States Tiptoe Into Regulating Bitcoin

Virtual currency will not make or break the American economy just yet.

23rd November 1965: Daniel Americanos and his bride at their reception at Stoke Newington town hall, London. According to Greek tradition guests pin money on to the clothes of the happy couple.
The world has new ways of thinking about money.

One sign that a new technology has a shot at turning into an industry: when governments start to write rules for it.

North Carolina’s governor just signed into law a new piece of blockchain legislation, updating money transmission rules to clarify which businesses will be regulated in the state and which will not. A blockchain is the kind of distributed, online database that powers bitcoin and and all virtual currencies. Advocates for these technologies point out that blockchains have many non-financial uses (as we have previously reported) that regulators should ignore for now.

Perianne Boring, president of the Chamber of Digital Commerce, said in a statement, “North Carolina anticipated key issues, and developed a reasonable solution to address each concern. This has paved the way for other states to realize and embrace the incredible potential of these technologies.”

It isn’t the first state to move on bitcoin. Here’s what we know about states that have updated their rules or laws to address businesses grounded the internet’s native money:

  • Oregon may have passed the first new law, which went into effect in May 2015, regulating bitcoin exchanges as money transmitters.
  • New York created its BitLicense, using existing authority, which became effective last August. According to a Department of Financial Services spokesperson, 26 firms have sought a BitLicense. Only two have received one (though two others are also permitted to conduct business in cryptocurrencies by meeting a higher bar, as trusts). Several bitcoin companies shut down operations in the state in response to BitLicense, and a few of those set up a protest website,
  • Several states have issued guidances (meaning that the authorities there are operating under a memo, until something more formal is needed). These documents tend to treat bitcoin exchanges as money transmitters, provided they meet certain conditions. These states include Kansas, Texas and South Dakota.   
  • Many others are still simply studying the issue, a stance we’ve confirmed via email with spokespeople in Colorado, Maine, Nebraska, Virginia and Kentucky. Pennsylvania also appears to be taking this position, based on a 2014 issue of the Department of Banking’s newsletter (in which it also explains that, from a legal perspective, bitcoin isn’t money).

A cryptocurrency think tank in D.C., Coin Center, has also been tracking relevant rules and laws as they develop. It’s identified a number of states with legislation before state lawmakers.

California got a piece of virtual currency legislation through one chamber, and the legislative offices behind it hoped to send a bill to the governor that would draw less ire from entrepreneurs than New York’s BitLicense has. “We looked at it as a model of things we would not want to do,” Mark Farouk, chief consultant to the California Assembly’s Banking and Finance Committee told the Observer in a phone call. Mr. Farouk helped State Assembly Member Matt Dababneh draft AB 1326, a virtual currency bill that was ordered “inactive” in the Senate last fall.

New York’s BitLicense is unique in the country because it “has state-level anti-money laundering requirements,” Coin Center’s Jerry Brito wrote.

FedCoin: when the government copies bitcoin

The USA PATRIOT Act sought to undermine terrorists by forbidding financial firms to serve anonymous customers. Rules preventing such practices are referred to as know your customer (KYC) or anti-money laundering (AML). “Historically, AML is a function of the Federal not the State government,” Brito wrote. The author of Mastering Bitcoin,  Andreas Antonopoulos has called these rules “dangerous.”

Other companies have defended New York. “We’re on the side of pro regulation,” Jesse Chenard, the CEO of MonetaGo told the Observer in a phone call. “We don’t think that bitcoin itself can be regulated or anything ridiculous like that but we do think that the gateways can be regulated and they should be.” MonetaGo is one of the companies that’s still waiting for a decision on its BitLicense application.

For states that want to move forward, the Uniform Law Commission has draft legislation to start from. The Conference of State Bank Supervisors has a model regulatory framework (which South Dakota uses as its guidance). Coin Center also has a framework.

Bitcoin put value on the internet in a native way. American law hasn’t adjusted to money that isn’t sovereign yet. Each state regulates the money business in slightly differently and they are all balancing the nascent industry’s maturity versus the need to write rules for it.

After all, the world’s bitcoin has a market capitalization of less than $11 billion, roughly one third the GDP of the state of Vermont, the country’s smallest. Virtual currency will not make or break the American economy just yet. No need to rush.  

States Tiptoe Into Regulating Bitcoin