How to improve North Carolina’s digital currency bill
Recently some have hailed North Carolina’s Senate Bill 680 as very friendly to cryptocurrency innovators. This is sadly not the case.
North Carolina’s Senate Bill 680, which seeks to cover virtual currency under the state’s money transmission law, has been making its way through the state legislature. Recently some have hailed the bill as very friendly to cryptocurrency innovators, suggesting it would bring significant clarity for all entrepreneurs and could serve as a template law for other states. This is sadly not the case.
While aspects of SB 680 may provide direction for some players in the space, it falls way short of broad clarity necessary for continued innovation for the entire ecosystem.
The key questions that we ask at Coin Center when looking at a state virtual currency licensing bill are: Who would the law require get a license? Who does the law allow to operate without needing a license? And is the law clear so that a startup (or a court judging a case against one) can easily tell on which side they fall?
We believe the answers to these questions are the best measure of whether proposed legislation is truly beneficial.
What the North Carolina bill does
The North Carolina bill adds virtual currency to the state’s money transmission law by requiring a license from anyone who "engage[s] in the business of … maintaining control of virtual currency on behalf of others.”
That clause may be helpful for some. Custodial exchanges and wallets that without question ‘maintain control of virtual currency on behalf of others’ will know for certain that they will have to get a license. Likewise, others that never even touch virtual currency, like permissioned blockchain software providers, will also know they don’t need a license. But what about all the other applications of Bitcoin, Ethereum, and other cryptocurrencies that are pushing the envelope and driving innovation?
Whether you must be licensed turns on whether you “maintain control” of virtual currency, but unfortunately what “control” means is not defined in the North Carolina bill.
What if you are a node on a Lightning Network?
Other people’s virtual currency are temporarily locked in a multi-sig address to which you have one of two keys. You can refuse to relay their transactions for the duration of the lock, but you can’t transact yourself, or permanently encumber the currency. Are you “maintaining control”?
What if you are a multisig wallet service provider?
You might help people set up a multi-sig address, and might hold a certain number of keys related to that address on their behalf. Depending on the choices you make in your business you might only keep insufficient keys to transact in order to simply provide a backup recovery service for users who lose their keys (but never be able to lose their funds). Or you might choose to store enough keys to transact without the user. Hopefully you can make that business decision in the shadow of a law that helpfully explains when and when not you might be deemed a money transmitter.
North Carolina’s banking commissioner has published FAQs interpreting existing law as excluding multisig service providers from the licensing requirement, which are excellent. They also tell us that without a clear definition as part of the Act, the law is open to interpretation and reinterpretation. And while the FAQs are spot on about multisig, it’s silent on the Lightning Network, and who knows what other innovations may come our way that would benefit from a clear definition that would help entrepreneurs make informed choices.
So what is the best solution?
A clear definition of ‘control’ written in law—not just in guidance that can change at the discretion of a banking commissioner—has been recognized by the Uniform Law Commission to be of paramount importance to any serious virtual currency legislation. Working with the ULC, Coin Center has helped develop a very precise definition for the draft ULC Virtual Currency Businesses Act:
(3) “Control” means possession of sufficient virtual currency credentials or authority on a virtual currency network to execute unilaterally or prevent indefinitely virtual currency transactions[.]
That definition echoes the one we proposed in our State Digital Currency Framework last year, and it’s a legal definition that is important to ensure that innovation on open permissionless networks is not inadvertently squelched. We urge North Carolina to adopt such a definition or wait for the Uniform Law Commission to issue its final model act and consider adopting it instead.
How does the North Carolina bill measure up to other states?
There are other areas where North Carolina’s bill right now doesn’t compare well to other state bills (as you can see in our state-by-state legislative tracker) or even the BitLicense. While S 680 has exemptions for agents of payees and avoids dual licensing, which is excellent, it has no explicit exceptions for software development and dissemination or for non-financial uses of virtual currency, and no transitional license or start-up on-ramp as even the BitLicense has.
Again, we urge North Carolina to consider the work of the ULC, which in its draft act has included clear exemptions for mining, third-party storage services, and an exemption for companies who hold a de minimis amount of consumer funds that serves as a start-up on-ramp.
For a bill to be truly friendly to cryptocurrency it must contemplate a broad range of applications. At Coin Center we advocate for outcomes that allow for the continued innovation for all aspects of the ecosystem. We appreciate that states, like North Carolina, are working to address the legal and regulatory issues raised where technology has outpaced the law and stand willing to help policymakers engage in the legal analysis that is critical to good policy outcomes for cryptocurrency.