Texas Takes First State Steps to Regulate Bitcoin
Texas will not treat Bitcoin and other virtual currencies as legal money, according to a new memo from the Texas Department of Banking. Yet some companies that deal in Bitcoin transactions could draw state oversight, even if they are based outside of Texas.
Texas Banking Commissioner Charles Cooper issued a memo this month outlining the agency’s policies involving virtual currencies like Bitcoin.
“At this point a cryptocurrency like Bitcoin is best viewed like a speculative investment, not as money,” Cooper said in a statement.
In his memo, Cooper provided reasoning that echoed the IRS. Last month, the federal agency announced that, for tax purposes, it would treat Bitcoin as property instead of currency because no government recognizes the virtual currency as legal tender.
“Because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the statute,” Cooper’s memo reads.
While Texas does not have a state income tax, the state's Department of Banking does regulate certain financial transactions and license financial institutions. An exchange of Bitcoin for U.S. dollars between two parties would not draw the agency's interest, according to the memo.
But some third-party Bitcoin exchanges are already drawing state scrutiny because of the way they handle transactions involving U.S. currency and Bitcoin, according to Daniel Wood, assistant general counsel at the Department of Banking. Cooper’s memo states that such exchanges are involved in “money transmission” because they act as an “escrow-like intermediary” that holds onto a buyer’s funds “until it determines that the terms of the sale have been satisfied before remitting the funds to the seller.”
Such exchanges do not need to be based in Texas to fall under the state’s regulations, Wood said. “If they do business with Texas consumers, we can force them to get a Texas license,” he added.
Under the state finance code, a Bitcoin business conducting the type of money exchanges subject to state regulations could be required to meet a minimum net worth requirement of $500,000.
The memo puts Texas ahead of the curve on determining the state regulatory environment for currencies like Bitcoin, Wood said.
“I would say this is the first memorandum to offer specific guidance on how Bitcoin and cryptocurrency fit into the current regulatory scheme from a state,” Wood said.
The agency’s decision to write the memo was not instigated by any particular event or company, Wood said, though he added that the agency has heard from at least one entrepreneur interested in creating some sort of currency exchange involving Bitcoin.
“There’s a fair amount of business going on involving virtual currencies, and there’s a lot of confusion,” Wood said. “There was some motivation to get out there quickly and help guide the national discussion.”
Over the last year, Bitcoin has drawn increasing international attention and controversy. The lack of government oversight that supporters have championed has also drawn concerns about the currency’s reliability. Until recently, Mt. Gox was the world's leading Bitcoin exchange. In February, the Tokyo-based company suspended trading and announced that it had lost Bitcoins worth more than $400 million. The company is currently in the midst of bankruptcy proceedings in U.S. federal court in Dallas.
U.S. Rep. Steve Stockman, R-Friendswood, a Bitcoin supporter, has been critical of the IRS’s decision to treat virtual currencies like money. This week, he announced plans to file a bill to change the federal tax status of such currencies to currency.
"I don't think anyone really has a flavor for what they want, and I want to start the Bitcoin conversations,” Stockman said in his weekly email newsletter to constituents.
Stockman’s office did not respond to a request for comment Friday.