On November 30, 2016, the Illinois Department of Financial and Professional Regulation (IDFPR) issued a proposed “Digital Currency Regulatory Guidance” (the Guidance) regarding the application of the Illinois Transmitters of Money Act (TOMA) to various digital currency activities. The Guidance applies only to “decentralized digital currencies,” which are not issued by a particular person or entity, do not have a central administrator, and do not have a central repository. Therefore, the Guidance would apply to activities involving Bitcoin and most other cryptocurrencies. The IDFPR is accepting comments on the Guidance until January 18, 2017.

In the Guidance, the IDFPR concludes that the transmission of digital currency by itself does not require a money transmission license under TOMA. TOMA requires a money transmission license for those who engage “in the business of receiving money for transmission or transmitting money,” and defines “money” as a “medium of exchange that is authorized by a domestic or foreign government as part of its currency….” Because the decentralized digital currencies to which this Guidance applies have not been authorized or accepted by any governments, it is not considered “money” for purposes of TOMA. Therefore, those who transmit digital currency by itself (without also transmitting traditional currency) are not in the business of “receiving money for transmission or transmitting money.” Under the Guidance, therefore, intermediaries who receive digital currency for transfer to a third party, and virtual currency wallets that hold digital currency on behalf of customers, would generally not be required to obtain a money transmission license.

The Guidance cautions, however that transactions involving both digital currency and traditional currency may be considered money transmission, and could require a license. For example, a digital currency exchange site would be considered engaging in money transmission if it accepts traditional money from a digital currency buyer, holds the funds until it determines the terms of sale have been satisfied, and then transmits the funds to a digital currency seller. Similarly, the exchange of digital currency for traditional currency through automated machine (such as “Bitcoin ATMs”), in which the machine is configured to act as an intermediary between digital currency buyers and sellers via a connection to an established exchange site, would also be considered money transmission.

The Guidance also explicitly clarifies that numerous digital currency-related activities would not be considered money transmission under TOMA. For example, the direct exchange of digital currency for traditional money between two parties (without an intermediary) would not qualify as money transmission, as the IDFPR analogized this transaction to the sale of goods between two parties. Therefore, if a Bitcoin ATM is configured not to act as an intermediary, but instead facilitates a transaction directly between the customer and the machine’s operator, no money transmission has occurred. The IDFPR also clarifies that payment for goods or services by an individual with digital currency (and the acceptance of such payment by a merchant), digital currency mining, use or development of multi-signature software, and use of a digital currency’s blockchain or distributed ledger technology for non-monetary purposes (including smart property and smart contracts) would not be considered money transmission.

The Guidance goes against the recent trend of states expanding their oversight to include digital currency activities. For example, within the last two years, New York issued its comprehensive BitLicense regulatory regime, both North Carolina and New Hampshire amended their money transmission laws to cover the transmission of digital currency, and the State of Washington’s Department of Financial Institutions interpreted the Washington Uniform Money Services Act as applying to various digital currency activities. The Guidance is not novel, however. In 2014, the Kansas Office of the State Bank Commissioner and Texas Department of Banking also concluded that transmission of digital currency on its own did not constitute money transmission because digital currency did not fall under the respective statutes’ definition of money.