Digital Asset Companies Struggle Under Patchwork State Licensing

Despite a thaw in the regulatory and political climate surrounding digital assets, companies offering digital asset services to consumers still face substantial compliance obstacles.

At the forefront of these challenges is the fragmented federal and state money transmission licensing regime that regulates inherently national businesses through a de facto 50-jurisdiction patchwork.

Many states have extended money transmission licensing regimes or adopted standalone virtual currency statutes to cover digital asset services. These laws are designed to protect consumers but, in practice, they produce a duplicative and often contradictory regulatory environment.

Companies providing custody, stablecoin payments, or exchange services must navigate 50-state surveys and compliance reviews, and inconsistent statutory requirements. Furthermore, digital asset companies often combine functions that are traditionally separated in banking. The absence of a single federal prudential regime and federal preemption amplifies the complexity.

Federal Licensing Avenues

Two new federal pathways offer meaningful movement toward rationalization.

First, the GENIUS Act creates a federal licensing framework for payment stablecoin issuers. It also provides limited preemption of state money transmission laws for stablecoin issuance. Depending on GENIUS Act rulemaking, becoming a federally chartered payment stablecoin issuer could function as a national licensing “passport” for stablecoin issuance and related activities.

Second, fintech companies are increasingly pursuing national bank or national trust charters from the Office of the Comptroller of the Currency. Federally chartered entities benefit from substantial federal preemption for activities within the scope of their authorized powers. For instance, the OCC concluded that, in appropriate circumstances, a national charter can preempt state money transmission licensing requirements.

Although federal preemption under the National Bank Act is broad, it’s activity- and fact-specific, and doesn’t extend to state consumer financial laws more generally.

Both federal pathways promise streamlined supervision and regulatory consistency, but they come with significant tradeoffs. Chartered entities submit to bank-style supervision, capital and liquidity requirements, governance standards, multiple regulators, and ongoing examinations—costs that may place these options out of reach for smaller firms.

Both pathways also carry some legal uncertainty, particularly regarding whether preemption would extend to state virtual currency-specific statutes.

Overlapping State Regimes

The complexity of state regulation extends beyond just licensing.

At the federal level, the Financial Crimes Enforcement Network requires money services businesses, which include many types of digital asset companies, to register and maintain Bank Secrecy Act/Anti-Money Laundering programs. But FinCEN’s regime targets illicit finance, not consumer protection. States fill that gap through money transmission laws, each with its own definitions that capture varying subsets of virtual currency activity.

States’ divergent rules create threshold uncertainty: The same business model may be regulated in one state, arguably regulated in another, and unregulated in a third. For fast-moving digital asset firms, this necessitates continual legal review and often results in products being launched only in certain states.

States’ substantive obligations also vary. Permissible investment rules, net worth thresholds, and bonding requirements often diverge, sometimes forcing multi-state licensees to hold capital that exceeds any one state’s minimum. Some states impose in-kind reserve mandates for virtual currency obligations, complicating treasury management. Others have adopted bespoke cybersecurity requirements.

Critically, reserve requirements keyed to a company’s nationwide customer base, rather than just in-state customers, can force multi-state licensees to structure their balance sheets around the most restrictive state in which the company is licensed, regardless of where most customers reside.

Recognizing these inefficiencies, the Model Money Transmission Modernization Act was introduced to harmonize definitions and obligations. But adoption was uneven, modifications common, and treatment of digital asset activity inconsistent between states. Hence, the patchwork remains.

Potential for Preemption

Federal preemption offers a potential escape for some firms, but its contours are unsettled.

Even if a GENIUS Act license or OCC charter preempts aspects of state money transmission licensing, it’s unclear whether that preemption extends to virtual currency-specific laws, such as New York’s BitLicense or California’s Digital Financial Assets Law. These statutes regulate activities not traditionally associated with banking, including custody, validation, staking, and exchange services.

States may argue that these activities fall outside the business of banking and aren’t preempted. And GENIUS Act preemption, by its terms, applies only to payment stablecoin issuance; other activities would likely remain subject to state regimes absent separate federal authority.

Federal preemption under the National Bank Act also applies only to activities within a national bank’s powers or incidental to those powers. If a chartered company’s activities in part fall outside traditional banking functions, preemption may not apply.

The result is another murky patchwork: Federal preemption may apply in some contexts but not others, all subject to evolving statutes, rulemaking, and litigation. For firms that rarely operate in narrow silos, the compliance problem persists.

Constitutional Questions

For companies unable to obtain federal licenses or charters, constitutional arguments may eventually come to the fore.

The Dormant Commerce Clause prohibits state regulation that discriminates against interstate commerce or imposes burdens clearly excessive relative to local benefits. Courts have invalidated laws that force businesses to comply with conflicting state requirements – precisely the dynamic created when, for instance, states impose unique capital or reserve requirements based on nationwide activity.

Courts generally have been deferential to state consumer protection laws, and Dormant Commerce Clause doctrine has narrowed, particularly after Nat’l Pork Producers Council v. Ross. A successful Dormant Commerce Clause argument would likely require a substantial extraterritorial burden.

Nevertheless, challenges to state money transmission laws that impose nationwide capital or reserve requirements, rather than limiting obligations to in-state activity, remain plausible. Regimes that effectively regulate conduct outside a state’s borders or force compliance with inconsistent mandates could present the kind of extraterritorial burden warranting invalidation.

Call For Coordination

Digital assets challenge regulatory geography. The question isn’t whether states have a legitimate interest in protecting residents, but whether a 50-state patchwork remains viable for inherently national firms.

Absent state action, courts or Congress may ultimately resolve these tensions. For now, state lawmakers have a window to modernize and harmonize their regimes proactively.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Daniel Isaacs is partner at Morrison Cohen and focuses on regulatory enforcement, litigation, and arbitration relating to digital assets and cryptocurrency.

Josh Garcia is partner at Morrison Cohen and advises on blockchain, fintech and complex financial regulatory matters, with a focus on securities, commodities, lending, consumer protection and payments.

Vani Upadhyaya is an associate at Morrison Cohen and focuses her practice on litigation, arbitration, and regulatory enforcement relating to cryptocurrency and blockchain technology.

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