Are You Illegally Transmitting Money? A Legal Analysis of Token Issuance and Conversion Under Money Transmitter Laws
Ignorance of Money Transmitter Laws Can Destroy Your Tokenized Project
Startups launching tokenized platforms often prioritize technological innovation and product-market fit, leaving regulatory compliance as an afterthought. However, the issuance and conversion of tokens may trigger federal and state money transmitter licensing obligations. Noncompliance with these requirements can result in severe penalties, enforcement actions, or even cease-and-desist orders from state regulators and the Financial Crimes Enforcement Network (FinCEN).
This article examines the complex legal distinctions between issuing tokens, converting them, and transmitting funds. It further explores the circumstances under which token-related activities may constitute money transmission under U.S. law and provides essential compliance considerations for founders and legal counsel.
What Is a Money Transmitter?
Under the Bank Secrecy Act (BSA), as interpreted by FinCEN, a money transmitter is a category of Money Services Business (MSB) that receives funds from one party and transmits them to another, or to a different location or recipient, by any means. Many state laws adopt similar definitions, though specific requirements may vary widely across jurisdictions.
Crucially, an entity may be deemed a money transmitter even if:
It does not possess a banking license;
It does not charge a fee for the transmission of funds;
The transmission involves digital tokens rather than fiat currency.
Token Issuance vs. Conversion: Why the Distinction Matters
Token Issuance
The mere issuance of a token, particularly when classified as a utility token with no fiat-pegged value, does not automatically render the issuer a money transmitter. Nevertheless, the legal risk increases under certain conditions, including:
When the token is used to represent or redeem fiat currency or equivalents;
When the issuer redeems tokens in exchange for cash, stablecoins, or fiat-backed instruments;
When the tokens are transferable to third parties either within or outside the issuer’s ecosystem.
Token Conversion
Facilitating the conversion of one token to another—or to fiat currency or stablecoins—can implicate money transmission regulations. This is particularly the case where:
The platform exerts control over the flow or custody of funds;
The conversion mechanism facilitates the transfer of value between users or accounts;
The tokens being converted have liquidity or redeemability outside the platform.
Regulatory Guidance from FinCEN and State Authorities
FinCEN Guidance (2019)
FinCEN has clarified that the mere act of creating or issuing a convertible virtual currency (CVC) does not, in itself, trigger money transmitter obligations. However, if a platform enables users to transmit value to others through the use of CVCs, then such a platform may be engaged in regulated money transmission.
State Law Variability
State-level regulation of virtual currency activities is inconsistent, making jurisdictional analysis critical. Notable examples include:
New York: The BitLicense framework imposes strict licensing requirements on a broad spectrum of virtual currency activities.
California: Recent legislation has expanded the regulatory scope of the Department of Financial Protection and Innovation (DFPI) to include digital financial assets.
Florida: The state has actively pursued enforcement actions against virtual asset platforms, even in the absence of fully developed regulatory guidelines.
Common Startup Use Cases That May Trigger Money Transmitter Licensing
Several token-based activities, commonly employed by startups, may fall within the ambit of money transmission laws. These include:
Token swaps that allow the exchange of value between users or across different wallets;
The issuance of stablecoins that are redeemable for fiat currency or have equivalent functionality;
Platforms offering staking, yield farming, or interest-bearing accounts involving user deposits and withdrawals;
NFT marketplaces with integrated wallets enabling fiat on-ramps or off-ramps for digital assets.
Each of these use cases must be assessed carefully, as they may necessitate licensing or registration at both the federal and state levels.
Penalties for Noncompliance
Failure to comply with money transmitter laws can have devastating consequences for a token project. Potential penalties include:
Significant civil monetary fines imposed by FinCEN or state authorities;
Issuance of cease-and-desist orders leading to business disruption or suspension of operations;
Criminal prosecution under federal law, including up to five years of imprisonment pursuant to 18 U.S.C. § 1960;
State-level enforcement actions, including injunctions, administrative penalties, and reputational harm.
Compliance Strategies for Founders
To mitigate legal exposure, founders and platform operators should adopt a proactive and jurisdiction-specific compliance strategy. Key steps include:
Conducting a Jurisdictional Analysis: Evaluate the locations of users and whether activities conducted in those states require licensure.
Minimizing Platform Custody: Structure the platform to avoid taking possession or control of customer funds or value.
Restricting Transferability: Where feasible, limit the ability of users to transfer tokens between accounts or to third parties unless compliance controls are in place.
Obtaining Formal Legal Opinions: Secure written legal opinions from counsel addressing whether proposed activities constitute money transmission.
Engaging with Regulators: Maintain transparency and open lines of communication with regulators to reduce enforcement risk and demonstrate good faith compliance.
The legal implications of issuing and converting digital tokens are complex and evolving. Founders must recognize that their platforms may unintentionally engage in regulated money transmission, especially as functionality and user engagement increase. Compliance should not be viewed as optional, but as a core element of legal risk management.
To assess whether your token platform or product requires money transmitter licensing, consult experienced legal counsel. Contact our office today at 786.461.1617 to schedule a compliance consultation.
