Executive Summary
- Regulatory pivot: Historically, avoiding custody of funds exempted firms from money transmission laws. Today, intent drives enforcement.
- State crackdowns: California, Florida, and Illinois regulators now penalize entities facilitating transactions without direct custody.
- Case evidence: Two 2023 cases prove regulators use vague statutes to classify intermediaries as money transmitters.
- Structural risks: Even non-custodial models risk licensing requirements if deemed to “enable” transmissions.
- Proactive steps: Firms must audit transaction intent, consult legal counsel, and preemptively address regulatory scrutiny.
Introduction: The Collapse of a Long-Standing Assumption
For decades, financial intermediaries operated under a simple premise: if you don’t take custody of funds, you’re not a money transmitter. This logic underpinned countless fintech models, from payment facilitators to blockchain platforms. But in 2023, regulators began dismantling this assumption—prioritizing intent over infrastructure.
The shift is tectonic. By focusing on why a customer engages a service (e.g., “to move money”), states like California, Florida, and Illinois are reclassifying non-custodial actors as money transmitters. The implications? A compliance reckoning for firms that once relied on structural workarounds.
The Intent Doctrine: How Regulators Are Redefining Money Transmission
From Custody to Purpose
Under traditional frameworks, money transmission laws applied only to entities holding funds—a bright line that offered certainty. Today, regulators apply a subjective lens: Does the service’s primary purpose involve facilitating value transfer? If yes, licensing requirements apply, custody or not.
California’s Department of Financial Protection and Innovation (DFPI) exemplifies this shift. In enforcement actions, regulators now ask originators: “Why did you use this service?” If the answer aligns with moving funds (e.g., “to pay suppliers”), the intermediary risks classification as a money transmitter—even if funds never touch their accounts.
The Weaponization of Ambiguity
State laws like Florida’s Money Transmitters Act and Illinois’ Financial Services Code grant regulators broad discretion. Terms like “money transmission” and “monetary value” remain undefined, enabling agencies to stretch definitions to fit novel business models.
This ambiguity is strategic. As one Florida regulator stated in a 2023 case: “If it walks like a money transmitter and talks like a money transmitter, we’ll regulate it like one.”
Case Studies: When Structure Failed to Save Firms
California’s Crackdown on Non-Custodial Platforms
In mid-2023, a SaaS provider offering invoicing tools for cross-border B2B payments faced California’s wrath. Though funds flowed directly between parties, the DFPI argued the platform’s purpose was to “enable money movement,” citing user testimonials as evidence. Result? A cease-and-desist order and six-figure penalties.
Florida’s “Facilitation Trap”
A Florida-based crypto wallet provider learned the hard way. By allowing users to route payments via third-party custodians, the firm avoided direct fund handling. Regulators disagreed, asserting the wallet’s design “clearly intended to transmit value.” The outcome? A retroactive licensing demand and operational freeze.
Implications for Banks, Fintechs, and Payment Facilitators
1. Licensing Liabilities Expand
Non-custodial models are no longer safe havens. Firms must now assess:
- Do marketing materials imply money movement?
- Do users perceive the service as a payments tool?
If regulators answer “yes,” licensing becomes unavoidable.
2. The Peril of Third-Party Reliance
Architecting around custodians (e.g., banking-as-a-service partners) no longer immunizes firms. Regulators now trace liability to the “orchestrator” of transactions.
3. Data as a Double-Edged Sword
Even platforms handling only financial data (e.g., routing instructions) risk scrutiny. As one Illinois regulator noted: “If you’re the glue in the transaction chain, you’re part of the transmission.”
Navigating the New Landscape: Strategies for Compliance
1. Audit Transaction Intent
Map user journeys and marketing claims. If facilitating payments is a de facto outcome, assume regulators will notice.
2. Preempt State Scrutiny
Proactively engage regulators in “no-action” discussions, especially in aggressive states like California. Document all interpretations.
3. Rethink Marketing Language
Avoid terms like “seamless payments” or “money movement.” Position services as ancillary to core offerings (e.g., “transactional analytics”).
4. Leverage Legal Precedents
While sparse, recent cases offer clues. Florida’s focus on user perception and California’s “primary purpose” test provide frameworks for risk assessment.
Conclusion: The Future of Money Transmission Compliance
The era of structural loopholes is over. As regulators prioritize intent, firms must adopt a dual strategy: re-engineering user experiences to minimize transmission perceptions while preparing for inevitable licensing battles.
For the payments industry, the message is clear: Compliance is no longer about what you hold—it’s about what you enable.
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This page was last updated on February 3, 2025.
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