An update from the recent Uniform Law Commission drafting meeting
The latest from our participation in what could be United States' best bitcoin licensing law yet.
I’ve just returned from the Twin Cities where the Uniform Law Commission had its third and probably penultimate meeting of the committee to draft a Uniform Regulation of Virtual Currency Businesses Act. That’s a mouthful, but the ULC’s involvement in state virtual currency licensing law is one of the most positive developments in the young history of cryptocurrency policy.
That’s because (1) virtual currency licensing and money transmission licensing generally are a state-by-state affair and you may need to get a license in every state where you have customers, (2) existing state money transmission statutes are unclear regarding their application to virtual currency businesses and individuals, (3) each state has thus far either ignored that ambiguity or taken a haphazard and uncoordinated approach to clarifying their laws, and (4) companies, hobbyists, and academics interested in using these technologies are left in a chaotic and uncertain big-fuzzy-grey-area that differs for every state.
Enter the ULC, a private body of legal professionals and academics who specialize in fixing problems like this. They draft model legislation that the states can then chose to adopt, thus providing a forum for clear and unhurried legal thinking and a path to potential uniformity amongst state laws.
We’ve attended every meeting thus far and submitted at least one formal comment letter for each. Here’s our most recent letter. So what was discussed at this most recent meeting, and how close are we to an official model law?
There was, I’m happy to report, relatively little discussion of definitions. These definitions are key, particularly the definition of “control” of virtual currency. This definition gets used within the definition of virtual currency “exchange” “storage” and “transmission” and then these terms are used in the definition of “virtual currency business activity.” That definition is key because only those people found to be engaged in “virtual currency business activity” will need to get licensed, everyone else is outside of the scope of the law.
So we’ve long lobbied for a narrow definition of control that would ensure that full nodes, miners, multi-sig providers, and lightning network nodes, among others, do not need licenses. I’m happy to say that our proposed definition is still in the draft and was merely polished during this most recent meeting. At this point, barring something unforeseen, I think we can expect that definition in the final version. This would be an excellent step toward making sure that non-custodial activities like running a full-node will never be subject to a licensing requirement in the U.S.
More substantive discussions followed. In particular we are pleased with the evolution of a safe harbor for small-value activities. In light of discussions last weekend, we expect that the next draft will include a full exemption from licensing for any parties who are exchanging, storing, or transmitting less that a certain amount of virtual currency (potentially $50,000) in aggregate. This would mean that if you are an academic researcher who develops a new smart contracting platform, tests it, and does end up in control of a few thousand dollars worth of other people’s virtual currency, that you would not need to worry about suddenly being classified as an unlicensed virtual currency business (a classification that could subject you to crushing federal criminal liability).
Finally, we also discussed the question of minimum capital requirements and permissible investments. It’s well-established that money transmitters need to hold 1:1 reserves for all money they take from customers (in other words you can’t take some of the float you hold for customers and invest it in risky assets). We should expect the same treatment for virtual currency firms, but the most recent draft also would have required that virtual currency firms hold an additional 10% reserves. This provision also cropped up in Washington State. In Washington we were able to persuasively argue that the additional requirement is not helpful (it addresses a cybersecurity risk with a liquidity control), and we believe that Washington will now be dropping that provision. Fortunately, the ULC commissioners were also open to this argument. We’ll see how the next draft comes out, but I expect that the 10% will be one of several options to ensure solvency, including the option to get a bond instead (surety bonding is pretty common in state money transmission and potentially an easier compliance obligation for virtual currency firms than a 110% cash reserve requirement).
All in all the meeting went very well and we eagerly await the next draft. There will be one further meeting of this drafting committee and then the ULC will hopefully vote on the final model law this summer. At that point it will be up to the states to pass it into law.