State Crypto Efforts Take a Few Steps Forward and Back in 2019

A number of states have taken action over the past year to embrace blockchain and digital currency technologies as crypto legislation remains stymied at the federal level.

The efforts set the stage for even more activity in 2020—and also provide a cautionary tale about how tough it can be to create new crypto policies while also trying to comply with existing laws.

Below is a selection of notable cryptocurrency-related state developments:

Wyoming Opens the Doors

Wyoming, a state best known for national parks, agriculture and mineral extraction, made strides this year to add blockchain and crypto to its top industries by enacting eight new laws in early 2019. That followed on five blockchain or crypto-related bills in 2018, with potentially more to come in 2020.

One bill authorizes special purpose depository institutions, a new type of entity intended to help crypto-touching companies operate nationwide.

Another created a new asset class for digital tokens, intended to clarify how digital assets that aren’t treated as securities under state law should be handled in bankruptcy and corporate unwinding proceedings.

At least a handful of companies are seriously interested in applying for the special charter, though none have applied since the law went into effect Oct. 1, Wyoming State Banking Commissioner Albert Forkner said in an interview.

However, with a nine-month review process to charter a SPDI, it’s likely only one or two new “crypto banks” could be up and running by the end of 2020, he added.

At least one crypto exchange, Kraken, which withdrew from operations in New York in 2015 due to what it called onerous regulatory burdens, posted a position in December for a Wyoming-based special purpose depository institution operations director.

Wyoming is just one several states acting as laboratories of innovation, said John Collins, a partner at FS Vector, a Washington fintech consulting firm.

“We expect others to follow suit in 2020,” Collins said. “This will be good for both industry and the economy as the best ideas will take root and may eventually form the basis for federal action,” he said.

BitLicense Revamp

New York has taken steps to entice more crypto companies to the state by loosening the reins of its first-in-the-nation BitLicense program.

More than two dozen companies have obtained BitLicenses or trusts since the program launched in 2015. The DFS now wants to make it easier for already-regulated blockchain and cryptocurrency companies to list additional assets.

Licensed virtual currency companies would be able to create their own policies for listing new coins for sale and trading under new guidance proposed in December. Once the state approves a firm’s procedures, it can self-certify the listing of any new virtual coins, according to the proposed guidance.

The DFS also wants to post a list of existing virtual currencies that licensed companies can do business in without getting approval from the state, as long as the listed currencies are not modified in any way.

Those changes could usher in another wave of crypto activity, according to crypto law practitioners.

Public comments are due Jan. 27, with final guidance expected later in 2020.

Put a Committee on It

The patchwork of state approaches to virtual currency and how they’re traded could become more standardized if the Conference of State Bank Supervisors has its way.

The group is reviewing industry feedback on model legislation to define how virtual currency fits into existing state payments regulations. A final proposal is expected in 2020.

The group proposed in October that states add the phrase “conducting virtual currency activity” to the definition of money transmission, a state-regulated activity.

Six of the 12 comments to CSBS contain some sort of virtual currency proposal, with the law firm Hunton Andrews Kurth LLP calling for a standing “multistate interpretations committee.”

A uniform multistate payments law “would be self-defeating if multiple states adopts the model law but then chose to interpret it differently,” Austin-based HAK partner Erin Fonte wrote in her comment letter.

State Sandboxes

A couple more states adopted regulatory sandboxes in the past year, with potentially more coming in 2020.

In July, Utah became the second state to launch a regulatory sandbox, opening its doors for companies to test new fintech products without fear of regulatory or enforcement action. Wyoming’s sandbox, enacted in February, will launch Jan. 1.

Arizona launched the first state-level sandbox in 2018. Eight participants are currently participating, with an expected ninth coming by early 2020, said Evan Daniels, counsel for the fintech sandbox administered by the Arizona attorney general’s office.

State regulatory sandboxes are intended to encourage companies, typically startups, to test new products or services on a small number of consumers without first having to obtain a state license. In exchange, the companies activities are typically overseen by state regulators or law enforcement for the duration of the program.

The District of Columbia could be one of the next locations to launch a sandbox. The district is looking at regulatory sandboxes through an exploratory committee formed this year. The “innovation council” held its first meeting Dec. 18, with the second planned for Jan. 16. The council’s 19 members are drawn from a cross section of tech, legal, financial services and labor groups.

The council will “look at whether there are any regulatory barriers in the District that could be subject to regulatory relief for new or legacy businesses,” council chairman and Department of Insurance, Securities and Banking Commissioner Stephen Taylor said in an interview.

The group will make a formal recommendation after mid-year to D.C. Mayor Muriel Bowser on whether to move forward with a sandbox framework, Taylor said.

The council is also considering issues such as a framework for integrating blockchain can be integrated with existing financial services, artificial intelligence, robotics and other new technologies, he said

‘Oops’ in Ohio

Sometimes innovative crypto policy meets friction when it comes time for implementation.

In 2018, Ohio became the first state to authorize businesses to use bitcoin to pay 23 different types of taxes.

But the state’s embrace of crypto payments fell flat in 2019. It turns out state treasurer hadn’t followed all the rules in creating the payments portal, according to a Nov. 5 opinion from Ohio Attorney General Dave Yost.

The site OhioCrypto.com was suspended after it emerged it may have been operating as an unauthorized “financial transaction device.”

The site, which was contracted out to crypto payments processor BitPay, Inc., should have been put through a competitive bidding process, the attorney general said.

New Hampshire and Arizona, which have also considered allowing taxes to be paid in cryptocurrency, may want to take note of Ohio’s experience.

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