Almost certainly, yes.

Reserve provisions enable processors to keep a portion of funds from a transaction in a separate account, held at an acquiring bank until the risk of trailing liability ends.

Acquiring banks and processors rely on reserves to protect themselves against potential liability from credit card chargebacks and other disputed transactions. Reserve provisions enable processors to keep a portion of funds from a transaction in a separate account, held at an acquiring bank until the risk of trailing liability ends. A merchant agreement not only defines who owns the reserves, but how long they may be held by the acquirer post-termination before distribution to the merchant.

Until recently, banks and processors could feel relatively secure about the protection offered by standard reserve provisions. Yet the recent decision in Federal Trade Commission v. MOBE Ltd., Case No. 6:18-cv-862-Orl-37DCI (M.D. Fl. Aug. 8, 2018) suggests that things may not be as straightforward as they seem when it comes to the question of who owns and control merchant reserves. Qualpay and Synovus Bank learned this the hard way when the Court construed the apparent ambiguity in their merchant agreement regarding this question against them, and held that the merchant owned the reserves.

The recent decision in Federal Trade Commission v. MOBE Ltd., Case No. 6:18-cv-862-Orl-37DCI (M.D. Fl. Aug. 8, 2018) suggests that things may not be as straightforward as they seem when it comes to the question of who owns and control merchant reserves.

This ruling came about after the Federal Trade Commission obtained a temporary restraining order (“TRO”) against MOBE Ltd., an allegedly fraudulent business education program, and other related parties. The Court entered an order enjoining defendants’ unlawful conduct, freezing their assets, and appointing a receiver. The TRO included an asset freeze that covered “reserve funds held by payment processors, credit card processors, merchant banks, acquiring banks, … third party processors, … or other entities[.]”

Even though the processors and banks were not parties to the litigation, the FTC and the court-appointed receiver took the position that the reserve funds being held by them were equally subject to the TRO.

Qualpay and Synovus Bank sought emergency relief from the TRO on the grounds that the reserve funds were their property, under their control, and should therefore be excluded from the asset freeze and turnover order. The Court rejected this position, and held that the reserve funds constituted MOBE’s property and were therefore subject to the TRO.

The FTC and the court-appointed receiver took the position that the reserve funds being held by them were equally subject to the TRO. 

In reaching this conclusion, the Court focused on the parties’ roles relative to the underlying transactions, and found that the payment processor and acquiring bank are “middlemen” service providers without any entitlement to the net transaction proceeds. The Court also concluded that the merchant agreement was ambiguous with respect to ownership of merchant reserves, and construed this language against Qualpay and Synovus as the drafting parties.

It bears emphasis that the merchant agreement employed fairly standard language that is widely used in the industry regarding the character and ownership of reserves. The Court cited this language, including a clause allocating ownership of the reserves to the merchant, and made additional observations about the parties’ relationship, which favored the reserve fund being turned over to the receiver. For example, the Court observed that Qualpay and Synovus performed due diligence both before, and during, the contractual relationship, which suggested that the money at issue was “akin to collateral.” The Court – which obviously lacked a good understanding of how chargebacks operate – also found that over 180 days had passed since termination, so the risk of chargebacks had likely ended, and MOBE’s contingent interest in the reserve funds had therefore materialized; and thus, the receiver should now have control over those funds, even under alternative theories of ownership.

The Court cited a clause allocating ownership of the reserves to the merchant, and made additional observations about the parties’ relationship, which favored the reserve fund being turned over to the receiver.

The Court seized upon the fact that MOBE was the party granting Synovus a security interest in the reserve account, and held that a merchant can only grant a security interest in something that it owns. The Court also referenced provisions that allowed Synovus to deduct funds from the reserve account if there were insufficient funds in the settlement account, which the Court viewed would not be necessary if the bank owned the reserve account; and noted language that described the reserve account as part of the “property held by Bank.”

Based on the foregoing, the Court observed that Qualpay and Synovus were the “contributing authors to their own misfortune,” and held that any ambiguity in the merchant agreement regarding ownership of the reserve funds must be construed against them as the drafters – not MOBE.

After MOBE, reserves are now fair game for seizure by receivers in FTC cases.

This decision should be a wakeup call to acquirers and processors across the board. Based on over 20 years of experience in the payments industry, I can tell you that the vast majority of merchant agreements employ the same or similar language.

After MOBE, reserves are now fair game for seizure by receivers in FTC cases, and the standard reserves and security clauses present in most merchant agreements are vulnerable to attack, and may be ineffective to protect acquiring banks and processors’ valuable interest in these funds.

This decision should be a wakeup call to acquirers and processors across the board. The vast majority of merchant agreements employ the same or similar language.

The post Your Contract Doesn’t Protect You: Recent Decision Should Make You Worry About Your Merchant Reserves appeared first on Genco Payments.

The battle over surcharges has raged for decades. The card brands, merchants and even regulatory bodies have fought hard to prevail. What’s the latest? Read on to find out.

Credit card brands hate allowing merchants to charge consumers more when they use a credit card. Decades ago, the payment brands began placing contractual restrictions, through their rules, on retailers that prevented them from charging credit card users higher prices than cash customers. Congress put a partial stop to this practice through the Truth in Lending Act of 1974 and subsequent amendments, which outlawed contractual provisions in credit card merchant agreements preventing the use of cash discounts. As a result, card companies could not prohibit cash discounts, but they could forbid credit card surcharges in their merchant agreements. And they did.

Congress put a partial stop to this practice through the Truth in Lending Act of 1974 and subsequent amendments, which outlawed contractual provisions in credit card merchant agreements preventing the use of cash discounts.

Visa and MasterCard responded with new rules that allowed cash discounts but banned surcharges. Although the definition of what constitutes a cash discount versus a surcharge would be fought about for the next two decades, Visa currently takes the position that a “cash discount” occurs when a merchant posts credit card prices and offers a discount on that price for customers who pay with cash. For instance, when a merchant posts the full price along side a discounted price for paying for the product in cash, the merchant is selling utilizing a cash discount. On the other hand, when a merchant adds a fee to the transaction, that constitutes a surcharge. And to complicate matters further, the brands permit “convenience fees” in limited circumstances for fixed amounts for all tickets.

Visa currently takes the position that a “cash discount” occurs when a merchant posts credit card prices and offers a discount on that price for customers who pay with cash.

In the next step in this saga, merchants sued the brands alleging a variety of antitrust claims, including that the brands conspired to prohibit merchants from charging different prices for cash and credit, and adding the credit card fees to the transactions. As part of a 2013 settlement to the lawsuit, both Visa and MasterCard agreed to allow surcharging, but set up barriers to strongly discourage the practice. For instance, Visa requires each merchant to:

1. Notify Visa at least 30 days in advance of beginning to surcharge;
2. Limit surcharging to credit cards only (no surcharging debit and prepaid cards);
3. Cap the amount of the surcharge to the merchant’s discount rate for the applicable credit card surcharged, and to no more than 4 percent;
4. Disclose the surcharge as a merchant fee, and clearly alert consumers to the practice at the point of sale – both in store and online – and on every receipt; and
5. (Most surprising given the nature of the antitrust lawsuit that gave rise to the authorizing surcharging rule) Visa says a merchant can choose to surcharge Visa and not other card brands, but merchants must surcharge Visa on the same terms and conditions as competitors.[1]

It is a rare merchant that finds complying with these rules worth the effort. In many instances, the merchants decide they are better off just continuing to eat the transaction cost.

As part of a 2013 settlement to the lawsuit, both Visa and MasterCard agreed to allow surcharging, but set up barriers to strongly discourage the practice.

While the card brands and the merchants fought about surcharging, several states, including California, Florida, Massachusetts, New York, and Texas, enacted laws that make credit card surcharges illegal.[2] Merchants, in turn, began a series of lawsuits challenging these statures as unconstitutional based upon free speech grounds. In New York, the challenge to the surcharge ban went all the way to the Supreme Court of the United States (“SCOTUS”).

The case, Expressions Hair Design v. Schneiderman, centered on merchants’ arguments that the prohibition on credit card surcharges under New York General Business Law Section 518 (“Section 518”) constituted an unlawful restriction of speech in violation of the First Amendment. A group of merchants wanted to use a pricing model with single stickers, i.e. one price for each product, compared to stickers that identified a credit card price and a cash discount price. The merchants wanted to put up signs that would indicate a surcharge of either a flat dollar amount or a percentage of the total cost added for the use of credit cards.

On appeal, SCOTUS held that Section 518 does regulate speech as applied to these specific retailers, and remanded the case to the Court of Appeals to determine whether the regulation survived scrutiny as a speech regulation and whether the statute was vague as to the merchants.

These merchants filed a lawsuit against state officials, arguing that Section 518 restricted how they communicate their prices and effectively prohibited them from advertising the extra costs imposed on them to accept credit cards. The District Court ruled in favor of the merchants. Then, the Second Circuit Court of Appeals reversed, holding that the law required the sticker price of cash and credit card payments to be the same and, therefore, regulated conduct rather than speech.[3] On appeal, SCOTUS held that Section 518 does regulate speech as applied to these specific retailers, and remanded the case to the Court of Appeals to determine whether the regulation survived scrutiny as a speech regulation and whether the statute was vague as to the merchants.[4]

With the First Amendment now in play, the Second Circuit was then tasked with analyzing whether Section 518 is a valid commercial speech regulation, and whether the law could be upheld as a valid disclosure requirement.[5] The Second Circuit, in turn, kicked the question to the New York Court of Appeals to determine “whether a merchant complies with Section 518 so long as the merchant posts the total dollar-and-cents price charged to credit card users.”[6]

In a closely divided decision, the New York Court of Appeals held that the surcharge practice is acceptable so long as no arithmetic is involved, and customers need not calculate what the differential is themselves.[7] But merchants may not, as they sought to do, simply list the cash price and then list a surcharge of X percent or X dollars. (Yes, lawyers and judges hate math.)

Almost immediately, the New York Attorney General settled the lawsuit on terms that allowed these merchants to surcharge when the merchants post total prices for credit card purchases in dollars and cents. The settlement was likely a way for the New York Attorney General to save face and to attempt to keep some portion of its surcharging law.

In a closely divided decision, the New York Court of Appeals held that the surcharge practice is acceptable so long as no arithmetic is involved, and customers need not calculate what the differential is themselves. (Yes, lawyers and judges hate math.)

Surcharging bans on the state level are on their way out. In light of SCOTUS’s First Amendment ruling, merchants are challenging other state laws.

In Rowell v. Paxton, a federal district court declared Texas’s surcharge law unenforceable, reversing a previous decision from 2016 that the law was an ordinary business regulation.[8] The court found that under Expressions, the law must be evaluated as a regulation on speech, and the state failed to meet the high legal standard required to restrict the speech of these merchants.

Meanwhile, the Ninth Circuit recently evaluated California’s law and held that “the statute as applied to these plaintiffs violates the First Amendment.”[9] Florida’s law was found to be an unconstitutional abridgment of free speech even before Expressions came down.[10] And as long as the surcharge is clear and conspicuous to the consumer, even to the level of doing the math for the consumer, states will be hard pressed to say these laws are legitimate limits on speech.

The unlikely enemy of surcharge ban laws: free speech.

The key takeaway of the current landscape of surcharging is that laws banning surcharging are on the way out due to free speech concerns. Nevertheless, merchants will have to continue to comply with the card brands’ Draconian rules regarding surcharging that make it unlikely that surcharging will appeal to more than a small segment of merchants.

References

1] Source: https://usa.visa.com/dam/VCOM/download/merchants/surcharging-faq-by-merchants.pdf

[2] States that have enacted surcharge bans include: California (Cal. Civil Code §1748.1); Colorado (Colo. Rev. Stat. §5-2-212); Connecticut (Conn. Gen. Stat. §42-133ff); Florida (Fla. Stat. §501.0117); Kansas (Kan. Stat. Ann. §16a-2-403); Maine (Me. Rev. Stat. Ann. tit. 9-A, §8-509); Massachusetts (Mass. Gen. Laws Ann. ch. 140D, §28A); New York (N.Y. General Business Law §518); Oklahoma (Okla. Stat. tit. 14A, §2-211); and Texas (Tex. Business & Commerce Code Ann. §604A.001 et seq. and Tex. Finance Code Ann. §339.001). Puerto Rico (P.R. Code Ann. tit. 10, §11) also has a surcharge ban. Meanwhile, Minnesota limits the amount of surcharges to 5% and requires both an oral statement and a conspicuously posted sign informing purchases of the surcharge (Minn. Stat. §325G.051) while Georgia explicitly permits convenience fees (Ga. Code §13-1-15).

[3] See Expressions Hair Design v. Schneiderman, 137 S. Ct. 1144, 1145 (2017).

[4] Id. at 1147.

[5] Expressions Hair Design v. Schneiderman, 877 F. 3d 99, 102 (2nd Cir. 2017).

[6] Id. at 103.

[7] Expressions Hair Design v. Schneiderman, NY Slip Op 07037 (Oct. 23, 2018).

[8] Rowell v. Paxton, Case No. 1:14-CV-00190 (W.D. Texas Aug. 16, 2018).

[9] Italian Colors Restaurant v. Becerra, 878 F. 3d 1165, 1167 (9th Cir. 2018).

[10] Dana’s RR Supply v. Attorney General, 807 F. 3d 1235, 1239 (11th Cir. 2015).

The post Surveying Surcharges: Credit Card Surcharge Laws & Recent Legal Trends appeared first on Genco Payments.

What are the warning signs you are going to be screwed over by a payments company?

1. You don’t know who you are dealing with.
2. Your quoted rate is incredibly low.
3. They just want you to make a few white lies.

Let’s go over these:

Take five minutes and perform a simple Google search on any prospective payment processors. It is one of the best background checks you can perform.

Who are you dealing with?

The biggest warning sign is when you don’t know who you are dealing with. For instance, a payment company that fails to identify its management, with no profile picture, job history, or biography, or just a name without a photo on the website. Most of these are predators who are out to take advantage of merchants and do not want to provide an avenue for aggrieved merchants to reach out. Take five-minutes and perform a simple Google search on them. It is one of the best background checks you can perform. If their LinkedIn profile is similarly empty, with no profile picture, job history, or biography, you should avoid them. If the search pops up negative merchant reviews, avoid them.

Most banks continue to maintain a conservative position on the CBD industry pending a relaxation of federal laws and regulations – even after the recent passage of the 2018 Farm bill and associated advances. If a processor is giving elusive answers, it is best to look elsewhere.

Other processors will refuse to disclose the name of the acquiring bank for the solution. Most banks continue to maintain a conservative position on the CBD industry pending a relaxation of federal laws and regulations – even after the recent passage of the 2018 Farm bill and associated advances. If a processor is giving elusive answers, it is best to look elsewhere. They have some reason for concealing this information and you should assume they are suspect and avoid them.

Steer clear of payment processors who offer processing rates less than the cost from VISA and MasterCard. They claim they can legally and transparently process for products clearly banned by the card brands.

An offer that is too good to be true?

I see ads for CBD merchant processing in my email and on social media that are literally too good to be true. They offer processing rates less than the cost from VISA and MasterCard. They claim they can legally and transparently process for products clearly banned by the card brands. Or they assert they have a “secret sauce” that enables them to do what other processors cannot, such as operating at a higher chargeback rate. Almost always, these are bogus.

Just a little white lie.

It is far better to take the time to work with a processor that is interested in taking your business as it truly operates instead of taking a shortcut that can result in getting you black listed with the card brands.

The final warning sign is when your agent or processor requests that you sign an application with incorrect information. Usually, they ask you to identify a different owner or use an incorrect product MCC code. Or they ask you to use a “bank page” that eliminates a troublesome aspect of your business such as the claims you are making, or the sale of ancillary products prohibited by the processor. They ask you to do this to “get by underwriting.” Going along is a big mistake because you would be making a false statement to a bank, which is a federal crime. It is far better to take the time to work with a processor that is interested in taking your business as it truly operates instead of taking a shortcut that can result in getting you black listed with the card brands – this is called being MATCHed or TMF’d – or accused of committing a felony.

The post How Can CBD Merchants Avoid Getting Screwed by Their Payment Processors? appeared first on Genco Payments.

Experts predict that sales in the hemp subcategory of CBD could surpass $22 billion by 2022. With all this money flying around, getting involved is a no-brainer. But there’s still a ton of ambiguity over the legality of CBD. The Drug Enforcement Agency (DEA) has long asserted that CBD should be classified as cannabis under the Controlled Substances Act (CSA) of 1970. Meaning they’ve sought to regulate it aggressively since the 1990s.

Hemp industry officials are eagerly awaiting a decision regarding the legality of CBD.

Fighting Back: Congress Pushes for CBD Legality

In response to the zealousness of the DEA, Congress passed the 2014 Farm Bill and Consolidated Appropriations Act of 2016. Under the acts, Congress exempted several parts of the cannabis plant from the CSA definition. The exemptions allowed farmers under limited circumstances to grow industrial hemp and in turn produce CBD, as long as it has a THC content of less than 0.3%. The Farm Bill preempted the CSA and was meant to reel back the DEA’s authority.

The DEA wasn’t going to take that lying down. It claimed that even trace amounts of THC in CBD products proved that CBD comes from the non-exempt part of the cannabis plant — and thus is subject to DEA seizure.

The Drug Enforcement Agency (DEA) has long asserted that CBD should be classified as cannabis under the Controlled Substances Act (CSA) of 1970. Meaning they’ve sought to regulate it aggressively since the 1990s.After multiple lawsuits, the DEA issued an internal and external directive to federal agencies clarifying that the mere presence of cannabinoids does not necessarily place a CBD product under the authority of the DEA.

Instead, the DEA’s material concern is what the product was made from (i.e., exempt v. non-exempt parts of the cannabis plant). The DEA maintains that any CBD product containing more than trace amounts of CBD can only come from non-exempt parts of the plant — which would allow the DEA to seize and destroy those CBD products.

The 0.3% Rule: Excluding Hemp from the CSA

To help resolve this constant tension between the DEA and the CBD community, Senate Majority Leader Mitch McConnell introduced an amendment to the 2018 Farm Bill Act that would remove hemp crops and products that contain less than 0.3% THC from the CSA — which would settle the question regarding the DEA’s authority over CBD product.

The Farm Bill preempted the CSA and was meant to reel back the DEA’s authority.

McConnell has even go so far as to guarantee the Farm Bill will pass with his amendment to exclude hemp from the CSA. Currently, the bill is in a Senate-House Conference Committee, because the House originally passed the bill without the hemp provision. Before the bill can be sent to the President for his signature, it must first pass in both chambers with identical language.

How does this affect credit card processors and banks?

Card Processors and Banks Aren’t Ready to Get in Bed with CBD Companies

Processors like VISA and MasterCard are still wary of the industry, as are big banks like Chase and JP Morgan. For them, there’s tons of additional paperwork and red tape required for working with cannabis businesses. Federal laws require any transactions with ”marijuana”-related businesses to be reported — the hassle isn’t worth it for many large banks and credit card processors. Banks are highly conservative by nature, and they and their regulators are concerned about their reputation.

Once other credit card processors and banks realize how profitable the industry is, there will be more businesses willing to enter the space.

Due to the lingering stigma of cannabis, banks are afraid of receiving negative publicity for working with cannabis businesses (see bank examiners manual).

LegitScript, an online compliance service-provider that determines if businesses are selling legal products, initially classified CBD businesses as illegal until recently. Misinformation and a lack of reporting on cannabis have led banks to be especially cautious about any products that could be derived from cannabis or hemp.

Until McConnell’s announcement guaranteeing the passage of the 2018 Farm Bill, no major credit card processor worked in the CBD industry. Elavon, the first major processor, has just started to accept clients. It is likely the start of a positive trend for the CBD industry and the cannabis community in general.

Processors like VISA and MasterCard are still wary of the industry, as are big banks like Chase and JP Morgan.

Once other credit card processors and banks realize how profitable the industry is, there will be more businesses willing to enter the space. For now, smaller banks and credit unions are the primary source for banking — at least until the newest Farm Bill passes.

CBD Market Is Filled with Regulations and Red Tape — For Now

Additionally, federal agencies like the FDA have bogged down the CBD market with onerous regulations. The FDA has asserted that both THC and CBD products are excluded from the definition of dietary supplements. The FDA claims it’s a violation of the FD&C Act to transport CBD product across state lines in any food product.

State regulatory bodies are guilty of the same — which is why you’ll find more regulatory hurdles in states like California.

Federal agencies like the FDA have bogged down the CBD market with onerous regulations.

If the bill passes with McConnell’s proposed legislation, hemp-derived CBD would be federally legal. It would be the biggest win for the CBD industry, because it would remove the legal ambiguity surrounding CBD.

Federal legalization would also help normalize CBD, which would be instrumental in decreasing the reputational risk banks and credit card processors assign to the cannabis industry in general.

The 2018 Farm Bill passing should be a key first step in normalizing the CBD marketspace — and its payment processing.

The post Why’s It So F&%*ing Hard to Get Credit Card Processing for CBD Products? appeared first on Genco Payments.

In the first two parts of this three-part blog series, we reviewed a number of issues and concerns that can stem from businesses accepting cryptocurrencies like Bitcoin, Litecoin and Ethereum for payment. The U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and  the Internal Revenue Service (IRS) are just some of the federal bodies that have issued guidances and rulings pertaining to this kind of digital currency.

In this third and final installment in this blog series, we will review guidances on cryptocurrencies issued by other federal government agencies, as well as how some state-level government and industry oversight bodies have discussed these digital currencies.

Cryptocurrencies and refunds

Issuing refunds on transactions conducted via a digital currency could present logistical challenges for some businesses. For starters, will an organization be able to afford to issue a refund down the road if the price of their chosen accepted cryptocurrency drops between when payment is rendered and when a refund is requested?

The Federal Trade Commission (FTC) requires companies to offer their customers refunds in certain situations. Organizations which must comply with this FTC rule need to be clear with customers whether refunds will be issued via cryptocurrency or in government-issued tender.

This FTC rule regarding refunds also applies to Bitcoin Merchant Service Providers (BMSPs), which are the organizations that facilitate transfers between different cryptocurrencies and between these digital currencies and government-issued tender. However, an advisory issued by the Consumer Financial Protection Bureau (CFPB) noted “that though it is illegal for a virtual currency exchange to operate without registering with FinCEN, the registration does not, on its own, mean that an exchange is trustworthy.”

Professional oversight bodies and potential ethical considerations

For some organizations, especially those like law firms that must follow strict ethical guidelines, the volatility inherent in most cryptocurrencies at the moment can present problems.

For instance, the Nebraska Rule of Professional Conduct prohibits attorneys from making clients pay “unreasonable fees” for services rendered. Due to the ever-changing nature of Bitcoin’s price, for example, a firm that charged one bitcoin for a particular service in 2018 would be asking for something very different in return if that same organization asked for one bitcoin in 2008 as well. As such, a special ethics council appointed by the Nebraska Supreme Court ruled in 2017 that attorneys can accept cryptocurrencies for payment only if these payments are immediately transferred into accepted government tender.

State-level considerations

Different state-level bodies have issued different guidances and guidelines relating to Bitcoin and other similar digital currencies. It behooves organizations to understand how states where they operate in any fashion have ruled on and/or discussed cryptocurrencies.

For example, New York state requires businesses that buy, sell or trade cryptocurrencies, or engage in similar kinds of activities, to register with the state’s Department of Financial Services. However, merchants that only use these kinds of digital currencies to sell or buy services and/or goods are currently exempt from this requirement.

Connecticut has taken a similar tack as New York. In 2015, state officials amended the Connecticut Money Transmission Act to specifically account for cryptocurrencies. Now, organizations that operate in the state must have a license as a Virtual Currency Business if “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.”

In California, the ability to buy or sell goods or services with anything other than government-issued tender has only been deemed legal according to state law since 2014. The California Department of Business Oversight may require cryptocurrency users to register with the state, but no definitive action has been taken in this regard as of yet.

Other states, however, have taken much different stances regarding these sorts of virtual currencies. For instance, the State of Texas noted in 2014 that cryptocurrencies are not considered as money and do not have monetary value as that term was previously defined in its Money Services Act.

Potential future considerations

Even bitcoin, perhaps the currently best known cryptocurrency, is still relatively new. As such, many state and federal government agencies may issue future declarations and guidelines pertaining to these kinds of digital currencies.

In particular, a number of observers have noted that cryptocurrencies could be perceived as violating the Stamp Payments Act of 1862. However, these virtual currencies are not physical tender and are not (yet) perceived as being a “legitimate contender to the U.S. dollar,” so are unlikely to be viewed as being in violation of this law in the near future.

Many businesses either already accept cryptocurrencies like Bitcoin for goods and/or services, or are considering doing so. However, before a company makes a decision regarding these virtual currencies, they could be aware of current rules and regulations pertaining to cryptocurrencies. A law firm that specializes in payments processing-related issues and concerns can help a business to navigate the ever-changing cryptocurrency legal landscape.

Read Part 1 and Part 2 in the series.

The post Accepting Bitcoin for Payments: The Legal Basics Part 3 of 3 appeared first on Genco Payments.

Cryptocurrencies like Ethereum and Bitcoin have become more well-known over the past few years. As they gain in notice, many businesses have started to consider accepting these kinds of digital currencies for payment. However, before organizations elect to do so, they may find it beneficial to understand the legal issues and other nuances of accepting cryptocurrencies instead of just government tender.

In the first part of this three-part blog series, we reviewed the basics of how most of these cryptocurrencies work and how the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has begun viewing these digital-only currencies in light of current standing laws related to money laundering and rules stemming from the Bank Secrecy Act (BSA).

In the second part of this blog series, we review how different government agencies, including other federal departments, view cryptocurrencies like Bitcoin. We will also review other considerations organizations may want to consider before deciding to accept cryptocurrencies as payment for goods and/or services rendered.

Tax considerations with cryptocurrencies

Cryptocurrencies do not fall outside the purview of tax collection in the United States. The Internal Revenue Service (IRS) has classified cryptocurrencies like Bitcoin as property. In March 2014, the IRS issued guidance that specified cryptocurrencies as property and not as foreign currency.

As a result of its classification, businesses also need to report any capital gains or losses sustained from buying or selling these kinds of digital currencies. In an article published by the American Bar Association, Stephen T. Middlebrook, co-chair of the Electronic Payments Subcommittee of the ABA Business Law Section’s Cyberspace Law Committee, spelled out some of the way the IRS classification of cryptocurrencies can affect a company’s taxes:

“[I]f a person accepts a bitcoin on Monday when the value is $400 and then makes a purchase with that same bitcoin on Friday when the value is $410, he or she has a $10 gain. Imagine a merchant that acquires bitcoin in multiple transactions over a month during which the price of bitcoin fluctuates. Its basis in each individual bitcoin may be different depending on the market price at the time of the transaction. When the merchant decides to cash out some of its bitcoin for dollars, it will need to decide not just how much bitcoin to sell but also which particular bitcoins to part with – because exchanging this bitcoin over that bitcoin will determine the amount of a reportable gain or loss.”

Cryptocurrency exchange services

Likely, any business that accepts Bitcoin or any other type of cryptocurrency for payments will want to exchange that digital currency for government-issued tender like U.S. dollars at some point. However, there are a number of considerations that organizations will have to work through in considering how to go about this.

As FinCEN’s 2017 ruling against money transmitter BTC-e highlights, companies risk running afoul of provisions from the BSA related to money laundering. To avoid working with the wrong Bitcoin Merchant Service Provider (BMSP), companies may want to clarify a BSMP’s guidelines around refunds, risk settlement, exchange rates, disclosures, fees and privacy.

Some BSMPs are registered as Money Service Businesses (MSBs), which means they are supposed to comply with rules and regulations spelled out in the BSA. A number of BSMPs are also registered with various state-level bodies created to oversee those who are buying and selling cryptocurrencies. However, the Consumer Financial Protection Bureau (CFPB) has noted that even BSMPs which are registered as MSBs may not be “trustworthy.”

Unlike banks, the vast majority BSMPs are not insured by the Federal Deposit Insurance Corporation (FDIC). If theft or amalfeasure occurs with a BMSP, its users would have very limited to no assistance from the FDIC in the matter. This is one of the many reasons why the CFPB has said that there are “a lot of big issues” with Bitcoin and other similar digital currencies.

Volatility and exchange rates

The value of cryptocurrencies is determined entirely by market demand. As such, the price of one unit can change dramatically in a relatively short amount of time. For example, during one 10-minute stretch on November 29, 2017, the price of one bitcoin decreased by $1,000.

This occasional volatility can mean that merchants may encounter difficulties navigating conversion rates. For example, if a hot dog vendor accepts one litecoin on a Monday, they could end up losing money should the exchange rate drop in the hours and day following the initial transaction.

However, in comparison to transactions and exchanges handled by banks or other similar financial institutions, BSMPs typically do not charge any fees when facilitating a transaction.

In the third and final part of this blog series, we will review additional legal considerations that organizations may want to consider, especially at the state level. We will also review some of the elements of cryptocurrencies that some businesses see as making it beneficial and help to positively differentiate it over traditional currency.

Contact us today to discuss your payments legal needs info@tfmlaw.com

The post Accepting Bitcoin for Payments: The Legal Basics Part 2 of 3 appeared first on Genco Payments.

Cryptocurrencies, peer-to-peer digital currencies whose value is not determined by a central bank like the United States Federal Re

serve but rather through a series of set mathematical equations, have been growing in prominence of late. Bitcoin is perhaps the most well-known example, but others like Litecoin and Ethereum also have their own loyal followers.

As the price of one Bitcoin climbed from just under $6,000 in mid November 2017 to more than $19,000 just over a month later, the hype surrounding cryptocurrencies grew. Google searches for the word “bitcoin” grew 20 fold from February to December last year.

With cryptocurrencies becoming more well known, many businesses may want to start accepting Bitcoin or other similar digital currencies for payments. After all, many large and well-known brands like Microsoft, Expedia and Overstock.com now accept Bitcoin for some transactions. But, before companies rush in and immediately start accepting cyrptocurrencies, it pays to have a firm understanding of the legal ramifications that arise as a result.

What exactly is Bitcoin, and how does it differ from U.S. tender?

Bitcoin is one of the oldest and best known cryptocurrencies, although it is far from the only option in the space. But, regardless of the specific one, many cryptocurrencies function roughly the same as far as how new coins are created and how its value is determined.

For Bitcoin in particular, new coins are created when a computer solves a series of pre-set equations. Blockchains, which are sharable public ledgers, record transactions between users.

Unlike U.S. dollars or another standard government-issued currency, cryptocurrencies are not overseen or governed by a central bank or another similar authority. The value of a singular Bitcoin or another cyrptocurrency is determined entirely by market demand.

Cryptocurrencies are also entirely digital and lack intrinsic value, unlike a commodity like gold. Neither names nor bank accounts are needed for cryptocurrency transactions, which also helps to differentiate digital currencies like Ethereum from online transactions conducted with a debit or credit card.

Top legal considerations

Organizations that want to accept cryptocurrencies as payment should be aware of the legal ramifications of doing so. In the United States, a number of laws and rulings from various agencies and government bodies pertain to these digital currencies.

For Money Service Businesses (MSBs), the anonymity inherent in most cryptocurrencies can potentially cause a company to run afoul of the Bank Secrecy Act (BSA). As part of compliance with the BSA, MSBs must have a clear plan in place to avoid laundering money. MSBs must also keep accurate records pertaining to all payments, and to report all suspicious payments to the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN). However, the lack of names and other personally identifying information associated with most cryptocurrency wallets can complicate an MSB’s previously established anti-money laundering plan.

Thus far, however, the relative newness has meant that FinCEN is still determining many of the specifics regarding how it will regulate and oversee digital currencies like Litecoin, if it will at all. Here is what FinCEN had to say about cryptocurrencies in its March 2013 guidance released on the topic:

“A user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.”

While the guidance specified cryptocurrencies as not being real currency, saying that it lacks “legal tender status in any jurisdiction,” it did note that anyone who then transfers these digital currencies would fall under FinCEN’s regulations.

Thus far, FinCEN has shown that it is willing to go after alleged offenders for violating money laundering laws with cryptocurrencies. In July 2017, FinCEN issued a fine of more than $110 million to BTC-e. One of BTC-e’s operators, Alexander Vinnik, was also arrested and had a separate $12 million penalty assessed against him by FinCEN for his role in BTC-e. FinCEN has alleged that BTC-e, an exchange in which various cryptocurrencies like Litecoin and Ethereum could be exchanged for other currencies, allowed those engaged in fraudulent and illegal activities to use the exchange and was not keeping satisfactory records on its users.

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws,” Jamal El-Hindi, FinCEN’s then-Acting Director, said at the time of the arrest and fine issuance.

Still, while these definitions have been written down for almost four years now, they may be changed coming up. In November 2017, the inspector general of the Treasury Department announced that it would be auditing FinCEN’s cryptocurrency guidelines, in order to better “determine how FinCEN identifies, prioritizes, and addresses money laundering and terrorist financing risks associated with virtual currencies.” The nature of this review, as well as when it will begin and end, has not yet been specified.

In the second part of this blog series, we will review the basics of how other government agencies view cryptocurrencies, as well as other important considerations businesses should keep in mind before electing to accept digital currencies like Ethereum for payments.

The post Accepting Bitcoin for Payments: The Legal Basics Part 1 of 3 appeared first on Genco Payments.

An eager consumer walks into a nootropics store. The customer — who’s excited about this category of products that might help him improve his memory, increase his alertness and even reduce his risk of Alzheimer’s — asks innocently: “Can I see a list of all the FDA-approved nootropics?”

The supplier hands the customer a blank sheet of paper.

“There’s your list,” he says.

This is a list of all the nootropic substances that are explicitly allowed by the FDA.

What Are Nootropics?

The word “nootropics” was coined in 1972, by a Romanian scientist, Dr Corneliu Giurgea. It comes from Greek phrase meaning “to turn the mind.”

Dr. Cornel Giurgiu created a definition for nootropics that is still in use today.

Dr. Giurgea laid out the following characteristics for nootropic substances:

● They lack any stimulant, sedative or toxic effects.

● They protect the brain from harmful chemical damage or significant chemical transfigurations.

● They improve neuronal firing mechanisms in the brain.

● They can enhance memory & learning functions.

● They assist the brain with functioning well under disruptive external & internal conditions.

Optimizing one’s own body and brain is an age-old temptation.

Nootropics have entered the public consciousness — if not by their name, then certainly by their function — through pop culture. The feature film and TV show Limitless shows a Hollywood-ized version of them. Silicon Valley types have latched onto the “biohacking” possibilities of nootropics. The promise of optimizing one’s own body and brain is an age-old temptation.

Common nootropics include L-Theanine, Bacopa Monnieri, Curcumin and even caffeine. They are said to help with memory, reduce anxiety, increase alertness and more. They are sold by big names like Amazon, eBay, and even in Wal-Mart and Costco. There are entire message boards and subreddits devoted to where to find them and how to take them.

As nootropics have become more popular with consumers, the government is beginning to take notice.

The category is growing at an astounding pace — but unfortunately, as nootropics become more visible to consumers, they’re becoming a potential target for government scrutiny.

A Dangerous Legal Gray Area

The joke about the blank list provides an accurate summary of the murky legal landscape where nootropics currently reside. According to FDA, products like nootropics can be legally classified as one of two things:

1) Scheduled drugs approved for treatment of a specific disease or condition, or

2) Supplements and foods generally regarded as safe (GRAS)

The government has made it clear that it considers nootropics to be “neither fish nor fowl.”

One thing nootropics definitely aren’t? They’re not FDA-scheduled drugs.

They’re definitely not scheduled drugs — FDA drug approval is a clear-cut (and very expensive) process. No nootropic substance has yet gone through it. And it’s likely to remain that way. Due to the fact that patents have expired for popular and lucrative nootropics like piracetam, there’s no logical reason for any company to spend the $50MM+ that it takes to earn FDA approval — only to have their competitors jump on that approval once it’s attained and start selling identical products for less.

The FDA sent a warning letter to a major piracetam supplier in 2010.

For decades, nootropics suppliers considered their products to be supplements and foods GRAS. The arrangement worked for a while. But with increased consumer demand came increased government scrutiny — and the FDA has recently laid down the law with warning letters, punitive actions, merchant freezes and product seizures all across the nootropics industry.

FDA is Taking Notice

The trouble started in earnest in August 2010. That’s when the FDA issued a warning letter to United Nutrition/Smartpowders, a company that was selling bulk quantities of piracetam.

Piracetam was purported to offer cognitive boosts, including a reduction of stress and anxiety, an increase in brain circulation and potentially the prevention of dementia. In fact, piracetam was the very first nootropic — Dr. Giurgea coined the name for the category after synthesizing it.

The FDA letter took exception with Unlimited Nutrition’s claim that its piracetam product was a dietary supplement.

The FDA’s letter was a shot across the bow. It put a deep scare into nootropic companies all over the United States. The FDA letter took exception with Unlimited Nutrition’s claim that its piracetam product was a dietary supplement. The government agency stated that in order for it to be called such, piracetam would have to be one of the following:

● Vitamin

● Mineral

● Amino acid

● Herb or other botanical

● Dietary substance for use by man to supplement the diet by increasing the total dietary intake

● Concentrate, metabolite, constituent, extract or combination of any dietary ingredient from the preceding categories

The FDA took exception to this claim: “Piracetam supports memory and concentration, overall well-being, cardiovascular health, and helps reduce stress and fatigue.”

Specifically, the FDA had a problem with the following language, which appeared on Unlimited Nutrition’s piracetam product label:

“Piracetam supports memory and concentration, overall well-being, cardiovascular health, and helps reduce stress and fatigue.”

Those relatively innocuous words were enough to prompt the FDA to take this major step. And the entire nootropics industry took notice — piracetam suppliers entered into a justifiable panic.

More Legal Woes

The 2010 FDA letter to Unlimited Nutrition re: piracetam was enough to convince many large manufacturers and sellers to get out of the piracetam business. Still others switched from offering it as pill meant for consumer use to selling it as a bulk powder labeled for “research purposes.”

The problem with that is that the bulk powder for “research purposes” is still purchased by many consumers wanting to try piracetam for personal use. And yet, due to FDA restrictions, piracetam sellers are forbidden from including critical dosage and use instructions in their marketing materials.

In response to the FDA scrutiny, some U.S. piracetam suppliers now sell the substance in bulk quantities “for research only.”

This is the worst of all worlds: Motivated consumers will still seek out piracetam. It isn’t technically illegal to purchase. And yet suppliers must not include vital instructions on their packaging, lest they run afoul of FDA rules. The entire landscape is a mess of poor oversight and spotty product quality control.

As a result, many consumers turning to questionable overseas or bootleg markets — where their outcomes could be potentially disastrous.

How Can Nootropics Suppliers Protect Themselves?

Fortunately, it’s not all bad news. The legal landscape for nootropics is alarming and worrisome. But the future of the industry is incredibly bright.

The current administration has proven to be very pro-business — especially for domestic companies. This could be a promising sign for nootropics eCommerce companies.

The incident with piracetam demonstrated that the FDA is paying close attention to this growing industry. However, there are plenty of clues that the current administration wants to encourage and support domestic trade and eCommerce.

Nobody knows exactly what the future of nootropics will be. This is an industry that’s in its relative infancy, and precedents are still being established.

For nootropics suppliers and manufacturers, it’s extremely important to ensure compliance with all applicable laws and regulations. It’s also beneficial to follow the latest news and developments in this industry and its related ones.

Theodore F. Monroe is an attorney whose practice focuses on the electronic payment and direct marketing industries. For more information, email him at monroe@tfmlaw.com or call him at 213-233-2273.

The post Are Nootropics Legal in the U.S.? It’s Complicated appeared first on Genco Payments.

When my stoner niece brought me to her favorite dispensary recently, I was blown away by what I saw. When it was time to make a purchase, we went to a kiosk, paid, took a ticket to the counter, and received the product. The staff never handled any money or payment cards.

Across the board, payment processing has gotten quicker, more sophisticated, and less fraud-prone. The technologies that can be used to verify identity and prescription info have become seamless. Why shouldn’t an industry as forward-thinking as this one be an early and enthusiastic adopter of the most efficient technologies?

By ditching cash, dispensaries save time, reduce fraud risk, and create an all-around superior experience for customers and employees. But how do they do it?

Here are 7 non-cash payment methods for MJDs.

1) Misrepresentation

Lying to the processor is — and has always been — the leading method for MJDs to process credit card transactions. An agent sets the MJD up using a false name or an incorrect MCC code, or arranges for another merchant to act as a straw man. Weed transactions are reported to the bank as something else. Once the merchant gets caught, it’ll be shut off for bank fraud. Why do MJDs use this method? Some feel they have no other option – the two major card brands prohibit the sale of marijuana products in the U.S.

Advantage: Allows merchant to process quickly and relatively cheaply.

Disadvantages: Not legal. If caught, merchant will be shut off for bank fraud.

2) Point-of-Banking

Here’s a method that gets around the bank fraud issue. In point-of-banking, cardholders use the ATM as an intermediary. This method requires a special ATM that’s loaded with proprietary software. When a consumer puts his PIN-based credit, debit, or ATM card into the ATM, he receives a piece of paper that he takes to the merchant. This eliminates the need to report and categorize the purchase type.

Advantages: No lying to the bank. The system receives authorizations from a decent number of credit and debit cards.

Disadvantages: Transactions must be done in fixed increments – usually multiples of 20USD. Requires a PIN. Can be expensive for the consumer, as many will be charged an out-of-network ATM fee or cash advance fee.

3) PIN Debit

I’m only aware of one bank that offers this. It’s similar to the point-of-banking method, but it tends to work better. By doing this, MJDs can take advantage of the regional debit networks, and they can ride those rails to avoid VISA’s and MasterCard’s systems. The acquiring bank knows what’s going on. This can be used for any amount of money that a debit will work for.

Advantages: No out-of-network ATM fee. Cheapest method for merchant and consumer.

Disadvantages: Requires PIN. Limited to credit cards.

4) ACH

This method rides the NACHA network rails for transactions. It’s fairly straightforward, and involves the same mechanism used for direct deposit, payroll, and vendor payments. In this case, the consumer is the payor and the MJD the payee.

Advantages: Cheap. NACHA hasn’t banned the transaction.

Disadvantages: Consumer must use his checking number – few people know it. More importantly, reversals are a bit too easy for most merchants.

5) Offshore

This is exactly what is sounds like: Merchants insert an extra layer between themselves and the transaction by using processing solutions in places like Asia and Mexico. This can allow CNP gateways to be used for processing – which wouldn’t be possible given that the transaction occurs in-person and face-to-face before being routed through the offshore processor. This method likely isn’t in compliance with some card brand rules.  

Advantages: It’s a fallback after other options have failed.

Disadvantages: Low authorization rates. Not clear whether it’s compliant with card brand rules.

6) Closed loop

In a closed-loop payment system, consumers pay for purchases using a form of payment – such as an app, gift card, or barcode – that can only be used at the MJD. The funding source can be a credit card, ACH, cryptocurrency, etc.

Advantages: Works well. Helps the MJD keep track of consumers, which is useful for compliance. Promotes better customer awareness, which helps merchants handle chargeback issues more effectively.

Disadvantages: Unclear whether this is compliant with card brand rules. Some commentators consider it a staged wallet that’s out of compliance if it’s mostly or exclusively used for MJ transactions.

7) Cryptocurrency

Now that crypto has gone mainstream, it’s no surprise that MJDs are turning to it too. Cryptocurrency can be funded by credit card and then used as tender. Other times, merchants add an extra layer through the use of a wallet solution.

Advantage: Arguably, this method is compliant.

Disadvantages: Cost, volatility, and the inconvenience/uncertainty with dealing with cryptopayments (e.g., wait periods, confusing wallet systems, etc.).

The post Need a Cash Alternative? Here are 7 Payment Methods for Weed Merchants appeared first on Genco Payments.

The hearing was the latest development in a years-long legal debate over whether industrial hemp – which has zero TCH and is the key ingredient in CBD oil – should be a Schedule I substance.

The matter is being closely watched by members of the hemp industry nationwide, as the coming decision will have dramatic ramifications on the ability to sell, market, and transport CBD products. It will also have an impact on sick people who live in states that allow CBD but not THC products.

 Background

The Drug Enforcement Administration (DEA) has a long history of hostility to industrial hemp.

In 2004, a case involving the Hemp Industries Association (HIA) and the DEA – also called “Hemp II” – established that the DEA had no authority to regulate drugs that are not explicitly scheduled. The ruling also confirmed that “parts of the plant are exempt” from the definition of marijuana – and thus from the Controlled Substances Act (CSA).

Fast-forward to the Farm Bill of 2014. This legislation stated that industrial hemp that’s grown in an authorized research program is separate and distinct from marijuana. The Farm Bill expanded on the earlier CSA “plant parts” exemption, and established that all parts of the industrial hemp plant grown in an authorized research program were exempt, provided that they contain ≤0.3% THC.

Despite this promising development, the DEA continued to exert its regulatory stance by blocking farmers from participating in hemp research programs. This led Kentucky farmers to sue. In response to the DEA’s obstruction of the Farm Bill, Congress passed a rider to the Omnibus Appropriations Bill in September 2016. The rider stipulated that federal government was not to spend any funds to interfere in legitimate hemp research.

In December 2016, the DEA created a Controlled Substances Code Number for “marihuana extract.”

This scheduling move extended DEA’s own regulatory power to all products containing cannabinoids. The agency has maintained its rigid stance that all CBD extracts should be federally controlled substances.

The DEA claimed that the establishment of a “marihuana extract” code number was taken for administrative and research purposes. But members of industries reliant on these CBD products were nervous – the move felt like the first step in a very unfavorable crackdown.

In early 2017, HIA sued the DEA for contempt for its position. You can review a brief synopsis of the case here.

Members of industries reliant on CBD products are nervous – the scheduling move feels like the first step in a very unfavorable crackdown.

The Hearing – A Sign of Things to Come?

The mid-February 2018 hearing was simply the latest development in that late 2017 HIA v. DEA case. Each side had 15 minutes to lay out its case, and there were plenty of questions peppered in between.

The judges are deliberating now, and we won’t know the outcome of the hearing for at least another three months. But as is the case with these matters, analysts can make an educated guess about what the final decision will be based on what type of questions – and how many – were asked.

Prior to the hearing, the judges had already read both side’s full arguments and had thoroughly reviewed relevant case law. The questions that the judges ask during the hearing provide valuable insight into which way the panel is leaning for its decision.

The judges are deliberating now, and we won’t know the outcome of the hearing for at least another three months.

Under the Microscope: What the Judges Asked

During the hearing, Judge Richard Tallman asked whether this scheduling matter had to do with the DEA’s need to comply with international drug treaties. In other words, did the DEA have to code the substance to comply with U.S. treaty obligations? The Attorney representing the HIA answered that on the contrary, the drug code definition in itself “goes far beyond the congressional authorization written to the DEA.”

Judge Tallman also asked the HIA why it was so concerned about the extra administrative and tracking steps involved with the scheduling. Again, the HIA asserted that the drug code goes beyond Congress’ legislative mandate.

The panel also wanted to know whether it was a problem that the DEA wants to extend its scheduling rule to the entire Cannabis genus. In other words, are HIA members suffering or likely to suffer significant harm from the DEA’s rule, or is this just an theoretical exercise? The panel also wanted to know whether there was any issue not yet recorded in the reply brief.

The HIA responded yes – citing enforcement by the feds in Tennessee recently. And it was not in the record until the reply brief, which was highly unusual. It’s not in the norm for either side to add a new declaration during this late stage.

Working on the limited information available at this stage – that line of questioning could telegraph a key problem for the HIA. The panel might rule that the issue is simply a treaty obligation by the U.S., and that the HIA has not yet shown how it has been harmed.

The industry eagerly awaits the coming court ruling, which could happen as early as May 2018.

What Happens Now?

The final words of the hearing were completely inconclusive: “We will puzzle through it and get back to you as soon as we can,” Judge Tallman said.

At this point, the panel has several options:

1)   It can send the matter to a lower court for a more complete record.

2)   It can rule for or against the HIA.

3)   It can hand down a limited ruling focusing only on the treaty obligation, while avoiding the key issue of whether industrial hemp in CBD oil is legal.

At this point, it is unclear which of the above will happen.

Nevertheless, as this matter has wound its way through the courts, there have been many promising signs pointing to the future legality of CBD at the federal level (e.g., the numerous amicus briefs and shows of support in Congress).

We have strong reason to believe that CBD will eventually be clearly legal. For now, though – the industry eagerly awaits the coming court ruling, which could happen as early as May 2018.

Theodore F. Monroe is an attorney whose practice focuses on the electronic payment and direct marketing industries. For more information, email him at monroe@tfmlaw.com or call him at 213-233-2273.

The post Will CBD be Legal? Here’s the Latest on the HIA v. DEA Lawsuit appeared first on Genco Payments.