in mind, a key strategic component is often missing — the importance of establishing good relationships with state regulators. 

Good relationships lead to good outcomes

A key component of monitoring state regulation updates is to establish and maintain relationships with relevant state authorities in form of an active dialog. These relationships can often provide a significant advantage when it comes to getting ahead of pending legislation.

If you haven’t dealt with regulators before, you may feel unsure about the prospect of reaching out to them proactively. But don’t be afraid to open a dialogue with regulators. It’s important to remember that they are just doing their job, and both parties have the same overarching goal: to achieve a safe, fair, and competitive cryptocurrency marketplace. 

The only way for your business to grow (and stay in business) is for you to compete with legitimate crypto companies. Laws and regulations protect the marketplace from companies with unfair practices. On the other hand, state regulators not only want a level playing field for crypto MSBs, but they also want to protect consumers from unfair treatment. 

build relationships with state regulatorsWhat are the steps?

Here are some steps you can take to create an open dialogue with regulators to help prevent potential regulatory and financial trouble down the road:

  • Understand a regulator’s mission: Viewing things from the regulators’ perspective can help erase any misconceptions you may have about them. Familiarize yourself with how the regulatory agencies are organized, their points of emphasis, how they conduct their exam activities and their consequences for non-compliance. This can help you understand their priorities, how they think and why specific requirements are in place.  
  • Keep the lines of communication open: Take the first step and set up an introductory meeting with regulators in relevant states. Tell them you want to work with them, not against them. Demonstrate a willingness to work with them to help the cryptocurrency marketplace succeed. Schedule regular meetings so you can build a lasting relationship. Some state regulators, like the California Department of Financial Protection & Innovation (DFPI), hold office hours for entrepreneurs, financial tech innovators, consumers, and advocates. Consistently communicating with regulators enables you to stay up-to-date on changes to cryptocurrency regulations or forthcoming legislation. Ask their advice on any changes you plan to make to avoid any problems later.
  • Be clear and transparent: Don’t give regulators a reason to mistrust you. Keep all your promises. Listen to what the regulator wants and answer their questions clearly and honestly. Respond to any requests quickly. Ensure you keep accurate and precise documentation of your financial transactions and be prepared to provide it to regulators when asked. If you make a mistake, be upfront and truthful. Self-disclosing an error is far better than regulators discovering the issue later. When regulators believe a business is being straightforward and trying to do the right thing, you may benefit from this established trust in certain situations.
  • Show respect: Regulators are human beings trying to do their job to keep the cryptocurrency market safe and fair. Show them the respect you expect them to show you. Always be friendly and cooperative and try to get to know them. Treat regulators as you would treat your customers. If you disagree, don’t lob insults or accusations at the regulator, directly or indirectly (i.e., social media). You will only make things worse for your business going forward. Developing a relationship built on mutual respect will be beneficial for your business in the future. Also, keep in mind people in different state agencies often know each other, so word will spread on how you treat people and conduct yourself. 

Key takeaways

It’s important to remember that regulators aren’t purposely trying to put up roadblocks to your business. The regulations are being put in place to protect consumers and the wider marketplace that your business is a part of.

As noted in this article, taking the time to open a dialogue with state regulators will help you understand their perspective. It will also help future interactions go more smoothly, which can only be a positive for your business.

As cryptocurrency becomes more prevalent, states will continue to enact new regulations to protect consumers, which means more regulatory obligations for crypto MSBs. It will be incumbent upon crypto business owners to ensure compliance with the unique money transmitter laws and requirements in each of the states in which they operate.

Of course, keeping track of all the state regulations is time-consuming and difficult to scale. That’s why ComplyFit monitors changes to MTL reporting requirements in all 50 states, as well as Puerto Rico and the District of Columbia, providing real-time updates.

In addition to updating MTL requirements, ComplyFit streamlines many day-to-day compliance tasks for financial institutions, including reporting and recordkeeping.

If your small business is struggling to stay on top of all the changing regulatory and compliance obligations, we urge you to try ComplyFit here.

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