Fintech

Forget the feds: States have over a hundred crypto laws on deck

From Albany to Sacramento, tighter crypto regulations are on the table, and the Lummis-Gillibrand bill leaves room for local rules.

Gavin Newsom

States have taken point for more than a decade on U.S. cryptocurrency regulation, creating a patchwork of rules.

Image: Gage Skidmore/Flickr

The big federal crypto bill the industry has been waiting for is finally here — but that won't slow the action at the statehouse. If anything, it might spur more state-level regulation of digital assets.

The same day that Sens. Cynthia Lummis and Kirsten Gillibrand introduced the most comprehensive federal crypto legislation yet, a California lawmaker proposed a new state licensing process for companies “engaging in digital financial asset business activity,” joining a long list of active state efforts focused on the industry.

In the absence of clear federal policy, states have taken point for more than a decade on U.S. cryptocurrency regulation, creating a patchwork of rules that range from the aggressive approach of New York to the red carpet rolled out in Wyoming. The Responsible Financial Innovation Act, introduced Tuesday by Wyoming Republican Lummis and New York Democrat Gillibrand, hopes to clarify federal policies, and includes a provision aimed at making state regulations more uniform.

The bill faces a long road to becoming law that almost certainly extends into 2023. In the meantime, the California proposal will join more than 160 crypto-related bills under review in statehouses across the U.S., according to a list kept by the National Conference of State Legislatures.

"What we have seen is that states are just going to do their own thing, and not just states, but also localities," David London, Coinbase’s head of State and Local Public Policy, told Protocol in April. "We're literally tracking legislation all across the country, and seeing that states are putting policy proposals forward in lieu of federal action."

States of change

Cryptocurrency legislation, as tallied by the state legislature group, covers a wide range of topics. New York lawmakers recently approved a moratorium on permits for new cryptocurrency mining facilities powered by fossil fuels. Wyoming and Arizona, meanwhile, are weighing whether to allow residents to make tax payments in crypto. In New Jersey, lawmakers advanced a pair of bills last week creating a state licensing system for businesses that facilitate digital asset transactions. California’s new bill would do much the same.

Through a separate effort kicked off last week, California's Department of Financial Protection and Innovation is taking comments on how it should regulate blockchain businesses, based on an executive order from Gov. Gavin Newsom to create "a comprehensive and harmonized framework for responsible web3 technology."

The D.C.-based Blockchain Association opened its first regional office earlier this year in Albany, a sign that New York is a key battleground for crypto rulemaking. Industry groups opposed the state’s mining moratorium and professed little love for the BitLicense required to conduct cryptocurrency sales in the state (though that hasn't prevented New York crypto startups from raking in venture capital dollars).

Perhaps the new Senate bill can bridge the gap: Gillibrand represents the state seen as most aggressive in regulating crypto, Lummis the friendliest.

Getting in uniform

The bill includes a provision that would require states to adopt "substantially uniform standards" for how digital assets are treated under money transmission laws. Most states, along with the federal government, require a money transmitter license for cryptocurrency exchanges and other businesses that facilitate transactions. A common industry complaint is a lack of clarity and consistency in that process.

For states that have not adopted a uniform money transmitter standard, the Consumer Financial Protection Bureau would be authorized to step in and enforce licensing rules based on the standards adopted in other states, according to language in the bill.

In a bill summary, the senators described the approach as similar to that of the Safe Mortgage Licensing Act of 2008. That bill required state regulators and the federal government to adopt a uniform online registration system for mortgage loan originators.

The provision shows the bill will allow for a “continued role for state regulators alongside the federal government,” said Matthew Homer, executive in residence at Nyca Partners and a former official at the New York State Department of Financial Services.

There will be plenty of debate around what makes state regulatory regimes consistent with each other, Homer added, but “the proposal seems to create a pathway for states to agree to minimum regulatory standard, avoiding a race to the bottom.”

Similar to the Safe Mortgage Act, the Lummis-Gillibrand bill would rely in part on the Conference of State Bank Supervisors to develop the rules. Last August, the state regulator group announced its members had agreed to the Money Transmission Modernization Act, also known as the Money Transmitter Model Law, a legislative framework to make transmitter laws uniform across all states, including when they are required in digital asset transactions.

So far, only lawmakers in Arizona and West Virginia have approved legislation adopting the model license. If approved, the Lummis-Gillibrand bill could give that adoption process a boost, provided the standards outlined in the legislation align with the model offered by CSBS. A spokesperson for the regulator group did not immediately have a comment after the Senate bill's release Tuesday.

The section on money transmitter licenses is one of more than 60 in the 70-page bill released Tuesday morning, and many in the industry are still weighing its potential impact.

"Certainly anything that makes it easier and creates more uniform regulation is generally positive," said Kristin Smith, executive director of the Blockchain Association, which offered support for the bill as a whole. "Whether or not this specific language is exactly how we want to do that is an open question.”

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