The ULC’s model act for digital currency businesses has passed. Here’s why it’s good for Bitcoin.
The Uniform Law Commission has given states a clear path to approach this technology the right way.
The Uniform Law Commission, a private body of lawyers and legal academics from the several states, has just voted to finalize and approve a uniform model state law for the regulation of virtual currency businesses. This is great news for businesses, users, and developers of cryptocurrency and decentralized computing technologies.
We’re thrilled to see this pass the commission. I’ve been personally in the room at every one of the five drafting committee meetings that were publicly held all across the country over the last two years. And I’m writing this a bit jet lagged from my red-eye return flight from the full commission’s annual meeting in San Diego. Throughout these two years, I’ve become fond of several of the drafting committee members, and I’ve come to believe–absolutely–that they want what is best for innovation and for our community. I’ve also found them to be some of the few people smart enough about the law, patient enough to learn about the technology, and also hardworking enough help draft something so essential. You should know that this is not something they are paid to do; it’s a volunteer effort and a labor of love–specifically love of clear laws and a hatred of the costs (both human and monetary) that stem from sloppily drafted law or ill-considered regulation.
I’m also proud of several specific pieces of language in the act, because they closely mirror Coin Center’s frameworks and are the results of our advocacy, mixed with and meaningfully improved by, debates amongst the drafting committee members and the committee of the whole during this year’s annual meeting. I’ll highlight those passages later in this post.
Finally, I’m relieved. The discussion on the floor of the annual meeting in San Diego was not always easy and this model law could have been delayed another year or left to whither and die. I had moments, sitting in the ballroom of the US Grant hotel, when I thought all our work might come to nothing. But ultimately, critical commissioners came around, and as they learned more about the bill and the problems our community has encountered with the existing laws of money transmission, several had a change in heart. Several even became vocal advocates for the law’s approval. I personally enjoyed a few conversations with commissioners who, by offering further background about how the bill protects both consumers and innovators, I think I managed to help come to support the language we had worked so hard to perfect.
But all that aside, why is this a good model law for the states?
Two main reasons: certainty and safe harbors
The model law is incredibly well-drafted. If you spend some time with it you can quickly understand who does need to get a license, who does not, and what a licensee must do to protect their customers. That’s not something that can be said about most state money transmission laws or the BitLicense. There’s a very real threat that existing money transmission law already applies to companies in this space, and the vagueness with which those statutes and regulations are drafted will likely leave many such determinations to a judge or a regulator (actually to as many as 53 or more judges or regulators, for every state that regulates money transmission). By providing more certain and justiciable legal language, this act could actually mean that fewer people will be going to jail because they didn’t understand the laws that made their activities illegal and fewer people might avoid starting a business or conducting research and experimentation in our field for fear of the legal consequences.
The act does not create an explicit “safe harbor,” but by clearly and carefully carving several activities out of the scope of its reach, it guarantees that a vast area of innovation will not be treated as activity requiring a license.
The act only regulates Virtual Currency Business Activity, not personal uses of the technology, or the technology itself. And, because of Coin Center’s efforts over the last two years, this activity is defined narrowly to include only three things relevant to bitcoin, ethereum or similar cryptocurrencies: exchanging, storing, or transferring as a customer-facing intermediary. And because those three activities don’t necessarily have a plain meaning they are fastidiously defined:
(5) “Exchange” means to assume control of virtual currency from or on behalf of a resident, at least momentarily, to sell, trade, or convert:
- (A) virtual currency for legal tender, bank credit or one or more forms of virtual currency; or
- (B) legal tender or bank credit for one or more forms of virtual currency.
(20) “Store” or “storage” means maintaining control of virtual currency on behalf of a resident by a person other than the resident.
(21) “Transfer” means to assume control of virtual currency from or on behalf of a resident and to:
- (A) credit the virtual currency to the account of another person;
- (B) move the virtual currency from one account of a resident to another account of the same resident; or
- (C) relinquish control of virtual currency to another person.
As emphasized above, a person will only be found to be engaged in these regulated activities if they have control of other people’s virtual currency And, of course, thanks in part to our work, the draft has a narrow, commonsense, and easily applied definition of “control”
(3) “Control” means:
- (A) when used in reference to a transaction or relationship involving virtual currency, power to execute unilaterally or prevent indefinitely a virtual currency transaction.
Simply put, only truly custodial companies who hold your cryptocurrency private keys (all of them or enough to make or prevent a valid transaction) are regulated under this act. Therefore, this act clearly excludes every other variety of cryptocurrency activity from regulation.
- Hosted wallet providers,
- Custodial exchanges
- Core Developers
- Software and Hardware Wallet Developers
- Multi-sig Wallet Developers (who don’t hold sufficient keys to transact)
- Key Recovery Service Providers
- Lightning Network or Payment Channel Nodes
- Signers in a Sidechain Federated Peg
- Anyone else without sufficient keys to transact on behalf of another person.
Earlier I said the act doesn’t regulate persons or businesses who are not acting as intermediaries, but who are rather using cryptocurrencies on their own behalf. Here’s the exemption that makes it clear. The following persons (that’s both individuals and businesses as defined) are exempt under the model act:
(7) a person using virtual currency solely
- (A) on its own behalf,
- (B) for personal, family, or household purposes, or
- (C) for academic purposes,
including creating, investing, buying or selling, or obtaining virtual currency as payment for the purchase or sale of goods or services;
Three things about this:
- This means that a person (again, including a business) is not regulated under this act if they are doing any of the following:
- Inventing a new cryptocurrency or decentralized token and selling it to interested buyers.
- Selling or buying cryptocurrency over the counter in order to open or close investment positions that they hold.
- Helping their friends or family members buy bitcoin or other cryptocurrency.
- You will not find a similar, clearly drafted exemption in state money transmission regulation or the BitLicense. And if the ULC act is adopted by the states it supplants existing money transmission regulation with respect to these technologies, bringing clarity where there was none and authoritatively carving a substantial amount of virtual activities from regulation.
- FinCEN at the Federal level has a body of interpretive guidance (several letters answering questions posed by companies) that (probably) would exempt the same persons from having to do KYC/AML and other Bank Secrecy Act compliance, but isn’t it neat that with the ULC model act (for the first time anywhere) we have a clear statement of these critical exemptions right in the law itself.
Finally, I know it can be hard to understand how passing a new licensing law is progress for technology, but in this case it is. This is as far away as possible from the BitLicense as you can get in a licensing law and any competent attorney will tell you that. So, if we can get this passed in states like New York where there is a terrible existing law, or in states where today there is ambiguity, it will be a huge win. I know it can take a lot of background to understand this progress, because you have to start by understanding how existing laws, like money transmission licensing, are riddled with complexities, uncertainties, and liabilities. And I know, at the end of the day it can be tiresome to even read all this and even more difficult to get excited about. But here’s the deal: this act, if adopted by the states, will be one of our best shots at saving people from unwarranted prosecution, promoting innovation by exempting a huge group of our community who should never be regulated, and helping consumers with common sense protections. This is a big win for Bitcoin and cryptocurrencies.