When Huobi announced that it had obtained the US MSB (Money Services Business) license in 18, it attracted attention and heated discussions in the industry, and also kicked off the compliance process for various exchanges. As STO rules mature under the dynamic supervision of the US SEC, many exchanges have also begun to apply for US MSB and MTL licenses and make compliance arrangements.

In fact, the regulation of financial services institutions in the United States is unique and adoptsTwo-tier regulatory framework, for encryption service providers,Compliance is required at both the federal and state levels :

Federal compliance: MSB license

Currently at the federal level, cryptocurrency exchanges and cryptocurrency issuers are defined as money service providers by FinCEN (the Financial Crimes Enforcement Network, an agency under the U.S. Treasury Department).

The "Application of FinCEN's Regualations to Persons Administering, Exchanging, or Using Virtual Currencies" states that digital asset "managers" (such as asset issuers) and "exchangers" (such as exchanges) that provide services to Americans are MSBs under the U.S. Bank Secrecy Act (BSA) and are required to register with FinCEN within 180 days of establishment.

MSB is the abbreviation of Money Services Business, which is regulated by FinCEN and requires a registration and licensing system.

Therefore, crypto service providers need to register with FinCEN as MSBs and comply with the Bank Secrecy Act and anti-money laundering and counter-terrorist financing requirements.

State-level compliance: MTL license

At the state level, the crypto asset regulatory regulations introduced by each state are different (such as New York State's Bitlicense).

Crypto service providers must comply at the state level by applying for MTL licenses (Money Transmitter Licensing) in each state, and can apply selectively based on demand.

License Application Guide

1. How do encryption service providers apply for a license?

The MSB license is applicable to international remittances, foreign exchange, currency transactions/transfers, ICO issuance, provision of prepaid items, issuance of traveler's checks and other businesses.

The MTL license is applicable to digital currency transactions, currency-to-currency transactions, fiat currency transactions and other businesses.

Having an MSB does not mean that you can conduct cryptocurrency trading business in compliance with regulations in the United States. Therefore, you must first apply for an MSB from FinCEN, and then apply for an MTL license in each state.

2. What are the application requirements for MSB and MTL licenses?

• Register a local company and open an account in the United States
  
• Apply for an MSB license from FinCEN

The MSB license is common in all 52 states. No deposit is required for the application. You can apply for an MSB license from FinCen by registering a local company in the United States and applying for a tax number.

• Apply for an MTL license in each US state

An MTL license requires a deposit, which is different in each state. After registering a local company in the United States, you need to open a company account and pay the deposit as required, and then submit an application for an MTL license to each state.

STO Compliance Guide

STO is regulated by the US SEC

If cryptocurrencies have securities attributes or the trading of tokens with securities attributes, they will be supervised by the U.S. Securities and Exchange Commission (SEC).

The SEC (U.S. Securities and Exchange Commission) released blockchain token regulatory guidelines in April 2019, using the Howey test to classify cryptocurrencies to determine whether they have securities attributes.Currently, except for Bitcoin, Ethereum and stablecoins, which are clearly non-security tokens, other tokens may be judged as securities.Compliant cryptocurrency exchanges must also make careful choices when choosing the types of token transactions to avoid possible security tokens.

In addition, the SEC is also responsible for reviewing applications for cryptocurrency ETFs.So far, the SEC has only approved applications for Bitcoin futures ETFs, but has not given the green light to Bitcoin spot ETFs that track the price of physical Bitcoin. In addition, cryptocurrency trust products with a smaller risk range have been approved by the SEC, such as Grayscale's GBTC and ETHE, both of which are products reporting to the SEC.

The SEC is also concerned about the regulation of cryptocurrency trading.The Digital Commodity Exchange Act of 2020 mentions that when trading digital commodities, the requirements of securities laws must be complied with.

STO needs to apply for exemption from the US SEC

In 2012, the U.S. Congress passed the JOBS Act (Jumpstart Our Business Startups Act), which added new exemptions to the registration system for public offerings of securities under federal securities laws.Based on various laws, the SEC has formulated a series of specific exemption rules such as Regulation D, Regulation A+, and Regulation S.

At present, the US STO practice mainly obtains registration exemption based on Regulation D, Regulation A+, and Regulation S. Specifically:

Regulation D It is suitable for private financing or public fundraising for qualified investors. For STO, it is only applicable to its private placement stage and cannot be publicly raised from general investors.

Regulation A + Also known as a "mini IPO," it has a total financing limit of up to $5000 million. However, before financing can begin, it is necessary to obtain advance approval (Qualification) for securities issuance from the SEC or the state. The trading volume of securities in the secondary market in the first year of issuance must not exceed 30% of the total issue price. For projects with a financing amount exceeding $2000 million, the financing party is also required to fulfill strict continuous disclosure obligations similar to IPOs.

Regulation S It is mainly aimed at projects that raise funds from overseas investors outside the United States. By issuing securities through this clause, investment and financing can be made to investors outside the United States, and it is not subject to financing limits. It only needs to be filed with the SEC within 15 days after issuance, but is prohibited from being transferred to investors in the United States within one year. At the same time, it is also necessary to comply with regulatory requirements such as investor suitability and pre-issuance conditions in the investor's country.

Regulation D, Regulation A+, and Regulation S have become the main basis for various STO projects to claim compliance, and are usually used in combination:

1. Regulation D completes the private placement phase and “locks up” the tokens sold, and technically prohibits investors in the private placement phase from transferring the tokens they purchased to comply with the lock-up period.

2. Raise funds from investors outside the United States based on Regulation S, or apply to the SEC for permission to conduct a "mini IPO" under Regulation S based on Regulation A+.

In addition to the regulatory requirements of U.S. law, Regulation S also points out that financing must also comply with the relevant regulatory requirements of the investor's country.