Louisiana Approves Virtual Custody Services, Proposes Virtual Currency Business Licensing Rules | Sheppard Mullin Richter & Hampton LLP
Recently, Louisiana lawmakers and regulators took steps to legalize operations in the state involving virtual currencies. On June 15, the Governor of Louisiana signed a bill that, effective August 1, 2022, will allow financial institutions and trust companies to provide virtual currency custody services to their customers as long as they satisfy certain risk management and compliance requirements. On June 20, the Louisiana Office of Financial Institutions (OFI) released proposed rules on the licensing and regulation of virtual currency businesses in the state pursuant to the Louisiana Virtual Currency Business Act, which came into effect. effective August 1, 2020.
Virtual Currency Custody Services:
In order to legally provide virtual currency custody services under the new Louisiana law, the entity must be a financial institution or trust company, and allows these entities to use third-party providers. The new law defines “financial institution” as a deposit-taking institution insured by the federal government and licensed under the laws of any state or federal law. The law allows these entities to legally perform custodial services involving virtual currencies if they comply with certain “self-monitoring” requirements, such as: (1) implementing an effective risk management system and controls to measure and monitor relevant risks associated with digital assets such as virtual currency; (2) maintain adequate insurance coverage; and (3) maintain a monitoring program to monitor any third party service provider it uses to provide the custody services.
Virtual Currency Commercial License:
The new OFI regulations establish several important rules related to operating a virtual currency business in the state, such as: (i) reciprocity of licenses with other states, (ii) reviews of licensees, (iii) bonding requirements and (iv) prohibition of unfair, deceptive or fraudulent practices. It also establishes the OFI’s enforcement authority to regulate compliance with the law and provides an avenue for companies that already operate virtual currency businesses in the state. If an entity is already engaged in virtual currency business activity in the state, it may continue to operate legally in the state if it applies for a license or registration with the state within 90 days of the date of entry into force of the regulations.
put into practice: Louisiana is the latest state to allow virtual currency custodial services (we discussed a similar provision in other states in a blog post here.) While the OCC has already instituted measures allowing Nationally chartered banks to offer virtual currency custody services under federal law, banks have shown a reluctance to operate in the space without the certainty of federal legislation. The passage of Louisiana laws and regulations, however, provides a way for virtual currency businesses to seek certainty under state law. If operating in Louisiana, virtual currency businesses must ensure they are compliant with new laws and regulations.