The US Conference of State Bank Supervisors (CSBS) has released the final version of its model regulatory framework for digital currencies.
The organization, comprised of representatives from state-level banking regulatory bodies, released an initial draft version of its proposed digital currency regulations in December. The draft drew from comments made during a subsequent two-month comment period in which both the digital currency ecosystem as well as financial incumbents were able to weigh in on the proposal.
While the framework is only a recommendation – state bank regulators can use it as a basis or to craft rules for the technology – it’s publication will likely play a role in how US states move toward finalizing their approaches to overseeing activities that involve digital currency.
The group recommended that companies involved with third-party exchange or transmission of digital currencies, as well as “services that facilitate the third-party exchange, storage and/or transmission of virtual currency (e.g. wallets, vaults, kiosks, merchant-acquirers, and payment processors)” should fall under the oversight of state bank regulators.
The group wrote:
The text released by the CSBS also included changes to its initial proposal related to permitted types of investment, anti-money laundering compliance, record keeping, supervision and crisis management.
also offers insight into the responses the CSBS received as well as how changes were made to the previous version of the framework.
Definition for 'virtual currency'
The text includes the organization's definition of a "virtual currency" for use by state regulators, which focuses on the unit of account itself rather than the software enabling its use.
The finalized definition reads:
The CSBS noted that one commenter said regulators should adopt common language for this definition "rather than engaging in haphazard reinterpretation of existing laws".
The framework includes recommendations for a nationwide data sharing system based on the Nationwide Multistate Licensing System, a network used for financial institution licensing.
indicated its support for this approach earlier this year, and according to the CSBS, several unidentified companies in the digital currency space have voiced support for the proposal.
The CSBS stated:
The group said that it had altered its previous call for third-party cybersecurity audits to allow for flexibility at the discretion of state regulators.
“CSBS originally drafted a cybersecurity audit requirement, including a provision that the audit be performed by a third party. CSBS recognizes this can be costly and potentially premature for startups. CSBS also recognizes a third party audit is important for riskier institutions. Accordingly, the final framework was modified to provide more flexibility,” the group wrote.
Now, the model suggests that regulators decide on a case-by-case basis whether a third party audit is required or if an internal audit prepared by the licensee would be sufficient.
The CSBS also indicated that it had received support from comment submitters for a regulatory “onramp” that would allow certain entities to receive provisional approval, an approach adopted by New York in its BitLicense framework.
In its final regulation model, the CSBS declined to include such language, stating that “state regulators understand the argument in favor of legal and regulatory incubation”.
The final version of the CSBS Model Regulatory Framework can be found below:
Paperwork image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.