Connecticut is joining numerous other states in its movement toward regulating virtual currency businesses. On June 19th, Governor Malloy signed Substitute House Bill Number 6800 into law. HB-6800 gives the Banking Department oversight powers with regard to virtual currency money transmitters.

HB-6800 amends Connecticut’s existing Money Transmission Act by requiring businesses engaged in the transmission of virtual currency to comply with the Money Transmission Act. Under the Money Transmission Act, businesses are prohibited from engaging in the business of money transmission without a license, and persons who knowingly engage in the business of money transmission without a license are guilty of a class D felony.

HB-6800 requires money transmitter license applicants to specify whether they will be transmitting monetary value in the form of virtual currency. Applicants indicating that they will be transmitting virtual currency are then subject to additional consideration by the Connecticut Department of Banking. The new law defines “virtual currency” in part to mean “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” “Virtual currency” includes both centralized and decentralized currencies, and excludes currencies associated solely with gaming platforms or customer rewards programs.

A primary focus of HB-6800 appears to be the financial health of the entity and the stability of the virtual currency with which the entity works. The bill permits the Connecticut Banking Commissioner to deny an application of a person engaging in transmitting virtual currency if “the issuance of such a license would represent undue risk of financial loss to consumers, considering the applicant’s proposed business model.” The bill analysis clarifies that “[t]he bill allows the commissioner to deny a money transmission license to an otherwise qualified applicant who will or may engage in business involving virtual currency if the commissioner believes it would be an undue risk of financial loss to consumers[.]”

Virtual currency applicants will also be subject to the existing standards in the Act. The Banking Commissioner will investigate the financial and business experience, character and general fitness of money transmitter applicants, and the Commissioner will only issue a license upon finding that the business will be conducted “honestly, fairly, equitably, carefully and efficiently” and “in a manner commanding the confidence and trust of the community.”

HB-6800 establishes unique bond requirements for virtual currency money transmitters. Unlike traditional money transmitters, which are subject to established bond requirements based on the amount of their money transmissions, HB-6800 provides that virtual currency licensees will be subject to a bond requirement which will be determined by the Commissioner on an individual basis as reasonable to “address the current and prospective volatility of the market in such currency or currencies.”

HB-6800 also allows the Commissioner to “place additional requirements, restrictions or conditions upon the license of any applicant who will engage in the business of transmitting monetary value in the form of virtual currency.”

Connecticut joins numerous states, including New York, in its recent movement toward regulating virtual currency businesses. However, states have been taking slightly different approaches to regulation. For example, in New York the regulation of virtual currency businesses was accomplished by DFS’s administrative rulemaking rather than by state legislative action. The New York rule also includes relatively detailed requirements regarding anti-money laundering and cyber-security programs. HB-6800 contains no such provisions. The New York rule contains a carve-out from the definition of “virtual currency” for “digital units used as part of Prepaid Cards.” HB-6800 does not contain this exception. Finally, the New York rule applies to a broader class of businesses than the Connecticut law. Extending beyond money transmitters, the New York regulatory framework applies to businesses engaged in “virtual currency business activities,” as that term is defined in the proposed rule.

This new law gives the Connecticut Commissioner tremendous discretion to regulate virtual currency. The criteria for obtaining a license includes include vague requirements such as a finding by the Commissioner that a virtual currency business is conducted “in a manner commanding the confidence and trust of the community.” It is difficult to imagine how this determination will be made or on what ground such a determination could be challenged. Similarly, when issuing a license, the Commissioner has the authority to place additional requirements and restrictions on that license. The scope of this power is unclear. It is not yet possible to predict with confidence how the Connecticut Banking Commissioner will interpret and apply this new statute. For now, this statute is yet another variable in the virtual currency regulatory landscape.