EFF’s opposition to California bill unwittingly endangers Bitcoin innovators

We think their opposition stems from a misunderstanding of the state of the law in this space—one that could have dangerous consequences.

Today, the Electronic Frontier Foundation has launched a lobbying campaign opposing California’s A.B. 1326, a bill that would create a new licensing system for digital currency businesses in the state. It’s a bill that we support and that we’ve helped develop and improve by working with its sponsor and by educating California lawmakers on digital currency technology. As I said in testimony before the California Senate last month, the bill is not perfect and it could be improved, but it’s also the best bill we’ve seen from any state because it takes cryptocurrency’s unique attributes into account and avoids unnecessary regulation. So, we’re sad to see this opposition since we’re typically in complete alignment with our friends at EFF, and we think it stems from a misunderstanding of the state of the law in this space.

Before I explain this misunderstanding, let me first say that there are technical issues with the bill that we agree with EFF should be changed. For example, the disclosure requirements in the bill are specific to Bitcoin while the bill applies to all digital currencies. And it would be great to see a definition of “full custody” included in the bill. In my testimony last month (and privately to legislative staff) I’ve proposed the definition in Coin Center’s state framework. However, EFF’s main reason for opposing the bill is that it’s just too early to impose regulation on such a nascent industry.

“The regulation is premature; digital currency is an industry in its infancy,” EFF’s blog post today states. It goes on to say, “We don’t know what the future of cryptocurrencies will look like, but this legislation locks in a burdensome regulation before we know either where the technology is headed or what its likely uses will be.”

In a vacuum, I’d completely agree. This is a nascent industry, regulating prematurely could stunt it, and an absence of rules would not necessarily be a bad thing. But we’re not in a vacuum, unfortunately. It is not correct to believe that digital currency businesses today are not subject to regulation, that AB 1326 would for the first time subject them to regulation, and that if it does not pass then businesses will remain unregulated. It is incorrect to believe that but for this bill there would be an “absence” of rules. California’s Money Transmission Act applies to digital currency businesses today. If A.B. 1326 does not pass, I would expect the Department of Business Oversight (DBO, the equivalent to New York’s DFS) to issue guidance or rules applying existing money transmission licensing to digital currency businesses.

In January, DBO’s commissioner said that “the California Department of Business Oversight has not decided whether to regulate virtual currency transactions, or the businesses that arrange such transactions, under the state’s Money Transmission Act.” News accounts suggest that DBO has concluded that it indeed has the authority to regulate digital currency businesses under existing rules but are demurring so that the legislature may produce a digital-currency-specific law. If the legislature does not, it is likely DBO will decide to go ahead and regulate under the existing statute.

Unlike A.B. 1326, that existing money transmission statute has no exemption for software development; it has no exemption for non-custodial businesses; it has no provisional license for start-ups; it has no exemption for miners or others who contribute resources to decentralized digital currency networks. Worst of all, the statute has the following requirement that would render any digital currency business model unviable if regulated as money transmission:

2081. (a) A licensee shall at all times own eligible securities having an aggregate market value . . . of not less than the aggregate amount of all of its outstanding payment instruments and stored value obligations . . .

Under § 2081. (a), a company providing a hosted bitcoin wallet product would need to hold eligible investments equal to the total value of virtual currency they secure, and it should be no surprise that virtual currencies are not on the list of eligible investments. Want to offer a bitcoin wallet product? Prepare to invest a dollar into state treasury bonds for every dollar in bitcoin a customer stores using your product.

A.B. 1326 gives relief from these onerous regulations to hobbyists, developers, and small businesses. We don’t imagine EFF wants to deny these innovators such relief; we think they’ve dangerously misjudged the implications and unintended consequences of their vocal opposition.

Bottom line: it’s not a choice between this bill and no regulation; it’s a choice between the sensible regulation in A.B. 1326—even if it could be improved—and the ill-fitting regulation of the Money Transmission Act. If this bill fails, we may end up with the aggressive and industry-stunting regulation that we’re all seeking to avoid. And if this bill fails, we’d also lose the best bill we’ve seen that could be a model for other states and a counterweight to the BitLicense.

At Coin Center we’re idealistic but pragmatic, and we think opposing this bill is letting the perfect be the enemy of the good. The bill could certainly be improved, but even if it passed as is, it would be still be much, much better than having the existing ill-fitting money transmission license apply.

Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.