Tennessee and Cryptocurrency Blockchain Legislation
On December 16, 2015, the Tennessee Department of Financial Institutions (TDFI) issued a memo entitled “Regulatory Treatment of Virtual Currencies under the Tennessee Money Transmitter Act.” The memo addressed “All Virtual Currency Companies Operating or Desiring to Operate in Tennessee.” The purpose of the memo was to outline the TDFI’s policy towards virtual currency and to establish the regulatory treatment of cryptocurrency under Tennessee law. In other words, the guidance intends to regulate cryptocurrency under the general legal framework that already exists within the state of Tennessee.
The memo starts by describing the characteristics of cryptocurrency. According to the TDFI, cryptocurrencies are legally categorized as virtual currency. The memo defines virtual currency as an electronic medium of exchange that: (1) does not have all the attributes of real currency, (2) is not legal tender, (3) is not issued or backed by any central bank or governmental authority, and (4) can be purchased, sold, and exchanged with other types of virtual currencies or real currencies like the U.S. dollar.
In particular, the TDFI declared that an essential characteristic of virtual currency is its lack of intrinsic value. Most traditional forms of currency have intrinsic value because they are backed by underlying assets, like gold or silver, or are backed by a national government. Cryptocurrency lacks intrinsic value because it does not receive its value based on any underlying assets such as gold or silver. Instead, the value of cryptocurrency is determined by the price a buyer is willing to pay. For this reason, cryptocurrencies are not commodities and are also not convertible assets under Tennessee law.
Under the TDFI’s policy statement, receiving cryptocurrency in exchange for a promise to make it available later is not a money transmission. Specifically, these transactions are not transmissions because cryptocurrency is not classified as money under the Tennessee Money Transmitter Act (TMTA).
However, the TMTA does control transactions involving the follow exceptions: (1) an exchange of cryptocurrency for sovereign currency through a third-party exchanger; and (2) an exchange of cryptocurrency for sovereign currency through an automated machine. These transactions are considered money transmissions because they include the involvement of sovereign currency, which is classified as money under the TMTA. Nevertheless, the following transactions are not considered money transmissions under the TMTA: (1) a transfer of cryptocurrency by itself, (2) an exchange of one cryptocurrency for another cryptocurrency, and (3) an exchange of cryptocurrency for sovereign currency between two parties. Although exchanging cryptocurrency for sovereign currency involves money, it is not a money transmission because the TDFI classifies such transactions as goods between two parties. Therefore, if two individuals exchange cryptocurrency for U.S. dollars, they are not subject to the TMTA because this transaction merely represents a sale of goods under the state laws of Tennessee.
However, legal ambiguity exists as to whether a transaction between an individual and a cryptocurrency exchange is a transaction between two parties. Since the reasonable assumption is that “two parties” refers to individuals and not third-party exchanges, one reasonable argument is a transaction between an individual and a cryptocurrency exchange are probably not transactions between two parties under Tennessee law. However, the TMTA explicitly states that the TMTA applies to cryptocurrency exchanges for sovereign currency through third-party exchanges. Thus, a transaction involving an exchange between an individual and a cryptocurrency exchange is probably controlled by the TMTA.
Finally, the memo details the legal requirements of cryptocurrency firms that operate within the state of Tennessee. First, the TDFI requires firms offering cryptocurrency services to comply with all licensing requirements under § 45-7-205 of the Tennessee Money Transmitter Act. In other words, cryptocurrency firms must be licensed and authorized by appropriate state authorities to legally provide cryptocurrency services under Tennessee law.
Second, companies that function as money transmitters are prohibited from including cryptocurrency assets in determining the firm’s net worth under Tenn. Code Ann. § 45-7-205. For example, suppose a firm owns $1,000,000 million worth of Bitcoin but only $250,000 worth of stocks. Under the state statute, the firm’s net worth would merely be $250,000 even though the firm has $1,000,000 worth of cryptocurrency. Arguably, the net worth calculation under the Tennessee code should be expanded to include virtual currency so firms will not understate their literal value. Finally, the third requirement prohibits licensed money transmitters from including virtual currency assets in calculations for their permissible investments under Tenn. Code Ann. § 45-7- 206.
In conclusion, the TDFI’s memo provides guidance on the TDFI’s policy towards virtual currencies and establishes the regulatory treatment of virtual currencies under Tennessee law. In addition, it describes the characteristics of cryptocurrency and categorizes them as virtual currency. Finally, the memo discusses how cryptocurrency is regulated under the TMTA, if at all, and details the legal requirements of cryptocurrency firms that operate within the state of Tennessee. In other words, the memo details how cryptocurrency is regulated under the general legal framework of Tennessee.
Tennessee – TCA s. 66-29-102
In Tennessee, cryptocurrencies are classified under the state’s Uniform Unclaimed Property Act (UUPA). Specifically, the Act defines virtual currency as “a digital representation of value used as a medium of exchange, a unit of account, or a store of value that the United States does not recognize as legal tender.” According to the Act, virtual currency does not include any of the following: (1) software or protocols governing the transfer of digital representations of value; (2) game-related digital content; or (3) loyalty cards or gift cards.
Under UUPA, virtual currencies are classified as property. The statutory definition of property includes both “tangible property” and “intangible property.” The statutory definition of property also includes “all income from or increments to the property.” An example of income stemming from tangible property is income revenue landlords earn from tenants. In contrast, an example of income stemming from intangible property includes capital gains resulting from cryptocurrency investments. Indeed, the Act states that property is evidenced by “money, interest, dividend, check, draft, deposit, payroll card, or virtual currency.” Therefore, capital gains from cryptocurrency investments are classified as income from intangible property under Tennessee law.
Furthermore, the Act exempts the following from its statutory authority: (1) game-related digital content, (2) loyalty cards, (3) in-store credits for returned merchandise, (4) gift cards, and (5) transit fare cards. Presumably, “game-related digital content” encompasses what most states call “utility tokens.” Tennessee law does not provide a statutory definition of utility tokens. Nevertheless, Merriam-Webster defines utility tokens as digital tokens of cryptocurrency issued to fund the development of a project, which can be later used to purchase a good or service offered by the issuer of the cryptocurrency. Since game-related digital content is likely categorized as a good, utility tokens are probably exempt from the Act. Therefore, utility tokens are presumed not to be considered property under the Act and, as a result, are outside the statutory authority of the UUPA. Nevertheless, all other virtual currencies are presumed to be regulated by UUPA as intangible property under the state laws of Tennessee.
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