Legislature(2021 - 2022)BARNES 124
04/22/2022 09:00 AM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB404 | |
| Board of Chiropractic Examiners | |
| HB405|| HB406 | |
| HB408 | |
| HB392 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HB 333 | TELECONFERENCED | |
| += | HB 405 | TELECONFERENCED | |
| += | HB 406 | TELECONFERENCED | |
| *+ | HB 408 | TELECONFERENCED | |
| += | HB 91 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 404 | TELECONFERENCED | |
| += | HB 392 | TELECONFERENCED | |
HB 408-MONEY TRANSMISSION; VIRTUAL CURRENCY
9:58:04 AM
CO-CHAIR FIELDS announced that the next order of business would
be HOUSE BILL NO. 408, "An Act relating to the business of money
transmission; relating to money transmission licenses, licensure
requirements, and registration through the Nationwide Multistate
Licensing System; relating to the use of virtual currency for
money transmission; relating to authorized delegates of a
licensee; relating to acquisition of control of a license;
relating to record retention and reporting requirements;
authorizing the Department of Commerce, Community, and Economic
Development to cooperate with other states in the regulation of
money transmission; relating to permissible investments;
relating to violations and enforcement of money transmission
laws; relating to money transmission license exemptions;
relating to payroll processing services; repealing currency
exchange licenses; and providing for an effective date."
CO-CHAIR FIELDS noted that HB 408, a bill by request of the
governor, addresses issues of transparency and financial
integrity. He said the bill was developed by staff at the
Department of Commerce, Community, and Economic Development
(DCCED). He invited the department to explain the bill.
9:58:31 AM
ROBERT SCHMIDT, Director, Division of Banking and Securities,
Department of Commerce, Community, and Economic Development
(DCCED), on behalf of the governor, introduced HB 408 by way of
a PowerPoint presentation titled "Alaska Uniform Money
Transmission Modernization Act HB 408 / SB 238," dated 4/11/22.
He recounted that in 1880 a person wanting to wire $20 to
someone would give the $20 to a money transmitter, say, Western
Union, and place faith in Western Union that the $20 would reach
the other person minus a pre-determined fee. That act of trust
placing money in the hands of others, he continued, resulted in
money transmission becoming regulated. Today, he related, the
Division of Banking and Securities serves as the primary
regulator for over 150 money transmitters in Alaska, and these
money transmitters follow the Alaska Uniform Money Services Act
(AS 06.55), passed in 2007 and implemented in 2008.
MR. SCHMIDT displayed slide 2, "Introduction." He said HB 408
would amend and modernize the Alaska Uniform Money Services Act,
which provides the legal framework for money transmission
functions, including currency exchange; transferring or wiring
of money; and loading and reloading of payment instruments,
including stored value cards. When passed in 2007, he stated,
the Act had not contemplated virtual or cryptocurrencies like
Bitcoin, nor the rate of money service business expansion and
innovations; HB 408 would update the licensing, recordkeeping,
and enforcement provisions to support these business activities
and protect Alaska consumers. Mr. Schmidt further specified
that HB 408 would adopt pertinent sections of the Uniform Money
Transmission Modernization Act, which was developed by state
regulators, the Conference of State Bank Supervisors (CSBS), and
with input and participation from industry stakeholders. He
related that a letter of unconditional support of HB 408 has
been received from the Money Service Business Association of
America addressed to the co-chairs.
10:02:40 AM
MR. SCHMIDT proceeded to slide 3, "What is covered by the 2008
Act?" He explained that when the current Act went into effect
in 2008, money transmission was sending a wire transfer at a
local grocery store or purchasing a money order or traveler's
checks at a bank. This bill, he continued, would modernize
Alaska's money transmission laws to include cryptocurrency, also
known as virtual currency, such as Bitcoin, Ethereum, and
DogeCoin. Alaska does not currently regulate cryptocurrency, he
pointed out, which is one of the top tools of rogue actors, such
as Russian oligarchs and North Korean kleptocrats, to evade
sanctions. He further pointed out that 28 states currently
regulate cryptocurrency. He said the model law being discussed
today has been passed and adopted in West Virginia. The
Conference of State Bank Supervisors finalized the model law in
September 2021, he related, and it has been introduced in many
other states.
MR. SCHMIDT continued to slide 4, "Money Transmission Licenses."
He reiterated that when passed in 2007, the Act did not
contemplate virtual or cryptocurrency nor the rates of money
service business expansion. He said HB 408 would update the
licensing, recordkeeping, and enforcement provisions to support
these business activities and protect Alaska consumers. In the
past, he advised, DBS has found licensed money transmitters of
fiat currency (real money) that have had very poor compliance
with the Bank Secrecy Act and the Office of Foreign Assets
Control. If companies do not have a compliance management
system in place, he further advised, Alaskans could be scammed,
and the funds they send may not be received by their intended
recipients. He explained that Alaska participates in a multi-
state money transmitter examination system using a risk-based
approach to streamline state supervision to be more effective
and to efficiently utilize state resources. In an examination,
DBS staff reviews a company's compliance with applicable state
and federal laws and regulations and areas deemed likely to
affect the safety and soundness of the licensee. The DBS staff
reviews the financial condition, business model, internal
controls and auditing management systems and technology in the
compliance management system of a licensee. Utilizing network
supervision with other states, Mr. Schmidt continued, allows the
division to reduce regulatory burden on companies by conducting
less frequent examinations and reducing the time, travel, and
expense for the licensee and the department. Examinations
ensure that policies or procedures are being followed and
consumers are protected, he added.
MR. SCHMIDT continued speaking to slide 4. He said the most
common form of money transmission in 2022 is activity like
PayPal, Venmo, and Zelle. He advised that money transmission in
Alaska keeps growing - as of 12/31/21, Alaska had 153 money
transmitter licenses, with 40 of those conducting virtual
currency business activity that is not currently regulated. He
further advised that over the last five years money transmission
licenses have increased 68 percent. He explained that this data
comes from three different buckets. Bucket one is a company
that only does real money transmission (fiat currency), and DBS
issues them a license and periodically examines them. Bucket
two is becoming much more common and is a company that does both
real money and virtual currency money transmission. The
division issues these companies a license to transmit real
money, but then specifically enters into an agreement with them
that says Alaska does not regulate virtual currency and the
company is not allowed to hold itself out as being licensed or
approved by the State of Alaska to manage real or virtual
currency. Bucket three is a company that only does virtual
currency, and the company doesn't get licensed and doesn't get
regulated under the current law.
MR. SCHMIDT moved to slide 5, "Money Transmission Volume." He
said the graphic depicts the annual Alaska money transmission
volume [for 2019, 2020, 2021]. The dollar amounts are from
buckets one and two, he specified, bucket three isn't included.
10:06:20 AM
REPRESENTATIVE SNYDER requested an example of business names
that manage these three buckets.
MR. SCHMIDT listed the names PayPal, Venmo, Zelle, Stripe,
Western Union, and Robinhood. In further response, he said
those are the big actors and each of them is at least in the
first bucket of real money and most of them are in the second
bucket of both virtual and real money.
10:07:13 AM
MR. SCHMIDT returned to slide 5 and reiterated that the graphic
represents buckets one and two. He pointed out that money
transmission in Alaska that is reported to the division has gone
from $1.7 billion in 2019, to $2.8 billion in 2020, and to $7.1
billion in 2021. Key and important, he emphasized, is that
bucket three is not included here - no companies are included
here that do only virtual currency transmission, but the graphic
does include bucket two which is both real and virtual money.
10:07:56 AM
CO-CHAIR SPOHNHOLZ asked whether the intent of HB 408 is to
incorporate those companies that only do virtual currency.
MR. SCHMIDT confirmed that the intent is to bring in virtual
currency to the regulated sphere of money transmission.
10:08:28 AM
MR. SCHMIDT moved to slide 6, "Money Transmission Volume -
Virtual Currency." He said the graphic depicts the virtual
currency transmission volume in Alaska that is reported to the
division, which means buckets one and two, none of bucket three,
and the numbers depicted are a floor. He stated that the
virtual currency transmitted within Alaska was $33.6 million in
2019, $91.7 million in 2020, and in 2021 it exploded to $2.3
billion. He related that after this bill was adopted by the
Conference of State Bank Supervisors, his staff was reporting to
him that something was going on because the numbers the division
was getting were astronomical.
10:09:41 AM
REPRESENTATIVE SNYDER requested an explanation of the
distinction between virtual currency and cryptocurrency.
MR. SCHMIDT replied that for purposes of this discussion he is
using the two interchangeably.
10:10:02 AM
CO-CHAIR SPOHNHOLZ asked what happened between 2020 and 2021
that resulted in this exponential growth in cryptocurrency use
in Alaska.
MR. SCHMIDT responded that because Alaska does not regulate
virtual currency the division never looks at these businesses on
their virtual currency products and the division never gets to
examine them, so DBS doesn't have a good ability to tell the
committee what is going on. He said he has received data at the
company level where companies that were doing a few thousand or
tens of thousands of virtual currency transmission in 2020 went
to doing tens of millions of dollars of virtual currency
transmission in Alaska in 2021. Some virtual currency
transmitters, he related, have gone from $2 million a few years
ago to $6 [million] to $9 [million], and some tens of millions
of dollars. One of the biggest virtual currency transmitters in
2021 grew from less $100 million to over a billion dollars of
virtual currency transmission in 2022, and because Alaska does
not regulate or examine this the division doesn't know. Virtual
currency price is very dynamic, Mr. Schmidt added, and has gone
up a lot in value. It is being utilized more, he continued, but
he is not comfortable in saying that the increase in value of
virtual currency, and Alaskans doing more virtual currency
transmission, alone explain this growth.
10:11:42 AM
CO-CHAIR SPOHNHOLZ said she understands Mr. Schmidt may not be
able to disclose which companies are doing this, but requested a
description of the industries in which the growth is being seen.
MR. SCHMIDT answered that the division does not have a sense of
that because the data reported to the division from virtual
currency is only from bucket two and does not disclose which
type of industry, such as tourism or natural resources.
10:12:29 AM
REPRESENTATIVE SCHRAGE asked whether other states are seeing
this kind of growth.
MR. SCHMIDT replied that he has a limited understanding of this
in talking to colleagues and others throughout the US, but when
he explains Alaska's growth, Alaska is a standout. Yes, the
industry is growing, he continued, but even in that context
Alaska is a standout and, yes, that concerns him.
10:13:09 AM
CO-CHAIR SPOHNHOLZ asked whether Mr. Schmidt has a sense of
scale of how Alaska is standing out.
MR. SCHMIDT answered that he has spoken with about five industry
groups or people involved at a national level, and all have a
sense that this is growing, and Alaska's numbers are big.
Everyone with whom he has discussed the numbers seen on slide 6,
he related, has been surprised by this level of growth. Because
Alaska does not regulate this and the division does not perform
any examinations other than what is reported, he added, anything
behind these numbers is very opaque.
10:14:19 AM
MR. SCHMIDT returned to slide 6. He reiterated that the graphic
shows the explosive growth of reported annual virtual currency
transmission in Alaska and that bucket three is not included in
the graphic. He said reported virtual currency transmission in
Alaska grew 6,782 percent from 2019 to 2021 and grew 2,420
percent in 2021 alone. Virtual currency transactions have
fundamentally changed the financial services world, he advised,
and are having exponential growth in Alaska. He explained that
HB 408 would add virtual currency activities to the definition
of money transmission to allow DBS to regulate this activity
that accounted for nearly one-third of the total money
transmission volume in Alaska in 2021. Based on licensing
inquiries from companies that have only virtual currency
activity, he continued, DBS expects reported volume to increase
significantly when the bill goes into effect.
MR. SCHMIDT moved to slide 7, "Fiscal Impact and Request for
Additional Staff," and stated that HB 408 contains a fiscal
note. He reported that the division's receipts have grown 53
percent from fiscal year (FY) 2012 to FY 2021, with receipts in
FY 2021 at $19.6 million and at $21.5 million in calendar year
2021, while the DBS budget for FY 2021 was only $4 million. The
DBS budget in FY 2012, he pointed out, was $3.5 million [and
receipts in FY 2012 were $12.8 million]. He said DBS will
require additional staff and support cost to respond to growth
in the money service activities, the complexity of new business
models, and use of third-party partnerships. He explained that
the positions will allow DBS to implement the new law,
incorporate changes in the operation of the Nationwide
Multistate Licensing System (NMLS), develop proficiency in the
examination of electronic systems, and assessment of
cybersecurity measures in a high-risk environment. New program
receipt revenue is estimated to be at the low end, a minimum of
$110,000 for 35 new license applications by FY 2025, he
continued. It is difficult to anticipate the number of new
applications and annual renewal fees and assessments and
resulting revenue for future years, Mr. Schmidt added. The
division expects to adopt an assessment fee model for new
regulations that would ensure actual cost of supervision of the
industry would be covered through annual program receipts and is
expected to range between $750,000 and $1.2 million. He pointed
out that as part of the regulations that will implement this
bill the division anticipates adopting a volume-based licensing
fee. A fee based on volume would be appropriate given there are
smaller local Alaskan businesses as well as big businesses like
PayPal and Venmo.
MR. SCHMIDT addressed slide 8, "Why Change the Act?" He
explained that the current law has not kept up with the
industry's explosive growth and innovation. Consumer protection
is insufficient, he stressed, as every regulator commenting on
top threats facing investors identifies cryptocurrency and other
digital assets as one of the highest risks for fraud. Under the
current act, he reiterated, virtual currency is not included in
the definition of money transmission.
MR. SCHMIDT moved to slide 9, "What Does HB 408 / SB 238 do?"
He explained that the bill would reduce regulatory burden by
streamlining initial licensing and license renewal utilizing the
NMLS, which is fully digitized and uniform. The NMLS, he noted,
was developed in the late 2000s following the great recession
and was originally intended for the mortgaging industry, but it
has now grown to include licensing and registration for all
kinds of financial industries.
10:19:24 AM
CO-CHAIR SPOHNHOLZ referenced a letter opposing HB 408 from the
Independent Payroll Providers Association (IPPA) and The Payroll
Group [dated 4/15/22]. She requested Mr. Schmidt to address the
concern that the bill would bring payroll processors into the
NMLS, in which they don't currently participate.
MR. SCHMIDT answered that there may be differences in business
models that might take a particular business out of payroll
processing but broadly speaking payroll processing is covered
within the scope of the current money transmission law - current
law includes payroll processing. He emphasized that payroll
processing is in no way a problematic industry and DBS is not
highlighting or singling out the industry for enhanced scrutiny.
However, he continued, payroll processing is in a position of
trust in handling other people's money; in the last 10 years
there has been a half a billion dollars of documented theft
within the payroll processing industry. One attribute of the
payroll processing industry that is a little bit different, Mr.
Schmidt explained, is that the criminal prosecutions have shown
that the payroll processing industry, when there is fraud, lends
itself to a Ponzi scheme. Scams that have come public show a
literal robbing of Peter to pay Paul where the payroll processor
covered one employer's payroll with another employer's fund. He
reiterated that there is nothing about the state of Alaska
payroll processing industry that he believes needs heightened
scrutiny, it is merely a matter that that industry is already
included in the existing law and would be within the NMLS in
this proposed bill.
CO-CHAIR SPOHNHOLZ surmised that payroll processors do not
currently participate in the NMLS and would be required to do
so. She asked whether payroll processors must currently
register or get licensed in the state of Alaska.
MR. SCHMIDT replied that currently there are payroll processors
that are licensed. He deferred to Ms. Tracy Reno to answer the
question further.
CO-CHAIR FIELDS noted that Ms. Reno is not presently online.
10:22:59 AM
CO-CHAIR SPOHNHOLZ stated she needs follow-up information to
understand the way the payroll processing industry is currently
regulated, the way it is proposed to be changed, and what would
be the impacts. She offered her understanding that West
Virginia adopted something similar, but that significant bonding
is required and the average cost per payroll processor is about
$50,000. She said she is therefore concerned about how this
bill would potentially impact mom-and-pop companies as compared
to big companies which can afford that.
MR. SCHMIDT shared that yesterday he, his staff, and a
representative of the Conference of State Bank Supervisors spent
about three hours with Senator Kiehl discussing changes to the
bill that would reduce entry barriers in a way that is
appropriate for Alaska, the size of Alaska's economy, and the
size of Alaska businesses.
CO-CHAIR SPOHNHOLZ said she would like to learn more about that.
10:24:36 AM
MR. SCHMIDT proceeded to slide 10, "HB 408 / SB 238 Protects
Consumers." He said the bill would protect Alaska consumers by
conducting criminal background checks through the NMLS on
individuals who control a money transmission business. He noted
that criminal background checks are currently done by DBS staff
using third party software, which takes about 140 hours of staff
time a year. He stated that HB 408 would ensure that regulatory
costs of supervision keep pace with growth by allowing
implementation of a volume-based assessment - licensees would be
required to report money transmission volume, which would ensure
licensees are treated fairly and equitably based on the level of
volume and business conducted in Alaska. The bill would broaden
the definition of money transmission to include virtual currency
transactions and other methods of moving or transferring
monetary value to better protect Alaskans. He said the bill
would provide consumer protections for Alaskans. He paraphrased
from slide 10, which stated [original punctuation provided]:
HB 408 / SB 238 protects consumers as it will
Require licensees to comply with federal laws,
including suspicious activity reporting.
Increase the record retention schedule to five
years for greater transparency.
Allow criminal background checks to be run on
licensees.
Update enforcement provisions by allowing a broader
spectrum of orders to be issued.
Ensure DBS can coordinate with other states in all
areas of regulation, licensing, and supervision to
reduce regulatory burden on the industry and more
effectively utilize regulator resources.
Define crypto/virtual currency money transmission
activities and allow regulation of those activities
(aka "virtual currency," Bitcoin, Ethereum,
DogeCoin).
MR. SCHMIDT concluded his presentation with slide 11, "Virtual
Currency and Money Transmission." He stated that the bill would
define virtual currency and add the business activity to the
definition of money transmission requiring licensure and
supervision. He said the definition is in the bill at AS
06.55.290(5). Virtual currency, he continued, is a money-like
asset that is managed, stored, or exchanged on computer systems
and transmitted by the internet. Virtual currency is issued and
controlled by its developers and used and accepted
electronically among the members of a specific virtual
community. It is accepted by natural or legal persons as a
means of payment and can be stored, transferred, or traded
electronically.
10:27:21 AM
REPRESENTATIVE SNYDER offered her understanding that digital
assets are typically bought and sold using cryptocurrency. She
asked whether Mr. Schmidt has any sense of the degree that non-
fungible token (NFT) transfers have played in the large increase
in virtual currency transmission that is being seen.
MR. SCHMIDT responded that NFTs are "all the rage." He said
that if his 17-year-old and 20-year-old sons are buying NFTs
like they are buying sneakers, then there is a lot of it out
there. That is not scientific or rigorous and he is being
somewhat humorous, he allowed, but he is unable to point to data
that there is significant activity in that space.
10:28:35 AM
CO-CHAIR SPOHNHOLZ restated her question regarding opposition to
the bill by the Independent Payroll Providers Association (IPPA)
and The Payroll Group. She asked what is currently required of
payroll processors in the state of Alaska and what would be
required under HB 408 if it were passed. She reiterated that
her main concern is about the small, mom-and-pop payroll
processors that might do bookkeeping and process the payroll for
a few companies.
10:29:50 AM
TRACY RENO, Chief of Examinations, Division of Banking and
Securities, Department of Commerce, Community, and Economic
Development (DCCED), replied that payment processors are not
exempt in the current act for money transmitter licensing, and
several are licensed currently with the State of Alaska. The
intention in this bill, she said, is to make it clear and
specifically call out that they are required to be licensed in
the state of Alaska, that it is transparent to them so they
would know what the requirements would be. The NMLS allows
[states] to have online electronic applications, renewals, and
fee payments. This streamlines the process so that it is the
same for everyone across all states in the US, which reduces
burden on the companies that are required to be licensing;
Alaska would not be unique. She deferred to Mr. Matthew Lambert
of CSBS to speak further to the question.
10:31:40 AM
MATTHEW LAMBERT, Esq., Non-Depository Counsel, Conference of
State Bank Supervisors (CSBS), responded that Ms. Reno's
synopsis is par for the course nationally. He said states
regulate money transmissions, money received from transmission,
and typically don't get into details about different business
models. So, when a company receives money for transmission,
whether that is at a counter through a Western Union agent to
send out of the country or for payroll processing, the intent is
to make sure that those funds are kept safe and that they are
there yet. The reason that payroll got explicitly added to the
model law, he explained, was a string of failures of payroll
companies, most of which had a background in fraud and a lot of
criminals. It is a case-by-case thing as to whether these are
folks that had bad intentions at the outset, or it just became a
way of covering losses, but both of those scenarios have come to
light in the past decade. So, Mr. Lambert continued, it seemed
important to make clear that if someone receives money for
transmission and is a payroll provider there is no payroll
processor exemption.
10:33:19 AM
CO-CHAIR SPOHNHOLZ referred to Ms. Reno's statement that payroll
processors are already legally required to be licensed in Alaska
and only a few are currently doing so. She surmised that that
implies there is a large number of them that are not doing so,
and the proposal is a one-size-fits all process. She requested
a description of what is required to get licensed as a payroll
processor in the state of Alaska.
MS. RENO answered that the licensing process for money
transmitters is that they pay a fee and are required to go into
the NMLS where they fill out information about their business,
provide financial statements and their business plan, and
provide information on the people who own the company and those
who are in control and making decisions for the company. She
explained that those people do not currently have background
checks run through the system, DBS does that manually in its
office. So, she continued, this bill would allow DBS to run
criminal background checks through the FBI for all money
transmitters and for owners and individuals who make those
decisions for the company. Also required, she said, are
quarterly reporting on volumes as well as annual reporting for
audited financial statements.
MS. RENO continued her response. She said DBS currently has a
set surety bond and the bill proposes a sliding scale surety
bond for volume-based or asset-based businesses. The bill
therefore takes into consideration the risk for national or
international companies while considering mom-and-pops and not
putting up a barrier to entry. She said the bill currently has
proposals for raising the net worth, but because there is
concern that that may be a barrier to entry DBS is looking at
lowering that to where people think it is a better fit. The
division is listening to industry groups, money transmitters,
and payroll processors and is looking at some minor adjustments
in amending the bill. Ms. Reno further specified that annual
renewal is required, and that the renewal assessment is
currently a flat fee regardless of the volume size in Alaska.
So, Ms. Reno continued, DBS is looking at doing risk-based
assessments based on the size and volume of a company to provide
a better fit for smaller and larger businesses in Alaska.
10:36:47 AM
REPRESENTATIVE SNYDER inquired how the everyday Alaskan might be
impacted by this bill, if at all.
MR. SCHMIDT replied that he expects virtual currency to continue
to increase as a means of payment. He said he wouldn't be
surprised if businesses in Juneau put up signs this summer that
they accept payments in virtual currency like Bitcoin. That is
coming, he continued, as people get more and more comfortable
utilizing virtual currency, appreciate the confidentiality that
virtual currency provides, and international tourists would love
to avoid money exchange issues. Because virtual currency is
going to be used more and more, he advised, this bill would
increase the confidence that consumers can have that virtual
currency is not a Wild West, that it is being appropriately
regulated, and they can have faith in the systems to get the
money where it is going to go in an appropriate way.
[HB 408 was held over.]