SB 84-MONEY TRANSMISSION; VIRTUAL CURRENCY  1:46:36 PM CHAIR BJORKMAN reconvened the meeting and announced the consideration of SENATE BILL NO. 84 "An Act relating to the business of money transmission; relating to money transmission licenses, licensure requirements, and registration through the Nationwide Multistate Licensing System and Registry; 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." He noted that this is the second hearing of this bill in the Senate Labor and Commerce Committee. 1:47:30 PM ROBERT SCHMIDT, Director, Division of Banking and Securities, Department of Commerce, Community and Economic Development, Anchorage, Alaska, offered a recap of SB 84. He reported that money transmission is a $5.8 billion industry to, from, and within Alaska. About two-thirds of that industry is end-to-end payments owned by mobile payment applications such as PayPal, Cash App, Apple Pay, and Google Pay. MR. SCHMIDT explained that the legislature wrote the current money transmission law in the mid-2000s, passed it in 2007 and it took effect in 2008. At the time it was written, mobile payments, iPhones, and cryptocurrency did not exist. Dean Fleer, the division's most senior money transmission examiner joined the division in 2011; at that time, there were about 30 licensed money-transmitters, now there are 168, but division staffing for this industry remains the same. SB 84 resulted from a joint industry regulator approach. He encouraged members of the committee to hear from industry professionals who are knowledgeable about the topic. There is no state advocating for federal preemption. No industry trade group or major market participant is advocating for federal takeover of this space. Alaska would be a minority of one if it were to ask for federal takeover of money transmission. While some aspects are overseen by the federal government, no federal regulator performs overall safety and soundness examinations of the money transmission industry. States perform that function. The division responds to nearly 1,000 inquiries from constituents regarding financial concerns. Alaska is in a better position to maintain control of money transmissions and protect Alaskans. Yielding this authority to the federal government would diminish Alaska's sovereignty. 1:50:49 PM TRACY RENO, Chief of Examinations, Division of Banking and Securities, Department of Commerce, Community and Economic Development, Anchorage, Alaska, offered the following recap of SB 84: SB 84 amends Title 6, Chapter 55 of The Alaska Money Services Uniform Act. The purpose of this bill is to replace existing money state transmission laws to modernize licensure requirements; add model language for virtual currency industries; allow the Department of Commerce Community and Economic Development to coordinate with other states in the regulation, licensing, and supervision to standardize the types of activities that are subject to licensing; and modernize safety and soundness requirements for money transmission. There will be a lot of repeal and reenacts because this bill is adopting a model law. This bill conforms with the model law by providing application requirements for a money transmitter license, and allows the department to change or update reforms to be consistent with licensing requirements in the Nationwide Multistate Licensing System (NMLS). This is important because companies that transmit money don't want 50 different sets of laws to follow. Money transmitters spent two years drafting the model law with state regulators. This bill reduces regulatory burden by streamlining initial application and renewal processes so that they are the same every year and in every state. Our licensers want Alaska's statutes to be uniform with the rest of the country. It's less paperwork for the companies requiring less staff; it gets their license approved faster so that they can get businesses up and running, and it says Alaska is open for business. 1:52:35 PM MS. RENO continued. This bill conforms with the model law by changing license renewal, renewal reporting, and renewal terminology. Fees collected at the time of renewal will change with this bill. Fees are currently set in regulation, and Section 52 ensures that fees collected are sufficient to cover the cost and to do the work. The annual renewal fee will be based on the licensee's total volume of money transmission to, from, and within Alaska. A good example of this is currently a licensee that transmits $100,000,000 each year pays the exact same renewal fee as a licensee that transmits $1 billion a year. There are currently 168 licensed Alaska transmitters that each pay $1,000 annually to renew their license; no matter their size, their complexity, or their geographic location they all pay the same flat $1000 annual renewal fee. We will take special consideration for small mom and pop businesses to ensure that the tier is not a barrier to entry for these small businesses. Having the details of renewal fees in regulation will allow us to update the fees charged to cover the regulatory costs of supervision and keep pace with growth and innovation in the industry. 1:53:45 PM MS. RENO continued. The proposed amendments to AS 06.55.850 would create a tiered assessment for renewal fees. The assessment would have several tiers with a range of volume transmitted annually, and would take a percentage to calculate the renewal fee. The division has been researching what some other state's assessments look like, and the hourly cost of examinations would no longer be billed for those examinations which are 1000s of dollars. They'll be covered as part of the new tiered assessment renewal fee. Expenses for travel would still be billed. This should reduce the regulatory cost of small money transmitters, providing businesses certainty when planning for their annual budgets. This bill conforms with the model law and will protect Alaska consumers by running criminal background checks on people who control or run a money transmitter company. These background checks will be conducted automatically at application through the NMLS, keeping bad actors from operating the companies that we license and saving hundreds of hours of DBS staff time. 1:54:41 PM MS. RENO continued. This bill conforms with the model law to add new sections regarding virtual currency derived from the Uniform Law Commission's language from the Uniform Regulation of Virtual Currency Businesses Act. It uses standard uniform language and it provides a foundation to regulate virtual currency. This allows the division to regulate virtual currency and adds virtual currency to the definition of money transmission. Details of what is and is not considered licensed activity are provided in the bill. It details a list of exempted activities for things like online gaming and provides disclosure requirements, so that Alaskan consumers know where to go when they have a complaint. This bill updates enforcement provisions for consistency with the model law regarding the suspension and revocation of the license. It amends civil penalties allowing the department to cover regulatory costs by assessing its costs and expenses for investigations and allowing a broader spectrum of orders to be issued. This amendment will allow staff to use network supervision working with other states, to jointly conduct examinations, and to investigate and take multi-state enforcement action on bad actors. These amendments also ensure that in the case of bankruptcy, the funds entrusted to a money transmitter to send are the consumer's property, not the company's. The licensee will be prohibited from using these funds as assets on their financial statements. 1:55:59 PM MS. RENO continued. While this bill follows the model law, a few modifications were made to make sure it was the right fit for Alaska. As an example related to net worth requirements, in the model law the net worth requirement starts at $100,000. After listening to small businesses and other stakeholders last session, the division reduced the net worth requirement to $35,000, as this is more appropriate for Alaska. This bill also allows the department to exempt applicants or licensees from the net worth requirements. Why is this bill important? Last year Alaskans sent or received 31 million money transmission transactions worth $5.8 billion dollars. This bill will protect Alaska consumers, it will reduce regulatory burden, it adopts the model law that industry drafted with state regulators, it will protect Alaska's sovereignty by creating uniform statutes across the country, and this bill will allow the division to have the ability to update fees and require license in regulation to keep up with technology and the innovation in this ever-evolving financial industry. Events of the last year have demonstrated the need for modernization of Alaska's money transmission laws. 1:57:27 PM SENATOR GRAY-JACKSON thanked Mr. Schmidt, Tracy Reno, and the Division of Banking and Securities staff for their help and explanation of cryptocurrency. 1:58:19 PM CHAIR BJORKMAN opened public testimony on SB 84. 1:58:49 PM LAHKA PEACOCK, Co-Owner, QuyanaCARD, Nome, Alaska, testified in support of SB 84. He stated that QuyanaCARD is a pre-paid card business based in Nome that services 1500 cardholders in rural villages that lack access to traditional banking services. He shared that when an auditor performed their first bank examination, his company had to cover the cost of the auditor's transportation, lodging, car rental, and hourly rate. He learned from the auditor that all of their paperwork and fees are the same as Google Pay, a billion dollar business. His business continued to operate through difficult times, always pushing to change the regulations to reduce the annual renewal fees, bonding fees, and exam fees that cost as much as Google Pay. Exam fees are $20000 which is the same as PayPal. Full financial audits cost $3500 annually. SB 84 would help his business deal with these barriers to entry, allowing QuyanaCARD to stay in business and pave the way for more similar businesses. 2:02:48 PM MATTHEW LAMBERT, Deputy General Counsel for Policy, Conference of State Bank Supervisors (CSBS), Washington, D.C., testified in support of SB 84. He explained that CSBS is an association of the banking departments from each state. He said SB 84 should be "win win win," by reducing the regulatory burden for industry, modernizing requirements for regulators including making it easier for regulators to work together and more efficiently, and allowing for the states to continue to serve as laboratories of innovation. Because states have taken the lead, hundreds of new companies are trying to enter the industry, creating a competitive framework for innovation. The main challenge is having the flexibility that allows for companies to operate on a scale that can focus on niche situations, all the way up to global superpowers. 2:04:59 PM CHAIR BJORKMAN asked how this legislation would prevent a recurrence of the fraud scandal like that of Sam Bankman-Fried, founder and CEO of the cryptocurrency exchange company, FTX. MR. LAMBERT said that FTX and Sam Bankman-Fried moved money across global borders. He pointed out that the United States cannot prevent fraudulent transactions across borders, but legislators can ringfence US assets. He commented on the fallout of FTX and explained how to protect customers from the scenario he described. 2:07:29 PM MR. SCHMIDT commented that a common feature of the noteworthy crypto bankruptcies the Division of Banking and Securities reviewed last year was that customer accounts had been pledged as assets of the company to the company's creditors. He explained that SB 84 contains a prohibition that a customer's account cannot be pledged as collateral to the exchanger's creditors. This issue has been rampant in crypto bankruptcies. 2:08:39 PM ADAM ATLAS, Money Services Business Association (MSBA), Montreal, Quebec, Canada, stated that the Money Transmission Modernization Act will codify the model act that was referenced earlier. He said MSBA is in favor of SB 84 and supports rolling out the model law because it provides significant benefits to customers, states and the industry alike. Customers will benefit from dealing with money transmitters in Alaska that are regulated in a way that is consistent with how those suppliers are regulated in other states. The industry will benefit from greater clarity in operations and supervision and reducing the complexity of complying with state-specific laws and the need to comply with duplicate oversight requirements. This new law will encourage more services in Alaska and serve underbanked consumers. He said MSBA supports the idea of the regulator setting the fees so that smaller volume transmitters would pay fewer fees than a large volume transmitter. Greater efficiency would be achieved under the model act, empowering the state to use technology, apply data analytics, and share resources under a network system. 2:13:00 PM CHAIR BJORKMAN closed public testimony on SB 84 and held SB 84 in committee. He stated that written testimony may be submitted to slac@akleg.gov.