Ohanae, Inc., ("Ohanae") a fintech company needs to ensure Ohanae Coin ("OUSD") comply with federal and state money transmission laws. Ohanae facilitates atomic settlement* for Capital Markets can trigger money transmission risks. To mitigate these risks, Ohanae intends to partner with banks to offer custodial accounts opened for the benefit of (FBO) their customers. Funds flow through an account owned and controlled by the bank and not Ohanae. Since banks are exempt from money transmission licensing requirements, Ohanae uses FBO accounts to provide banking-like services without incurring regulatory compliance and licensing.
However, Ohanae must structure their relationships and services to fit within the contours of the bank's FBO offering. The FBO model remains largely untested among regulators. Not all banks offer FBO accounts, and those that do may impose heavy compliance requirements or hefty fees.
Money transmission is highly regulated and subject to licensing requirements to protect investors and capital seekers that send and receive payments. Federal and state regulators have interpreted the definition of money transmission to apply to such activities as payment processing and other, similar activities.
While obtaining money transmission licenses on a nationwide basis may provide significant competitive advantages for Ohanae, obtaining such licenses takes time and financial resources. Accordingly, Ohanae is seeking ways to launch products and services without triggering federal or state money transmission requirements.
The FBO model has become a popular way to mitigate potential money transmission risk on a nationwide basis. Under such a relationship, Ohanae issues payment instructions to the bank to pull funds from a bank-owned settlement account or instructs its customer to deposit funds into the FBO account. The FBO model requires strong ledgering and reconciliation on the fintech's part, and small errors may result in significant losses.
*Atomic settlement: Simultaneous settlement of assets, whereby assets are linked to ensure the transfer of an asset only occurs if the others are simultaneously transferred (e.g., to achieve delivery versus payment in a securities transaction).
Disclaimer
Ohanae Securities LLC is a subsidiary of Ohanae, Inc. and a member of the Financial Industry Regulatory Authority and Securities Investor Protection Corporation (FINRA/SIPC). Additional information about Ohanae Securities LLC is available on BrokerCheck.
Ohanae Securities LLC is currently in discussions with FINRA regarding the potential expansion of its business lines, which may include custody and related services for crypto asset securities. Any statements regarding the capabilities or services of Ohanae Securities LLC are subject to regulatory approval, and there can be no assurance that such approvals will be obtained.
Ohanae Securities LLC intends to operate in a manner that addresses the unique characteristics of crypto asset securities, including maintaining robust policies and procedures for custody, safeguarding of private keys, and evaluation of distributed ledger technology. The firm’s approach is designed to support crypto asset securities that may not efficiently operate within the traditional National Market System (NMS). Subject to applicable regulatory approvals, Ohanae Securities LLC may expand its activities to include additional services that may be conducted in a dealer-principal capacity, with the objective of protecting investors and maintaining market integrity.