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.]