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Nov 3rd, 2020

Florida’s New FinTech Sandbox Statute Removes Barriers to Innovation in Digital & Cryptocurrency Servicing

By Robert Kain, The Concept Law Group and Zachary Catanzaro, Zachary L. Catanzaro PA

Florida continues to lead the nation on entrepreneurial digital currency services with the recently adopted Financial Technology Sandbox law (“FinTech Sandbox”). Codified at Fla.Stat. 559.952 (effective January 1, 2021), the FinTech Sandbox establishes a two year, extendable for an additional year, exemption and waiver of select provisions of Florida’s Money Services Business Act (“FMSBA”), codified at Fla. Stat. 560.103, and Florida’s Consumer Finance Act (“FCFA”), codified at Fla.Stat. 516.03(1). See also Fla.Stat. 559.952(9)(a)(providing that a business entity with a FinTech Sandbox license is deemed licensed under the FCFA and the FMSBA). However, the Innovative Financial Product (“IFP”) licensee is subject to any provision of the FCFA and the FMSBA not specifically excepted under the FinTech Sandbox. Fla.Stat. 559.952(9)(b)-(c). The licensee must still comply with those FCFA and FMSBA provisions. As such, the licensee “may not engage in, or in any manner advertise engagement in, the business of cashing payment instruments or exchanging foreign currency.” Fla.Stat. 560.303(1).

Once approved by the Office of Financial Regulation (“OFR”), an IFP license effectively permits all forms of digital currency, including cryptocurrency, creation and exchange services in Florida for any Floridian or Florida business organization who uses or contracts to use an IFP. See Fla.Stat. 559.952(3)(c). An IFP is broadly defined as any “new or emerging technology, or new uses of existing technology, which provide a product, service, business model, or delivery mechanism … not known to have a comparable offering” in Florida. Fla.Stat. 559.952(3)(h). A financial product or service means “a product/service related to a consumer finance loan,” as defined in the FCFA, Fla.Stat. 516.01, or “a money transmitter or payment instrument seller,” as defined in the FMSBA, Fla.Stat. 560.103, including “mediums of exchange that are in electronic or digital form,” which are under the jurisdiction of the OFR. Fla.Stat. 559.952(3)(f).

Who is eligible?

The FinTech Sandbox applies to Money Service Businesses and Money Transmitters. A Money Services Business (“MSB”) includes “any person located in or doing business in this state, from this state, or into this state from locations outside this state or country who acts as a payment instrument seller, foreign currency exchanger, check casher, or money transmitter.” Fla.Stat. 560.103(22). This includes both natural persons and business organizations. Fla.Stat. 559.952(3)(c). A Money Transmitter (“MT”) includes “a corporation, limited liability company, limited liability partnership, or foreign entity qualified to do business in this state which receives currency, monetary value, or payment instruments for the purpose of transmitting the same by any means, including transmission by wire, facsimile, electronic transfer, courier, the Internet, or through bill payment services or other businesses that facilitate such transfer within this country, or to or from this country.” Fla.Stat. 560.103(23).

The FMSBA prohibits a person to “engage in the business of a money services business or deferred presentment” or “advertise that they engage in, [] sell[] or issu[e] [] payment instruments or … act[] [as] a money transmitter” unless licensed or exempted by the OFR. Fla.Stat. 560.125(1) and Fla.Stat. 560.204(1)(“a person may not engage in, or in any manner advertise that they engage in, the selling or issuing of payment instruments or in the activity of a money transmitter, for compensation, without first obtaining a license under this part. For purposes of this section, ‘compensation’ includes profit or loss on the exchange of currency”); see also FinTech waiver and exemptions, Fla.Stat. 559.952(4)(a)(5) and (11). The FinTech licensee can conduct business through any electronic means, including the Internet or a software application. Fla.Stat. 559.952(4)(c).

Scope of IFP License & Exemptions

The FinTech exemption and waiver only extends to the licensee’s two- or three-year sandbox license period. The OFR approves the FinTech license “if one or more of the general laws enumerated … currently prevent the innovative financial or service from being made available to [Florida] consumers.” Fla.Stat. 559.952(4)(a)(6). The OFR may enter into agreements with other states or federal agencies “to allow licensees under the Financial Technology Sandbox to make their products or services available in other jurisdictions.” Fla.Stat. 559.952(6)(c).

Under the new law during the sandbox period, an IFP licensee has selective exemptions from some of (but not all) the requirements of the FCFA and FMSBA. See Fla.Stat. 559.952(4)(a)(1)-(2)(exempting some background check requirements of FCFA); id. at (4)(a)(3)(same for FMSBA); id. at (4)(a)(4)(exempting MSB from certain quarterly report requirements); id. at (4)(a)(5)(exempting certain MSB activities from licensure); id. at (4)(a)(6)(permitting IFP licensee to appoint authorized vendor without a license, if qualified); id. at (4)(a)(7)(eliminating certain consumer disclosure requirements); id. at (4)(a)(8)(exempting some background check requirements of FMSBA and prelaunch submission of MSB anti-money laundering plan); id. at (4)(a)(9)(creating renewal fee exemptions); id. at (4)(a)(10)(creating fee exemptions); id at (4)(a)(11)(permitting certain IFP advertising); id at (4)(a)(12)(removing submission of some MSB operational forms); id. at (4)(a)(13)(eliminating certain MSB operational activities); and id. at (4)(a)(14)(modifying bond and surety requirements).

Application Requirements & Process

The IFA license application must identify each specific law and regulation from the MSBA or FCFA “which currently prevents the IFP from being available to consumers and the reasons why.” Fla.Stat. 559.952(5)(b)(1). Common to similar licensed activities, the application must identify the business entity, the person representing the business, and all control persons. Fla.Stat. 559.952(3)(d) generally defines control persons as officers, directors, and anyone having 10% or more of the applicant’s business entity and their backgrounds. The application disclosures include whether any control person has “pled no contest to, or been convicted of or found guilty of, or is currently under investigation for fraud, a state or federal securities violation, a property-based offense, or a crime involving moral turpitude or dishonest dealing, in which case the application must be denied,” Fla.Stat. 559.952(5)(c)(5), and also the “financial responsibility of the applicant and any control person, including any history of unpaid liens, unpaid judgments, or other general history of nonpayment of legal debts, including, any bankruptcies within the past 7 calendar years.” Fla.Stat. 559.952(5)(c)(7).

Specific requirements include: (a) the maximum number of IFP consumers, initially capped at 15,000, but after a licensee’s semi-annual report, can be up to 25,000, Fla.Stat. 559.952(5)(b)(4);
(b) a proposed draft of a required consumer disclosure to be provided to consumers prior to the delivery of the IFP, Fla.Stat. 559.952(5)(b)(5);(c) nature of the IFP, including all relevant technical details, Fla.Stat. 559.952(5)(c)(1); (d) the potential risk to consumers, methods to protect consumers, and resolve complaints, Fla.Stat. 559.952(5)(c)(2); (e) the applicant’s business plan market analysis, financial projections, or pro forma financial statements, and financial viability, Fla.Stat. 559.952(5)(c.3); (f) necessary personnel, adequate financial and technical expertise, and a sufficient plan to test, monitor, and assess the IFP, Fla.Stat. 559.952(5)(c)(4); and (g) “Any other factor that the [OFR] determines to be relevant.” Fla.Stat. 559.952(5)(c)(7). Although the OFR is required to approve or deny the application in 60 days, this may be extended upon consent and the OFR “may impose conditions on any approval. Fla.Stat. 559.952(5)(c).

An IFP applicant cannot seek another license “for a substantially similar financial product or service”, Fla.Stat. 559.952(5)(d)(1), and must affirmatively demonstrate their financial responsibility and that of “any control person.” Fla.Stat. 559.952(5)(d)(3). If a FinTech applicant disagrees with an OFR licensing requirement or needs further clarification, “[b]efore filing an application, a person may seek a declaratory statement pursuant to Fla.Stat. 120.565 regarding the applicability of a statute, a rule, or an agency order relative to the petitioner's circumstances, variance or waiver of a rule.” Fla.Stat. 559.952(5)(a); see also Fla.Stat. 120.565. Upon approval of an application, the OFR notifies the licensee that it is exempt from the provisions of the FCPS and/or the FMSBA and corresponding rules during the FinTech Sandbox period. The OFR the approval on its website and a summary of the IFP and licensee’s contact information. Fla.Stat. 559.952(5)(e).

Customer Disclosures Requirements

Before any consumer purchases, uses or enters into an agreement for a licensed IFP, the licensee must provide to the consumer, and the customer must acknowledge receipt of, a statement disclosing: (a) licensee’s contact information; (b) that the IFP is available for a temporary period of time; (c) that the State of Florida nor any of its agencies endorse the IFP; (d) that the IFP is undergoing testing, may not function as intended, and may entail financial risk; (e) that the licensee is not immune from civil liability for losses or damages caused by the IFP; (f) the date licensee’s IFP sandbox period ends; (g) OFR contact information; and (g) “notification that [any] suspected legal violations, complaints, or other comments related to the financial product or service may be submitted” to the OFR. Fla.Stat. 559.952(6)(b)(1)(a)-(g). The licensee is required to disclose any other statements or disclosures as may be required by the OFR. Fla.Stat. 559.952(6)(b)(1)(a) to (h).

Other Obligations

Similar to the FCFA and the FMSBA, an IFP licensee has a continuing obligation to promptly report any material change in its operations that differs from its FinTech application. Fla.Stat. 559.952(5)(g). The OFR may administratively examine the records of a licensee at any time, with or without notice. Fla.Stat. 559.952(6)(d). Semi-annual OFR customer counts and financial reports are required. Fla.Stat. 559.952(8). Similar to other OFR licenses, the licensee must retain good records of all transactions and customer data, including receipt and acknowledgment of the customer disclosure. Fla.Stat. 559.952(6)(b)(2). Importantly, Florida’s stringent anti-money laundering record maintenance and reporting requirements remain in full force and effect under the Florida Control of Money Laundering in Money Services Business Act, and under the Florida Control of Money Laundering in Money Transmission Act, as codified at Fla.Stat. 560.123.

The FinTech licensee is subject to civil damages for acts and omissions and all criminal and consumer protection laws. Fla.Stat. 559.952(10)(a)(1) and (2). The OFR may revoke or suspend an IFP license if (a) the licensee has violated or refused to comply with any statute, a rule that has not been waived, an order of the OFR, a condition placed on the license; (b) a fact or condition that, it been known when the application was filed, would have warranted denial or the imposition of material conditions; or (c) a material error, false statement, misrepresentation, or material omission is discovered in the FinTech application. Fla.Stat. 559.952(10)(b)(1)(a) to (c). The OFR may revoke or suspend the license if “[a]fter consultation with the licensee, the OFR determines that continued testing of the IFP would: (a) be likely to harm consumers; or (b) [n]o longer serve the purposes of this section because of financial or operational failures of the IFP.” Fla.Stat. 559.952(10)(b)(1)(d)(I) and (II).

 

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