Tracking Bitcoin Regulation State by State
To help the public better understand what proposals are currently in play at the state level, today Coin Center is releasing a State Digital Currency Regulation Tracker.
The New York Department of Financial Services will likely release a first-of-its-kind digital-currency-specific state regulation, the BitLicense, within days. They’ll soon be joined by a growing number of states that have begun the process of either amending their existing money transmission licensing laws or writing their own technology-specific laws.
Coin Center has been working with lawmakers in these states as they engage in the slow but inexorable process of legislative drafting and regulatory rulemaking. To aid in these efforts, and try and get the best legal regimes possible for digital currency users and innovators, we recently published a State Digital Currency Principles and Framework. It outlines the basic components that any sound digital currency law must have, and includes model language that helps provide lawmakers with a template for sound legislation and rulemaking. We use this Framework in our state by state advocacy.
Legislative processes can often be murky and difficult to follow. This complexity is compounded because the several states are working on these same issues concurrently but with differing approaches. To help the public better understand what proposals are currently in play at the state level, today Coin Center is releasing a State Digital Currency Regulation Tracker.
This tracker breaks down the proposed Bitcoin regulations of several states into their basic issues. It can be used to compare the state approaches to each other as well as our State Digital Currency Principles and Framework.
A full screen version of this chart is available here.
Looking at the tracker, you’ll see that we’ve loosely color-coded aspects of these bills according to how well they match our optimal framework—red (poor match) to green (good match). Take note that you can’t just count the number of greens boxes to see how good a particular bill is, some boxes (i.e. some criteria) are more important than others.
As we engage with lawmakers, the issues we’ve been working hardest to get right in legislation is precisely calibrating the definitions and exemptions for what is and what is not licenseable activity (those are the first two columns from the left). As advocates for the broader cryptocurrency ecosystem, our top priority is shielding software developers and infrastructure providers from unnecessary and costly regulation—unnecessary because these entities don’t secure customer funds. As of right now, California’s bill, AB 1326, has a very well tailored definition of virtual currency businesses: only those companies who either (a) have full custody of customer funds, or (b) are exchanges—something we recently proposed. This ensures that a developer merely releasing software doesn’t have to license. It ensures that a company focused on multi-sig and securing a minority number of many keys doesn’t have to license. It ensures that miners and developers of new infrastructure like sidechains or lightning networks, again, do not have to license.
As protection for this definitional interpretation we have also been advocating for clearly exempted activities. California’s latest draft also has most of the exemptions we have asked for; all of the following are clearly exempted from licensure:
(h) A person or entity developing, distributing, or servicing virtual currency network software.
(i) A person or entity contributing software, connectivity, or computing power to a virtual currency network.
(j) A person or entity providing data storage or cyber security services for a licensed virtual currency business.
Our framework has only one additional exemption, for non-financial services (things like onename.io’s online identity service or proofofexistence.com’s document notarization service). We’re still working with California to advocate for that exemption, and we’re optimistic given the care and openness exhibited by the process thus far.
Less encouraging is where New York’s BitLicense currently stands. As you can see the definition is still broad, potentially sweeping in non-custodial members of the ecosystem. Even worse, the most recent draft still has state-level anti-money laundering requirements. Note that New York is the only state that is trying to impose these requirements on digital currency businesses. And you can’t tell from looking at the chart, but New York’s Bitlicense really breaks the mold when it comes to AML, and that’s not a good thing. Traditional money transmission licensing in New York and across the country has always focused on consumer protection not anti-money laundering. Historically, AML is a function of the Federal not the State government. New York has never explained why they think it’s necessary for states to duplicate or create new AML requirements, or why these requirements would only apply to digital currency businesses and not banks or legacy money transmitters. Despite all the innovation-promoting branding that has surrounded the BitLicense process, the draft we have now is very innovation unfriendly.
Other states range between California’s and New York’s examples. New Jersey’s and North Carolina’s bills are promising, while Connecticut’s is very troubling. We’ll keep this tracker up to date, keep you posted with blog posts, and—most of all—continue our efforts to turn all the boxes green!