US money transmission regulations and decentralised payment platforms

Abstract

US money transmitter law applies to money transfer businesses and payment processing companies. By imposing rigorous regulatory obligations on money transmitters, the law aims to protect customer assets and prevent the payment systems from being used for illegal activities. A central premise of the law is that the money transmitter intermediates between customers and the payment systems, and controls the flow of funds in the transaction. Decentralised finance has challenged this premise by connecting users to the payment infrastructure directly. Decentralised payment applications allow users who do not know each other to transact in cryptocurrency on the blockchain without requiring a trusted party to take custody of the assets while transaction is pending. This paper explores the incompatibility between money transmitter law and its policy objectives, and the increasing use of blockchain innovation to decentralise payment processing. It also discusses potential approaches available to regulators and their limitations. For payment industry practitioners and innovators, it is important to understand the scope and limitation of the existing law and how legal development may evolve in the future.