MSB – The Lines Between

I have been getting some DMs lately in response to our partial staking update. Many are offering potential work arounds or concerns about our recent update. I want to address some of the most common suggestions, as well as some additional background on how we came to the unfortunate conclusion that partial staking, as currently defined, makes us a money transmitter.

Talking to the experts

Before I go any further, I want to emphasize this was the result of a tremendous amount of due diligence (and thousands of dollars) from experts in the field. For a very long time, we refused to take “no” for an answer.

We started with one lawyer, with a specialty in crypto-currency. We outlined how the Helium network works in all its gory detail and eagerly waited to get the “all clear” and start accepting HNT.

Unfortunately, that never came. Instead, we received a memo that we would be classified as a money services business, most likely a money transmitter. It was explained that this was once more of a grey area, but FinCEN (the regulatory agency in the US) has since clarified many points in 2013 and again in 2019.

Like a bad medical diagnosis, we decided to get a second opinion… and a third… and a fourth. We even contacted a company that specializes in KYC/AML requirements for crypto exchanges. They have an in-house legal council and deal with this stuff day in and day out. Surely they would see things in a different light!

Nope. Everywhere we turned we heard the same diagnosis. Finally, it was time for us to face the facts.

Why?

There’s plenty of validator pools that don’t need a license. Why is Helium different?

The short answer is around custody. Currently, based on the Helium Network’s protocol, all staking must be done in increments of 10,000 HNT and each of those tokens must be in the same wallet. Due to this network limitation, any partial staking pool must take custody of your funds. That’s the only way to “bundle” the partial staking amounts into a lot of 10,000 tokens.

Here’s the rub, custody is the most important factor in determining whether a business is, in fact, a money services business.

You, of course, still own the tokens, but we, by necessity of the network, must take custody and have full control over your tokens. Essentially, we control the private key to your money. In regulatory speak, this makes us a “hosted wallet provider.”

During my stage of disbelief, I stumbled across this FINCEN guide. The interesting part is the section on CVC wallets. You can see several additional criteria FINCEN uses there.

Quoting from the PDF (emphasis mine),

…if the leader, the cloud miner, or the software agency combine their managing and renting services with the service of hosting CVC wallets on behalf of the pool members or contract purchasers, the leader, cloud miner, unincorporated organization or software agency, or the owner-administrator will fall under FinCEN’s definition of money transmitter for engaging in account-based money transmission.

Yet another nail in the coffin.

A “hosted wallet” is essentially when someone other than you takes control of your private key, but still gives you access to your funds. This is the essence of what partial staking pools for Helium do. They take control of your HNT, but still give you (limited) access to withdraw, check on your account, collect your staking payout, etc.

I am not a lawyer, and this is absolutely not legal advice. This is just a very, very small point in a much longer list our real lawyers have come up with.

Common concerns and suggestions

Here I’ll outline some of the most common suggestions that have seeped into my DMs.

Registering the company outside the US

These regulations apply to US citizens regardless of jurisdiction. Those that have been around the crypto space for a while probably recall a big shift where various crypto companies began discriminating against US citizens. This is the reason why. We could register outside the US, but we would need to block US citizens from applying. Binance.com vs Binance.us is one obvious example, but there are many more.

It’s worth noting that most countries have some form of MSB legislation (though often under a different name). For instance, if we wanted to onboard people from the UK, there are still regulatory requirements we must follow.

I’ve read some FINCEN guidance that says it does not apply to “users”. Can’t you just not be so formal about it and run the pool as “individuals”?

This doesn’t side step the issue at all. The exception is for users of the network that engage in MSB activity infrequently and not for gain or profit. Clearly, that doesn’t apply to validator pools.

Isn’t there an exception for “software providers”?

While there is an exception for software providers, this is meant mostly to protect developers re-selling their solution to another company.

For example, Company A develops software for running a crypto currency exchange, but doesn’t plan to use it themselves. Company B decides to buy the software and offer it to its customers. Company B would need to have a MSB license, but Company A would not.

Since we didn’t just build validator-pool software, but also intend to offer the service, we still need a MSB license.

HIP 31 leading to delegation is somewhat of a stretch, don’t you think?

Maybe. HIP 31 does not directly talk about delegation. However, in the community calls the topic has already been brought up several times. This is what lead us to our conclusion. If a HIP for delegation is not created shortly, we will sponsor it ourselves.

But [insert competitor] is doing it! Why can’t you?

This is a question we’ve been asking ourselves since our very first negative response, and a big reason why we continued to seek out so many other experts.

I can’t speak for anyone else. All I can give is our current understanding as a result of the vetting process above. Based on the advice we’ve received from multiple crypto-specific lawyers, this would affect any HNT partial staking pool accepting US citizens. Of course, we don’t have any control over our competitors. It’s up to them to come to their own conclusion. Without an all-clear from our legal council, we’re not willing to risk our client’s HNT or our reputation by being non-compliant.

Just do it anyway. What’s the worst that can happen?

Since the beginning, we’ve said staking is a serious business and we treat it that way. We continue to adamantly stand by that statement. Operating without a MSB is not a simple civil penalty — it’s a federal crime.

We may not like the regulation, but at the end of the day, the world has rules and we have to follow them. We acknowledge that, frankly, the law was written with good intentions. A common requirement for MSBs, for instance, is to hold surety bonds with each state. This is a large sum of money that the state can award to a service’s clients if the pool mismanages or abuses client funds.

We have to be able to live with ourselves. We strongly feel it’s better to be 100% compliant from the beginning than end up in a situation where we need to back-pedal or worse, are required to shut down unexpectedly and leave it up to the court process to return your assets.

We’re simply unwilling to put someone else’s assets at risk.

This whole thing sounds sketchy. Are you just trying to get out of offering the service?

Absolutely not. Demetre and I are devastated by the news. We’ve invested thousands of dollars and hundreds of hours to develop and offer the service — but more important than that, we feel we’ve let you down.

We encourage anyone with concerns to reach out to us. You can post on our Discord channel, DM us, or send us an email at [email protected]. We would be more than happy to talk in detail about anything discussed here with potential stakers or our competitors.

I think there’s something you didn’t consider.

Excellent! If you think you have found an alternate business model or a work around to stay compliant without becoming an MSB we would love to hear it. Please reach out and we’ll start investigating immediately.

Parting words

We started StakeMyHNT, not to simply jump on a business opportunity, but to give back to the community that has given us so much. I know, I know, cliché and sappy but it really is the truth. We can’t promise that all news will be good, but we do promise to always be transparent.

This is not goodbye, far from it. We’re still launching our full validator service and will continue to pursue every possible avenue for partial staking.

*I am not a lawyer and this should not constitute legal advice. This represents my personal opinion and current understanding of the facts presented to me.

1 thought on “MSB – The Lines Between

  1. RudyR says:

    Just submit the delegator HIP that allows partial staking with the delegator retaining the private key. This would remove you as a custodian

    or,

    Submit an HIP to lower the Validator HNT requirement from 10,000 to 100, 500, or 1,000 HNT. This would help decentralize the network and allow more Validator participants.

    Reply

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