NYSBL 640 & 641
April 26, 2007
Dear Mr. [---]
Your letter to the attention of Ms. Sara A. Kelsey, Deputy Superintendent and Counsel, has been referred to me for reply. In the letter, you requested the concurrence of the Banking Department with your opinion that your client, which you identify as a company called [---] is not required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law based upon its activities as a so-called "exchanger" for e-gold, a digital gold currency operated bye-gold Ltd. out of Nevis in the Lesser Antilles.Based upon our understanding of the facts, we disagree with your opinion and we believe that your client is required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law.
As we understand it, with e-gold's system, ownership of gold can be transferred over the internet; however, e-gold does not sell its e-gold (or other e-metals) directly to users. Instead, "exchangers" buy or sell it for others in return for dollars or other currencies and transaction fees, thus allowing it to be converted back and forth to a variety of national currencies. To purchase e-gold, an e-gold accountholder provides funds to the exchanger and the exchanger transfers the funds to e-gold, typically the transfer occurs from the exchanger's bank account to e-gold's bank account.
In the case of an exchanger, such as your client, which has a New York address, the exchanger's acceptance of funds that are subsequently transferred to e-gold appears to constitute illegal money transmission. Furthermore, in this case, it would appear that your client, the exchanger, also accepts the funds in New York.Therefore, based upon these facts, we believe that your client is required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law inasmuch as it is in the business of receiving money for transmission to egold.
Banking Law, Section 641.1 provides in relevant part that:
No person shall engage in the business of selling or issuing checks, or engage in the business of receiving money for transmission or transmitting the same, without a license therefor obtained from the superintendent as provided in this article, nor shall any person engage in such business as an agent, except as an agent of a licensee or as agent of a payee; provided, however, that nothing in this article shall apply to a bank... (Emphasis Added.)
The scope and meaning of the term "the business of receiving money for transmission" is not clear on the face of the statute and one must therefore look, among other places, to the legislative history.The legislative history of L. 1963 C. 1000, adding Article XIII-B to the Banking Law, provides in part as follows:
"The business sought to be supervised consists, essentially, of the sale of traveler's checks and money orders, and the transmission of funds overseas it involves, therefore, the receipt of funds from the public for transmission or for payment upon demand at a later date. The inherent possibilities of abuse through fraud, defalcation or insolvency are obvious.
The elements of the business sought to be supervised by the statute are present in the e-gold program. As far as we can determine from your letter, a purchaser is not unconditionally granted title to e-gold upon the exchanger's receipt of cash or other funds. Additionally, even when the purchaser provides cash to the exchanger, there is no indication that a non-conditional receipt effectively binding e-gold is issued at the time of transaction. Since the arrangement appears to place the purchaser in a position as a party upon which the risk of the exchanger's default or defalcation may fall, the activity appears to be one at which the statute is directed.Also, we disagree with your point that if the transfer of funds is through licensed banks (i.e., first a transfer of funds to the exchanger's bank account followed by funds being transferred from the exchanger's bank account to e-gold's bank account) the exchanger is not required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law.
While it is true that Section 641 of the Banking Law is clear that banks do not have to apply for a license to engage in the money transmission business (see language of the statute highlighted above); when the money reaches your client's account at the bank, your client has received, and is in control of, the money that it subsequently transmits. This is not the same as the bank, which is exempt from licensing, receiving and being in control of money that is subsequently transmitted. For the same reason 3 NYCRR 406.2(k)(7), which you cite in your letter, is not applicable as an exception to the requirement that your client obtain a money transmission license.
We further note that the exchanger, in our view, is not an "agent of a licensee or an agent of a payee" within the meaning of the language of the statute, also highlighted above. Section 641(1) states that an entity which acts as an agent of a payee is not engaged in money transmission and need not obtain a money transmission license. Consequently, if the exchanger would be, in this case, an agent of e-gold, there would be no legal objection to their collecting and transmitting payments. Although the various responsibilities of the exchanger and e-gold may be set forth in various contracts, which we have not examined, it seems to us from your letter and otherwise that the relationship does not constitute an agency agreement. We are willing to reconsider this characterization if you believe that the relationship constitutes an agency agreement and can provide to us clear and convincing evidence to that effect.As part of an agency agreement, agents of payees must give customers a receipt which indicates that payment to the agent is deemed payment to the payee. There can be no risk of loss to the purchasers if any of the exchangers fails to remit the proceeds (i.e., whether or not e-gold receives the funds, it must treat the purchasers as if, in effect, they received payment). If that does not occur and if the agency agreements do not clearly make the exchangers agents of the payees, the activity would not be legally acceptable for the exchangers as they would be engaged in illegal money transmission.
The opinion rendered herein is based on the facts set forth in your letter and may not be applicable to any other situation. I trust that this letter is responsive to your inquiry.
Very truly yours,
cc : J. Dinin