United States: 2023 Money Services Business Call Report Updates

MONEY SERVICES BUSINESS CALL REPORT UPDATE OVERVIEW

In 2023 the Nationwide Multistate Licensing System (NMLS) will implement highly anticipated updates to the quarterly Money Services Business Call Report (MSBCR). MSBs must begin using the revised MSBCR (Version 2) for first quarter reports, due in May 2023. We recommend that MSBs prepare early by updating their accounting and reporting procedures as necessitated by the new format. Version 2 provides functionality improvements for all reporting institutions; however, the updates predominantly display the continued influence of virtual currency on money services regulation, most noticeably revising transaction volume reporting for virtual asset service providers (VASPs). Additionally, the new format includes small, but significant changes in reports of financial condition that may indicate regulatory conflicts in financial supervision of VASPs.

TRANSACTION ACTIVITY REPORTS: CLARIFICATION AND EXPANSION

The MSBCR transaction activity reports, company-wide and state specific, often confound both licensees and regulators. The report provides static definitions and reporting of transaction activity that many firms' products do not conform to, especially for financial technology companies and VASPs. This creates disparate attempts from both sides to report non-traditional financial services within the provided categories. For VASPs, the absence of reporting fields for common activities, such as loads/deposits of virtual currencies into custodial platforms, often results in virtual currency activities reported as traditional money transmission, stored value, and payment instruments.

Understandably, states' regulators desire reporting of all licensable MSB activity to ensure adequate funding of supervisory programs through assessment fees, as well as accurate economic monitoring and planning. However, the lack of uniformity in MSB licensing and reporting requirements undoubtedly skews planning for financial oversight. States' examiners often cite violations for licensees' "failures" to accurately report transaction volume in MSBCRs. Licensees may attempt to amend past reports only to receive additional examination findings and contradictory reporting recommendations to satisfy other states' preferences.

MSBCR Version 2 attempts to expand and clarify transaction activity reporting for VASPs; however, it will likely require some time for firms to develop and implement new accounting and reporting procedures. We urge all MSBs to review the Version 2 form, become familiar with the transaction activity definitions and instructions, request clarifications if needed, and adapt procedures for calculating and reporting licensed activity volume.

FINANCIAL CONDITION REPORTS: SMALL CHANGES WITH LARGE IMPLICATIONS

The financial condition updates in Version 2 may appear small; however, carry large significance due to the fundamental differences that set VASPs apart from traditional money service providers. Version 1 instructed licensees to report only virtual assets belonging to the institution, often resulting in the exclusion of custodial virtual assets. Version 2 removes that statement from the instructions, implying the inclusion of all virtual assets in the possession of the institution, whether customer or company owned. In complement, the income statement section of Version 2 isolates comprehensive income from net income. Fiduciary institutions report fluctuations in custodial asset values as comprehensive income. Such institutions do not realize these fluctuations as income or losses, but rather, the customers that own the custodied assets realize these gains and losses.

The Version 2 financial condition updates may impact VASPs that operate as a fiduciary of customer assets under management. Such fiduciary relationships may conflict with the expectations of regulators for reporting financial condition through the MSBCR. Institutions that custody funds as a fiduciary commonly omit those funds from financial statements, since US generally accepted accounting principles (GAAP) may deem assets under management as inappropriate to present in their financial statements. Furthermore, financial audits may not consider and validate accounting for custodied assets. Such accounting rules for fiduciaries do not typically apply to traditional MSBs, which begs the question, if the Version 2 comprehensive income applies to a fiduciary institution, should the institution include such custodied assets in financial condition reports at all?

The omission of custodied assets in financial reports also complicates the demonstration of liquidity through permissible investments (PI) reporting. Excluding custodial assets and customer liabilities defies the logic rules of the MSBCR form, which requires reconciliation of liabilities reported in the PI section with liabilities stated in the financial condition section. Licensees can submit MSBCRs with explanatory notes to bypass this logical error; however, this deprives state regulators of visibility into licensees' customer liabilities and liquidity. We recommend that institutions consult experienced legal and accounting professionals to determine appropriate accounting policies. All MSBs should document accounting policies, procedures, and controls for examination by regulators.

PREPARATION AND IMPLEMENTATION

For most institutions, Version 2 of the MSBCR provides helpful updates and upgrades to increase efficacy and consistency in reporting. Time will tell whether Version 2 meets the expectations of regulators for the supervision of all licensed institutions. Financial technologies and innovations continue to evolve, and regulatory supervision must adapt to ensure safety and soundness in financial services. MSBs will begin submitting Version 2 for first quarter reports in May 2023, but the reporting period began January 1, 2023. This requires MSBs to align accounting and reporting procedures to the new format. Our team empowers financial institutions with guidance to navigate the complex and evolving regulatory landscape. Our team of compliance professionals provide trusted advice for licensing and registration, development and implementation of policies and procedures, and ongoing maintenance of regulatory requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.