Poll: Which U.S. State Should Adapt Bitcoin As It’s Official Currency?
Six States Are Approaching Bitcoin Adoption Via Friendly Regulation
Cryptocurrency should be regulated. Cryptocurrency should not be regulated. Cryptocurrency can’t be regulated. These are all common refrains emanating from the media these days. Now lawmakers across the United States and around the world are at a crossroads as to what is next in terms of this regulatory space.
Bitcoin and other forms of cryptocurrency present a monumental challenge for legislators, requiring a broad understanding of blockchain technology, especially in terms of its impact on tech innovation. Amid assertions that the U.S. is falling behind in terms of Bitcoin regulation , it could be argued that the regulatory picture is becoming clearer in 2020.
Bitcoin Magazine asked Pawel Kuskowski, CEO and co-founder of Coinfirm , and Joe Ciccolo, president of the Illinois-based Bitcoin compliance firm BitAML , to offer some commentary about the regulatory activity taking place in six U.S. states – Washington, Illinois, Hawaii, California and Florida – and what the regulatory landscape may look like in the days ahead.
California’s Assembly Bill 1123, a version of New York’s infamous BitLicense, has been proposed. It reads :
“This bill would enact the Virtual Currency Act. The bill would prohibit a person from engaging in any virtual currency business, as defined, in this state unless the person is licensed by the Commissioner of Business Oversight or is exempt from the licensure requirement, as provided.”
Says Kuskowski, CEO and co-founder of Coinfirm:
“In relation to this particular proposed bill in California, any bill with strong similarities to New York’s BitLicense is obviously not the direction to go in, as we saw the effects of that particular regulation result in New York’s loss of prominence as a crypto hub. But with California’s unique position as the technology innovation and startup capital of the world, this would have an even more catastrophic effect than the N.Y. version.”
Kuskowski goes on to say that the costly fees and bureaucratic administration associated with this legislation would likely hinder innovators and startups from applying or even operating in the state. Moreover, he says it would provide another segmented regulatory structure that limits the national and global growth of companies operating in the space.
The nation’s least-populous state has enacted 13 laws in the past two years to welcome blockchain and cryptocurrency companies.
If you believe you may have stumbled into a cryptocurrency conference (godspeed, my friend), there are a few telltale signs. First, look for the live bulls and the yellow Lambos. But if they’ve fallen victim to cost-cutting or newfound modesty, then look for a procession of cream-colored cowboy hats. They belong to a retinue of lobbyists and legislators from Wyoming, preaching the virtues of their state as a mecca for blockchain.
Wyoming’s transformation into a blockchain booster is somewhat legendary in cryptocurrency circles. Until recently, strict money-transmitter laws meant residents there couldn’t even use a Coinbase account. But over the past two years, Wyoming has enacted 13 blockchain laws, with a raft of other proposals on the way. The question is, what does the country’s least-populous state, far from tech hubs and long associated with an unhealthy dependency on resource extraction, want with blockchain?
“The ethos of blockchain and the ethos of Wyoming are very similar,” says Caitlin Long, cofounder of the Wyoming Blockchain Coalition, a lobbying group responsible for pushing for the crypto-friendly bills, many with a libertarian bent.
Wyoming’s push is a reflection of the nation’s patchwork of state laws, created in the absence of clear federal rules. Some, like New York, favor rigorous regulation. The state’s Bitlicense regime, which began in 2015, involves a strict vetting process for companies that want to deal with New York residents, prompting complaints that it deters innovation. Legislators in Wyoming, as well as neighboring Colorado and Montana, see that as an opening.
“It’s been good for Wyoming that the federal government has been proving its stripes of incompetency,” says Tyler Lindholm, a state representative who, at 6’7″, does much to increase the visibility of the cowboy hats.
Lindholm and Long first partnered on blockchain legislation two years ago. Long, a former executive at Morgan Stanley, became interested when she discovered that state regulations prevented her from donating bitcoin to her alma mater, the University of Wyoming. Lindholm, a longtime cryptocurrency enthusiast, had previously tried to tackle that issue. But his fellow legislators mostly associated cryptocurrency with drug sales and scams. “This was their first blush with crypto—even hearing about it,” Lindholm says. “I got my ass whipped pretty bad.”
Their fortunes improved by casting cryptocurrency as a way to replace flagging state revenue from the coal industry, Long says. Working with lawyers from Consensys, a company that builds and promotes Ethereum applications, they drafted bills that exempted certain digital tokens from state securities rules, and exempted cryptocurrency from state property taxes. Those laws passed, and over the next year they became the basis of what Long calls a complete legal framework for owners of digital assets and the companies dealing with them.
The effect of those laws, however, appears to be somewhat muted, says Benjamin Sauter, a lawyer for Kobre & Kim who works extensively with blockchain companies. The trouble is that blockchain, by nature, is not easily contained to one jurisdiction. It’s easy enough to fence out residents of New York, but harder for a company to take advantage of more permissive laws in one small state. And on issues like securities laws, companies still need to play by federal rules. Without hammering out any formal guidelines, the Securities and Exchange Commission last year suggested all tokens involved in initial coin offerings were securities, and thus subject to federal oversight. The move largely scuttled Wyoming’s plans to attract companies doing ICOs to the state, Long says.
Still, the new laws have brought one thing to Wyoming: limited liability corporations, or LLCs, dozens of them with “Blockchain” or “Crypto” in their names. “I’ve been around startups a long time and I don’t ever remember interacting with a tech startup that was based in Wyoming,” says Stephen McKeon, an economics professor at the University of Oregon. “But in the last two years just in crypto I’ve seen it multiple times.” But he notes that those companies, while legally based in Wyoming, have rarely established a physical presence there.
Lindholm, who last year cofounded his own blockchain startup, BeefChain, which verifies the provenance of premium Wyoming cattle, argues the state is on a path to attract companies that offer more than a $100 filing fee and a PO box in Cheyenne. Companies, in other words, that bring jobs and hubs of innovation that benefit Wyomingites. He points to a pair of bills passed in February as an initial step, establishing a new type of crypto-friendly banking license, as well as rules that allow banks to hold digital assets. Banks chartered under the license would not be FDIC-backed and unable to lend, with a requirement to hold more than 100 percent of their liabilities in reserve. And they would have to set up a physical office in the state.
Not exactly a moneymaker, in other words, as far as banking services go. But it’s an intriguing carrot for cryptocurrency companies, who say traditional banks, under pressure from the FDIC, often refuse to hold their assets or suddenly cut off services. That makes it impossible to run a business, since they need a checking account to pay employees and remit taxes to the IRS. That’s led to some creative, and in some cases destructive, workarounds. After Wells Fargo ended its services, Bitfinex, the company behind the “stable” cryptocurrency tether, turned to Panama-based Crypto Capital, whose assets were allegedly later seized by foreign governments. That left Bitfinex some $850 million short.
At least one company, New Mexico–based FreeRange, has said it plans to apply for the state banking charter when applications open later this year. Others say they are interested. Jesse Powell, CEO of the cryptocurrency exchange Kraken, says his company, which has been dropped by US banks in the past, could use such a banking license to hold crypto assets. He notes that because state charters are typically recognized in other states, Kraken could potentially offer services nationwide. Neither FreeRange nor Kraken, which has about 50 employees in San Francisco, say they expect to move large number of employees to Wyoming.
With a legal framework roughly in place, Wyoming’s blockchain enthusiasts are now entertaining some more unusual ideas for how blockchain could enter government services. Last month, the Wyoming Blockchain Taskforce heard the results of an experiment to put land titles on a blockchain system in Teton County and a pitch from officials in Bermuda to collaborate on a form of digital identity. It also floated making Wyoming a “safe harbor” for developers who fear they can be prosecuted for activities that take place on the “decentralized” applications they develop but say they do not control.
But Powell, who attended the meeting, says he’s more excited by a less sexy proposal: a blockchain-based form of automated LLC registration that he says could help Kraken’s customers sidestep pesky regulations in other states. That way, if a person in New York wanted to use Kraken, the company could set up an LLC in Wyoming on their behalf. “If we can get everyone in Wyoming, that would be great,” Powell says, pointing out that, even with low registration fees, its millions of users would be a “cash cow” for the state.
Long says the task force is still working out the details of the latest proposals, with plans to develop pieces of model legislation in July. Some initiatives, like automated LLC registration, are likelier to move ahead in some form, while others, like the digital identity application, face a tougher road. “The technology just isn’t there yet,” Long says.
One wrinkle for Wyoming: There soon might be fewer opportunities for the state to distinguish itself if federal policy comes into clearer focus—and preempts state rules. “I’m skeptical that many of these ideas will gain traction at the federal level,” says Sauter. “I don’t see the political will for it.” One federal bill, called the Token Taxonomy Act, would seek to tie the SEC’s hands and exempt some tokens from securities regulations, but both Long and Lindholm say it goes too far in lassoing states as well. But for now, they may be safe. There’s little indication Congress has any interest in tackling blockchain just yet.
Legislators in Washington state are building momentum around new rules for businesses offering digital currency services. Senate Bill 5013 provides a definition of virtual currency along with disclosure requirements of certain information to consumers. It also would require online currency exchanges within that state to maintain a surety bond. Finally, it offers definitional and clarifying changes for how money transmitters and currency exchangers are regulated under the Uniform Money Services Act.
At the time of this writing, this bill, which was introduced in January, had passed both chambers of the state’s legislature, clearing it to be sent to Governor Jay Inslee for signature. While there is no clear indication as to Governor Inslee’s intentions, broad support of the bill seems to suggest that it may pass.
There has already been a bit of fallout, however, as some cryptocurrency-centric startups are now thinking twice about operating in the state, with several firms having pulled out in the past year, noting the increasingly challenging regulatory environment. These include digital currency exchanges Bitfinex, Bitstamp and Poloniex, the latter of which has exited Washington .
“The State of Washington also appears to have applied a relatively heavy cybersecurity component, including broad and sweeping audits of data and other systems,” says Ciccolo. “Cybersecurity is a hot-button issue that continues to remain in the headlines. Bitcoin companies are wary of a regulatory interpretation of cybersecurity fitness, especially given the nascent stage of Bitcoin and the ongoing knowledge gap as it pertains to the crypto space. For some national players, it seemed the obvious and safe choice was to simply exit the state altogether.”
In November of 2016, Secretary Bryan A. Schneider of the Illinois Department of Financial and Professional Regulation (IDFPR) announced a new initiative with implications for cryptocurrencies in that state. This “Digital Currency Regulatory Guidance” is Illinois’s attempt to provide regulatory clarity on digital currencies, such as Bitcoin, Dogecoin, Litecoin, Ethereum and Zcash. The proposed guidance provides IDFPR’s interpretation of Illinois’s Transmitters of Money Act (TOMA) related to various activities tied to digital currencies.
Says Ciccolo: “The IDFPR and Secretary Schneider continue to deliver on the state’s promise of encouraging and supporting innovation in FinTech, Bitcoin and blockchain [technology]. What we’re doing in Illinois is quite possibly unprecedented in the area of financial regulation. Our state regulators are listening and thoughtfully engaging with industry while considering the impact of any laws and regulations. I’m very optimistic about the continued growth of financial innovation in the Land of Lincoln, and Chicago as a center for the new era of financial services.”
In a highly publicized move, prominent Bitcoin and Ethereum exchange Coinbase announced that it was forced to cease supporting customers in the State of Hawaii due to what it called “impractical” and “untenable” regulatory policies surrounding Bitcoin in that state. In September of 2016, Coinbase was first notified of a policy that demanded that they and any other other cryptocurrency operators hold case reserves equivalent to the values being held for customers.
This development came as Hawaii was exploring a bill that would establish a working group for examining the potential role of digital currencies and blockchain technology in advancing tourism in that state. According to the bill’s text contained in House Bill 1481 : “Digital currencies such as bitcoin have broad benefits for Hawaii. A large portion of Hawaii’s tourism market comes from Asia where the use of bitcoin as a virtual currency is expanding.”
Leaders at Coinbase said they were “heartened” that the bill had been introduced and that they would look forward to working with regulators. In the meantime, Ciccolo remarked: “Given its commitment to compliance and strong resources, the exit of Coinbase suggests few if any stand a chance in the Aloha State. Indeed, the case reserve requirement is overly burdensome and quite frankly utterly impractical. Since Coinbase holds a BitLicense, could it be said that Hawaii is more inhospitable to Bitcoin than New York? Let’s hope not.”
Florida House Bill 1379 recently passed, clarifying what virtual currency is and prohibiting its use in laundering criminal proceeds . The term “virtual currency” was added to the definition of “monetary instruments” under Florida’s Money Laundering Act. The legislation is currently with Florida’s governor and is expected to be signed soon. Ever since a Miami judge dismissed a criminal case involving Bitcoin, policymakers have been intent on establishing guidelines to curb cryptocurrency use.
Says Kuskowski: “In relation to what’s been going on in Florida, a lot of regulators, especially local ones, tend to be more in the crowd profiled earlier that catches headlines, and they go a bit far. But there needs to be a balanced approach from the other side as well. People need to realize that a clear regulatory environment allows companies and creators in the space to make concrete strategic decisions that they [otherwise] can’t when the regulatory environment isn’t clear; it just has to be done properly. Once there is a clear regulation in place, businesses have the confidence to make certain strategic decisions and further grow.”