North Carolina ripe for Bitcoin startups

The United States may have some of the most anti-bitcoin regulations anywhere, but the environment for startups is world class. There are many favorable conditions available, depending on the state you choose to run your business from, so it’s essential to shop around.

Although Silicon Valley in California and Austin in Texas are well known for being Bitcoin business hubs, there may be an even better option for Bitcoin startups, which has been overlooked by almost everyone in the space. North Carolina (NC) has recently transformed itself into a promising home for tech companies, that is inviting to all startups, and Bitcoin startups especially.

The state boasts an unusually strong labor force, business-friendly regulation, and recently created one of the most favorable corporate tax environments in the US. Forbes recently ranked North Carolina 2nd in its Best States for Business list.

The Tar Heel State has been working on becoming a tech startup paradise since 2013, when republicans gained majority control of the state congress. Legislators quickly passed laws that fundamentally restructured the state’s tax code.

The overhaul completely repealed the estate tax, eliminated the personal exemption, reduced the graduated individual income tax from a top rate of 7.75 percent to a flat rate of 5.75 percent and most importantly, cut the corporate tax rate from 6.9 percent to only 5 percent.

The Washington DC-based think tank, Tax Foundation, ranked the state 44th in its 2014 State Business Tax Climate Index. With the tax overhaul underway, the state now ranks 16th, a substantial jump from the previous year. In the 2016 the ranking is projected to improve further, to 15th in the overall tax index – but the state ranks 7th in the Corporate Tax category.

Not only is the current corporate tax already one of the lowest in the US, the state’s revenue figures have triggered a further drop. Governor Pat McCrory’s office announced in July that North Carolina’s corporate income tax rate will by 4 percent, starting Jan 1, and the rate will go to 3 percent in 2017 if revenue targets continue to be met. With corporate income tax of four percent, NC will have the lowest top corporate income tax rate in the country. By comparison, California’s rate is almost 9 percent and Iowa’s is 12 percent.

This major overhaul has been lauded by Republicans, who see the changes as a way to attract more business to North Carolina and create jobs. But the overhaul, which represents a scaled-back version of earlier proposals, has also been heavily criticized. There are contention that tax cuts will disproportionately benefit the rich, and the revenue loss will cut into government services.

Low taxes are far from the only incentive NC has to offer employers. Finding happy, skilled employees is also relatively easy.

The annual Global Location Trends report, produced by IBM-Plant Location International (PLI), ranks North Carolina 2nd in job creation, driven by both foreign and domestic investment projects.

Having very few union constraints could also be considered a plus for employers. According to the U.S. Bureau of Labor Statistics, in 2014 North Carolina had the smallest union workforce by percentage, at 1.9 percent. By comparison, New York had the highest union membership rate of any state, at 24.6 percent.

Living in NC is likewise pretty inviting. Time Inc.’s Money Magazine ranks a suburb of Raleigh, Apex, as the best place to live in the US. The rank reflects the number of high paying tech industry jobs, and the relatively affordable cost of living.

Raleigh also topped Glassdoor’s 2015 list of 25 Best Cities for Jobs, as determined by hiring opportunities, cost of living and job satisfaction. Meanwhile, personal finance website Wallet Hub ranks the city as the second-best large U.S. city to make your home, ranking just behind Austin, Texas, and surpassing Seattle, San Jose, Denver, Colorado Springs, Portland and San Francisco. However, Raleigh beats Austin in the Education category.

North Carolina’s a great place for export focused business too. The state’s latest annual trade report breaks down the details behind the big news of the year: state businesses exported a record US$31 billion in merchandise to international markets in 2014, having increased more than 40 percent over the past decade. Exports were 7 percent higher than the 2013 figure, which is more than twice the national average growth of 2.8 percent over the same period.

Getting funding in North Carolina isn’t difficult, either. The largest and longest-running network for entrepreneurs in the country, the council for Entrepreneurial Development (CED), published a proprietary Innovators Report stating that NC entrepreneurial companies raised $426.9 million during the first half of this year.

This amount represents a 70% growth in statewide funding compared to the same period last year. 86 companies completed 90 equity deals, 48 of which were in the tech industry.

The largest recent change that Bitcoin startups will find attractive is in the state’s regulatory framework, which seems tailor-made for Bitcoin companies.

In February, the NC Office of the Commissioner of Banks (NCCOB) amended the North Carolina Money Transmitters Act (MTA) to clarify requirements for entities involved in virtual currency. Among the main changes is an exclusion for certain business-to-business money transmission activity.

The final Money Transmitters Act, House Bill 289, replaced the previous MTA on Oct 1. The new version modernizes and clarifies various features, as well as initiating regulation for non-bank companies that engage in the business of transmitting funds on the behalf of others.

NCCOB reports that there were approximately 96 money transmitter licensees in North Carolina, as of May 2015, including traditional money transmitters Western Union and MoneyGram.

While NCCOB confirmed that virtual currency is regulated under the NC MTA, the rules provide many more exceptions than the regulations imposed by the US Financial Crimes Enforcement Network (FinCEN).

When dealing with virtual currencies, both FinCEN and NCCOB classify participants with the terms “user,” “exchanger,” and “administrator.”

Just like FinCEN, the NC MTA does not regulate the use of virtual currency, so a user of virtual currency is not a money transmitter and does not need a money transmitter license. FinCen defines a user as “a person that obtains virtual currency to purchase goods or services on the user’s own behalf.”

While FinCEN does not mention ‘merchants’ specifically in its Guidance, the NC MTA defines a merchant as someone “who accepts virtual currency as payment for goods or services,” and further classifies a merchant as a user, and therefore, is not required to hold a license.

Perhaps one of the most active categories of virtual currency participant is miners. NC MTA defines a miner as “someone who receives virtual currency as payment for verifying transactions, typically by providing computer resources to process data.” After mining, they generally becomes a “user” of virtual currency and are therefore not subject to the money transmitting rules.

FinCEN agrees, having published its administrative rulings in 2014. The document clarifies in great detail that miners who mine virtual currency solely for their own uses are not money transmitters.

“The label applied to a particular process of obtaining a virtual currency is not material to the legal characterization under the BSA [Bank Secrecy Act] of the process or of the person engaging in the process to send that virtual currency or its equivalent value to any other person or place.”
— – FinCEN

FinCEN recognized that how virtual currency is obtained is largely irrelevant. Instead, “what the person uses the convertible virtual currency for, and for whose benefit” defines whether or not the person is a money transmitter.

The main differences between the FinCEN definition of a money transmitter and North Carolina’s lies in virtual currency exchangers and administrators. A virtual currency exchanger is “a person that exchanges virtual currency for fiat currency or other virtual currencies, and vice versa,” according to NC MTA. FinCEN’s definition is more detailed, adding “for transmission to the merchant.”

FinCEN further defines an exchanger as a broker or dealer. A broker exchanger matches two (mostly) simultaneous and offsetting transactions, involving the acceptance of one type of currency and the transmission of another. A dealer transacts from its own reserve of currency. For FinCEN’s purpose, both types are money transmitters.

However, for NC MTA, only a broker exchanger will typically be considered a virtual currency transmitter, a dealer is not.

“An exchanger that sells its own stock of virtual currency is generally not considered a virtual currency transmitter under the NC MTA.”
— – NC MTA

The last consideration is for a virtual currency administrator, defined as “a person that issues or redeems virtual currency.” Although administrators must register with FinCEN as a money transmitter, and comply with the Bank Secrecy Act, merely acting as an administrator generally does not require a license under the NC MTA.

While FinCEN’s rules are more difficult to decipher, NC has made their rules much clearer. The ‘Money Transmitter FAQs‘ section of the NCCOB website now  primarily focuses on virtual currencies. Seven out of the eleven Frequently Asked Questions about Money Transmitter rules are now about virtual currencies.

The changes in North Carolina are sure to attract startups to the state. There are already many businesses accepting bitcoin, and even a major Bitcoin convention series, Cryptolina. While there is still a long way to go before NC can beat out Austin or Silicon Valley for the title of top US Bitcoin hub, the incentives are in place, and as bitcoin grows in popularity, the rate at which NC’s bitcoin scene grows could outpace anywhere else before it.