Originally published on October 17, 2017.
Updated on June 28, 2018.
As of this inaugural publication, there exists no uniformity with respect to how businesses that deal in virtual currencies (also known as “cryptocurrencies”) such as Bitcoin are treated among the states. For these proprietors, often the first question asked when deciding whether to operate within a state is whether existing state money transmitter rules apply to the sale or exchange of virtual currencies. As you will see from the discussion below, most states have not yet enacted regulations that provides virtual currency operators with any guidance on this question.
Some states have issued guidance, opinion letters, or other information from their financial regulatory agencies regarding whether virtual currencies are “money” under existing state rules, while others have enacted piecemeal legislation amending existing definitions to either specifically include or exclude digital currencies from the definition. To use a pun those in the blockchain space should understand, there is a complete lack of consensus as to whether they do or not. This uncertainty is made all the more complicated by potentially contradictory guidance from the Federal government. For example, in March 2018 the Financial Crimes Enforcement Network (FinCEN) published a letter stating that token issuers were money transmitters required to follow federal money transmitter requirements. The letter came just two days after a U.S. District Court in New York accepted the understanding of the Commodity Futures Trading Commission (CFTC) that cryptocurrencies were commodities, a ruling that on its face appears to take the exchange of cryptocurrencies for fiat currency outside of the definition of money transmission under previous FinCEN and now questionable past guidance. See, e.g., Application of the Definition of Money Transmitter to Brokers and Dealers in Currency and other Commodities, FIN-2008-G008, Sept. 10, 2008.
The few states that have attempted to enact such comprehensive regulations, including New York’s much maligned “BitLicense” scheme, has resulted in an exodus of blockchain and virtual currency businesses from states attempting to treat all virtual currency operators identically with traditional money transmitters that are better equipped to deal with an overly restrictive regulatory framework. There is a proposal pending within the NY State Assembly to replace the BitLicense with a more innovation-friendly framework, and indeed, many states are attempting to enact crypto-friendly regulations in an attempt to entice entrepreneurs to move to their state. Accordingly, in what is perhaps the most important state regulatory development in this Update, Wyoming enacted a series of regulations that, among other things, exempts “Utility Tokens” from state securities regulation and virtual currencies from state money transmission laws. Wyoming’s law, at least with regard to its take on the application of state securities regulation, likely offers only theoretical comfort to those wishing to issue “Utility Tokens” through an Initial Coin Offering since Federal Securities Law (and the SEC’s recent informal announcement that all tokens may, in fact, be securities), takes precedent over state law.
The authors of this article are hopeful that over the next several years states will begin to craft regulation that balances the dual needs of protecting consumers from businesses operating in the fledgling industry while also promoting continued innovation by not saddling virtual currency businesses with regulatory burdens that make it financially impractical to operate. One attempt to craft such legislation has been proposed by the Uniform Law Commission, which in July 2017 introduced a model Regulation of Virtual Currency Businesses Act. The model legislation has not yet been adopted by any state, and has been subject to both criticism and praise by the industry, but is instructive of the types of considerations legislatures need to address when attempting to regulate the industry, including common sense definitions of “virtual currency” and what type of activity or economic thresholds should be implemented for “virtual currency business activity” so as to not drive away innovation from the state or punish personal or low-stakes use of the technology.
This article attempts to outline the range of regulations or guidance provided by the states with regard to virtual currency regulations or blockchain specific technologies. Because the law is rapidly developing we will try to update it quarterly to address new regulations or case law impacting the industry.
The Alabama Monetary Transmission Act, approved by Governor Kay Ivey in May 2017, defines “monetary value” as “[a] medium of exchange, including virtual or fiat currencies, whether or not redeemable in money.” H.B. 215, 2017 Leg., Reg. Sess. (Ala. 2017) § 8-7A-2(8). The act requires that every person engaging in the business of monetary transmissions obtain a license from the state. Money transmission includes receiving monetary value (including virtual currency) for transmission. H.B. 215,
2017 Leg., Reg. Sess. (Ala. 2017) § 8-7A-2(10). The act exempts banks, bank holding companies, securities-clearing firms, payment and settlement processors, broker-dealers, and government entities.
There are no blockchain or virtual currency specific regulations enacted under Alaskan law. House Bill 180 was introduced in March 2017 but, as of September 2017, appears to be stalled in the state legislature’s Labor and Commerce Committee. The bill would regulate money transmission and currency exchange businesses, as well as transmitting value that substitutes for money. H.B. 180, 30th Leg., 1st Sess. (Alaska 2017). The bill’s definition of virtual currency covers “digital units of exchange that have a centralized repository” as well as “decentralized, distributive, open-source, math-based, peer-to-peer virtual currency with no central administrating authority and no central monitoring or oversight.” If passed, it would also amend the Alaska Uniform Money Services Act to expressly include dealing in virtual currency within its definition of money transmission. H.B. 180, 30th Leg., 1st Sess. (Alaska 2017).
In 2017, Arizona adopted two statutes related specifically to the storage of information on the blockchain. Arizona Statute § 44-7061 makes signatures, records, and contracts secured through blockchain technology legally valid. “A contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.” H.B. 2417, 53d Leg., 1st Reg. Sess. (Ariz. 2017). Arizona Statute § 13-3122 makes it unlawful to require people to use or be subject to electronic firearm tracking technology (including distributed ledger or blockchain technology). H.B. 2216, 53d Leg., 1st Reg. Sess. (Ariz. 2017). Arizona has pending legislation that would allow people to pay their state taxes in cryptocurrency. S.B. 1091, 53d Leg., 2nd Reg. Sess. (Ariz. 2018). If passed, tax and any interest and penalties may be paid in the form of “a payment gateway, such as bitcoin or other cryptocurrency.” S.B. 1091, 53d Leg., 2nd Reg. Sess. (Ariz. 2018). Another proposed legislation adds income “derived from the exchange of virtual currency for other currency” to the computation of Arizona adjusted gross income for the purposes of the income tax. S.B. 1145, 53d Leg., 2nd Reg. Sess. (Ariz. 2018).
There are no blockchain or virtual currency specific regulations enacted or pending in Arkansas at the time of publication.
In August 2017 the state re-introduced Assembly Bill 1123 which proposes to create a Digital Currency Business Enrollment Program that would require all companies that store, transmit, exchange, or issue digital currencies to qualify as a “digital currency business” and pay a non-refundable $5,000 fee to participate in the program.” The bill’s most recent incarnation scraps a previous, and much criticized, prior proposal by the state’s legislature to create a licensure requirement for digital currency businesses similar to New York’s BitLicense.
In June, 2016 the California legislature enacted Cal. Stat. § 320.6, which make it unlawful to sell or exchange raffle ticket for any kind of cryptocurrency.
In February 2016, the California legislature introduced a bill that, if passed, would expand the definition of electronic records and signatures contained in the Uniform Electronic Transactions Act to include records and signatures on the blockchain.
In February 2018, the Colorado House introduced a bill that subjects people who buy, sell or exchange cryptocurrency to regulation under the “Money Transmitters Act.” H.B. 1220, 71st Gen. Ass., 2nd Reg. Sess. (Co. 2018). The proposed law defines “cryptocurrency” as “a digital currency in which encryption techniques are used, independently of a central authority to do one or more of the following: (a) regulate the generation or issuance of currency, (b) verify the transfer of funds, (c) record transactions, or (d) prevent counterfeiting and fraudulent transactions.” H.B. 1220, 71st Gen. Ass., 2nd Reg. Sess. (Co. 2018).
House Bill 7141 became law on October 1, 2017 and requires that anybody engaged in a financial services industry be licensed by the state. “Each licensee that engages in the business of money transmission in this state by receiving, transmitting, storing or maintaining custody or control of virtual currency on behalf of another person shall at all times hold virtual currency of the same type and amount owed or obligated to such other person.” The bill defines virtual currency as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” H.B. 7141, 2017 Leg., 2017 Jan. Reg. Sess. Gen. Assemb. (Conn. 2017).
In February 2018, the Connecticut House introduced a bill to impose a fee on transactions involving virtual currency. H.B. 5001, 2018 Leg., 2018 Feb. Reg. Sess. Gen. Ass. (Conn. 2018). If passed, the law will impose a fee to transfer or trade virtual currency in Connecticut. H.B. 5001, 2018 Leg., 2018 Feb. Reg. Sess. Gen. Ass. (Conn. 2018).
In July 2017 Delaware enacted Senate Bill 69, a groundbreaking piece of legislation that provides statutory authority for Delaware corporations to use networks of electronic databases (including blockchain) to create and maintain corporate records. The law expressly permits corporations to trade corporate stock on the blockchain so long as the stock ledgers serves three functions: (1) to enable the corporation to prepare the list of stockholders, (2) to record information, and (3) to record transfers of stock. S.B. 69, 149th Leg., 1st Reg. Sess. (Del. 2017).
Governor Rick Scott signed House Bill 1379 in June 2017. The bill is viewed by many as a legislative response to a criminal decision by the Eleventh Judicial Circuit’s, Florida v. Espinoza, F14-2023, dismissing a criminal information against Michell Espinoza for money laundering under the rationale that virtual currencies such as Bitcoin are not “money” as defined by the state’s Money Laundering Act. The bill expands the Florida Money Laundering Act, Fla. Stat. § 896.101 to expressly prohibit the laundering of virtual currency, which the bill defines as “a medium of exchange in electronic or digital format that is not a coin or currency of the United States or any other country.” H.B. 1379, 119th Reg. Sess. (Fla. 2017). The bill took effect July 1, 2017.
Florida’s legislature introduced House Bill 1356 in January 2018, which would recognize blockchain ledgers and smart contracts as legally recognized methods of data storage. If enacted, it would make signatures, records, and contracts secured through blockchain technology legally valid.
In spring 2016, Gov. Nathan Deal signed a bill into law amending Title 7 of the Official Code of Georgia Annotated. The bill authorizes the state’s Department of Banking and Finance “to enact rules and regulations that apply solely to persons engaged in money transmission or the sale of payment instruments involving virtual currency,” including rules to “[f]oster the growth of businesses engaged in money transmission or the sale of payment instruments involving virtual currency in Georgia and spur state economic development.” Ga. Code Ann. § 7-1-690(b)(1). In addition, the code’s banking and finance section now includes “virtual currency” as a defined term. Ga. Code Ann. § 7-1¬680(26) (“‘Virtual currency” means a digital representation of monetary value that does not have legal tender status as recognized by the United States government.”). Georgia also requires that all money transmitters obtain a license to conduct any activity involving virtual currency.
The Georgia Senate proposed a bill revising Ga. Code Ann. § 48-2-32 to allow people to pay taxes and license fees with "any cryptocurrency, including but not limited to Bitcoin, that uses an electronic peer-to-peer system." S.B. 464, 154th Gen. Ass. Reg. Sess. (Ga. 2017).
House Bill 1481 is awaiting a vote before the Hawaiian Senate after being approved by the House. The bill would establish a working group “consisting of representation from the public and private sectors to examine, educate, and promote best practices for enabling blockchain technology to benefit local industries, residents, and the State of Hawaii.” H.B. 1481, 29th Leg., Reg. Sess. (Haw. 2017).
In March 2017, the Hawaiian Senate introduced Senate Bill 949 which seeks to clarify that decentralized virtual currency activities are not subject to the state’s Money Transmitters Act and establishes a Decentralized Virtual Currency Working Group within the state’s Department of Commerce and Consumer affairs to study whether virtual currencies should be regulated under the act. Two bills, Senate Bill 2853 and Senate Bill 3082, introduced in the Hawaiian Senate in January 2018 aim to define and include virtual currencies under Hawaii’s Money Transmitters Act. The bills would mandate that those transmitting virtual currencies in the state would obtain a license to do so, and that these persons or businesses issue a warning to consumers before enabling such transactions. S.B. 2853, 29th Leg. Reg. Sess. (Haw. 2018); S.B. 3082, 29th Leg. Reg. Sess. (Haw. 2018).
The state’s Department of Finance issued several "Money Transmitter No-Action and Opinion Letters" addressing problems related to virtual currency and the state’s money transmission laws. The latest letter was posted July 26, 2016. In it, the Department wrote "[a]n exchanger that sells its own inventory of virtual currency is generally not considered a virtual currency transmitter under the Idaho Money Transmitters Act." However, "an exchanger that holds customer funds while arranging a satisfactory buy/sell order with a third party, and transmits virtual currency…between buyer and seller, will typically be considered a virtual currency transmitter." See Idaho Department of Finance, Letter Re: Money Transmissions (Dated July 26, 2016), available at http://www.finance.idaho.gov/MoneyTransmitter/Documents/NAOP/
In January 2018, the Idaho Senate introduced a bill that would amend the Idaho Unclaimed Property Act to explicitly include virtual currency as property. According to the bill, "virtual currency" means "a digital representation of value used as a medium of exchange, unit of account or store of value that does not have legal tender status recognized by the United States."
Though no laws are currently in place or pending in Illinois, the state’s Department of Financial and Professional Regulation issued guidance regarding application of the state’s Transmitters of Money Act to those dealing in virtual currencies. Under the Department’s guidance, digital currencies are not “money” under the Transmitters of Money Act and therefore “[a] person or entity engaged in the transmission of solely digital currencies, as defined, would not be required to obtain a TOMA license.” See Illinois Department of Financial and Professional Regulation, Digital Currency Regulatory Guidance, (July 13, 2017), available at http://www.idfpr.com/Forms/DFI/CCD/IDFPR%20-%20 Digital%20Currency%20Regulatory%20Guidance.pdf.
This guidance suggests a willingness by the state to embrace the use of virtual currencies and blockchain technologies, as made further evident by the Illinois legislature having empaneled a Blockchain Task Force in February 2017 to study how the state could benefit from a transition to a blockchain based system of record keeping any service delivery.
In February 2018, the Illinois House introduced the Blockchain Technology Act. H.B. 5553, 100th Gen. Ass. 2nd Reg. Sess. (Ill. 2018). The Act prohibits local governments from imposing taxes on the use of blockchain, from requiring any person or entity to obtain a permit to use blockchain technology, or from imposing any other requirement relating to the use of blockchain. H.B. 5553, 100th Gen. Ass. 2nd Reg. Sess. (Ill. 2018).
There are no blockchain or virtual currency specific regulations enacted or pending in Indiana at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in Iowa at the time of publication.
Although there are no blockchain or virtual currency specific regulations enacted or pending in Kansas at the time of publication the Office of the State Bank Commissioner issued guidance clarifying the applicability of the Kansas Money Transmitter Act (KMTA) to people or businesses using or transmitting virtual currency. The guidance lays out the Office’s policy “regarding the regulatory treatment of virtual currencies pursuant to the statutory definitions of the KMTA.” See Kansas Office of the State Bank Commissioner, Guidance Document MT 2014-01, Regulatory Treatment of Virtual Currencies Under the Kansas Money Transmitter Act, (June 6, 2014), available at http://www.osbckansas.org/ mt/guidance/mt2014_01_virtual_currency.pdf.
The Office states that, because “no cryptocurrency is currently authorized or adopted by any governmental entity as part of its currency, it is clear that cryptocurrency is not considered ‘money’ for the purposes of the KMTA.” See Kansas Office of the State Bank Commissioner, Guidance Document MT 2014-01, Regulatory Treatment of Virtual Currencies Under the Kansas Money Transmitter Act, (June 6, 2014), available at http://www.osbckansas.org/mt/guidance/mt2014_01_ virtual_currency.pdf (last visited 10/02/2014). A person or business engaged solely in transmitting virtual currency, therefore, would not have to obtain a license to do so.
In February 2018, the Kentucky House of Representatives introduced a bill that would amend the Idaho Unclaimed Property Act to explicitly include virtual currency as property. According to the bill, "virtual currency" means "a digital representation of value used as a medium of exchange, unit of account or store of value that does not have legal tender status recognized by the United States."
There are no blockchain or virtual currency specific regulations enacted or pending in Louisiana at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in Maine at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in Maryland at the time of publication. The Department of Labor, Licensing and Regulation issued a warning to consumers about the potential dangers of virtual currency that suggests that, because Maryland does not regulate virtual currencies, “[a]n administrator or exchanger that accepts and transmits a convertible virtual currency or buys or sells convertible virtual currency for any reason is a money transmitter under federal regulations and therefore should be registered as a money services business.” See Office of the Commissioner of Financial Regulation, Virtual Currencies: Risks for Buying, Selling, Transacting, and Investing - Advisory Notice 14-01, (April 24, 2014), available at http://www.dllr.state.md.us/finance/advisories/ advisoryvirtual.pdf (last visited 10/02/2017).
Massachusetts recently enacted a statute defining those the dissemination virtual currencies on the internet as "market place facilitators" subject to sales or use tax collection when engaged in business in commonwealth. 830 CMRH 1.7(b)(1). Previously, the Office of Consumer Affairs and Business Regulation opined in a 2014 Opinion Letter that Bitcoin ATMs are not "Financial Institutions" as defined by Chapter 167B of the Massachusetts General Laws. The office found under the facts presented that the Bitcoins provided to the Bitcoin ATM’s customers not to constitute a foreign currency so as to require a foreign transmittal agency license. The office notes at the end of their opinion that they will continue to monitor the development of virtual payment systems like Bitcoin and may regulate such digital currencies in the future, but have not provided any additional guidance since issuing the letter.
There are no blockchain or virtual currency specific regulations enacted or pending in Michigan at the time of publication. The Michigan Department of Treasury issued guidance defining virtual currency and explaining how sales tax applies when virtual currency is used.
“The General Sales Tax Act and the Use Tax Act impose tax at a rate of 6% on the value of consideration given in exchange for tangible personal property.” Tax Policy Division of the Michigan Dept. of Treasury, Treasury Update, Vol. 1, Issue 1 (November 2015), available at http://www.michigan.gov/documents/treasury/Tax-Policy-November2015-Newsletter_504036_7.pdf (last visited 10/02/2017). If that consideration is not given in U.S. dollars, “the taxpayer must convert the value of the consideration to USD as of the date and at the time of the transaction; this requirement includes convertible virtual currency exchanged for taxable property. Therefore, a taxpayer accepting virtual currency in a retail sale transaction must convert the value of the virtual currency to USD as of the day and the exact time of the transaction.” See Tax Policy Division of the Michigan Dept. of Treasury, Treasury Update, Vol. 1, Issue 1 (November 2015), available at http://www.michigan.gov/documents/ treasury/Tax-Policy-November2015-Newsletter_504036_7.pdf (last visited 10/02/2017). Because virtual currency itself is not tangible property for purposes of the General Sales Tax Act and the Use Tax Act, virtual currency purchases are not subject to sales tax.
In February 2017, the Minnesota House of Representatives introduced a bill that would amend the Minnesota Unclaimed Property Act to explicitly include virtual currency as property. According to the bill, "virtual currency" means "a digital representation of value used as a medium of exchange, unit of account or store of value that does not have legal tender status recognized by the United States." H.B. 1608, 1st Reg. Sess., 90th Leg. Sess. (Minn. 2017).
There are no blockchain or virtual currency specific regulations enacted or pending in Mississippi at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in Missouri at the time of publication.
In a letter ruling, the Missouri Department of Revenue determined that an ATM provider “is not required to collect and remit sales or use tax upon transfer of Bitcoins through [their] ATM,” because sales and use taxes are imposed solely on items of tangible personal property. See Missouri Department of Revenue, LR 7411, Collection of Sales Tax on Bitcoin Transfers Through an Automated Teller Machine (ATM), (September 12, 2014), available at http://dor.mo.gov/ rulings/show/7411 (last visited 10/02/2017). Further, in a cease and desist order issued by the Office of the Secretary of State in June 2014, the Commissioner of Securities determined that offering and/or selling shares of stock in Bitcoin constituted “transacting business as an agent” in the state of Missouri. See State of Missouri, Office of Secretary of State, In the Matter of Virtual Mining, Corp., Case No. AP-14-09, ORDER TO CEASE AND DESIST AND SHOW CAUSE WHY RESTITUTION, CIVIL PENALTIES, AND COSTS SHOULD NOT BE IMPOSED, (June 2, 2014), available at https://www.sos.mo.gov/cmsimages/securities/orders/AP-14-09.pdf (last visited 10/02/2017).
Montana is notable as being the only state to not have enacted a money transmission statute. There are no blockchain or virtual currency specific regulations enacted or pending in Montana at the time of publication, although the state amended its Electronic Contributions Act to expressly require the reporting of political contributions made “through a payment gateway,” including Bitcoin. See Mont. Admin. R. § 44.11.408.
Despite a lack of regulatory guidance related to blockchain or virtual currencies, Montana is the first government to take a financial stake in a Bitcoin mining operation when it granted Project Spokane, LLC, a data center that provides blockchain security services for the Bitcoin network, a grant of $416,000. See US State of Montana Invests Directly in a Bitcoin Mining Operation, Trustnodes, (Jun. 13, 2017), available at http:// www.trustnodes.com/2017/06/13/us-state-montana-invests-directly-bitcoin-mining-operation.
There are no blockchain or virtual currency specific regulations enacted or pending in Nebraska at the time of publication. In an administrative release, however, the Nebraska Department of Revenue found that the term “currency” does not include Bitcoin or other virtual currency. See Jennifer Jensen, et al, Sales and Use Taxes in a Digital Economy,The Tax Adviser, (Jun. 1, 2015) http://www.thetaxadviser.com/ issues/2015/jun/salt-jun2015.html#fnref_13. The guidance did not explain whether sales of virtual currencies are taxable.
Additionally, there are three blockchain-related bills pending at the time of publication. The Nebraska Legislature introduced three bills—L.B. 695, L.B. 691, and L.B. 694— focusing on blockchain and cryptocurrency in January 2018. If passed, L.B. 691 will amend the state’s money-laundering statutes to account for cryptocurrencies. L.B. 691, 105th Leg. 2nd Reg. Sess. (Neb. 2018). L.B. 694 will prohibit local governments from taxing or otherwise regulating the use of distributive ledger technology. L.B. 694, 105th Leg. 2nd Reg. Sess. (Neb. 2018). L.B. 695 would allow the technology to be used for notarization. L.B. 695, 105th Leg. 2nd Reg. Sess. (Neb. 2018).
Nevada became the first state to ban local governments from taxing blockchain use when it enacted Senate Bill No. 398 in June 2017. The bill defines blockchain as an electronic record, transaction, or other data which is (1) uniformly ordered; (2) Redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and (3) Validated by the use of cryptography. N.R.S. SB 398 § 1. Under the bill, local governments are prevented from taxing blockchain use. Additionally, the bill states that, “if a law requires a record to be in writing, submission of a blockchain which electronically contains the record satisfies the law” – meaning that data from a blockchain can be introduced in legal proceedings in Nevada courts. N.R.S. SB 398 § 1.
New Hampshire has amended its Money Transmitter statute (NH St. § 399-G:3) to exempt “persons who engage in the business of selling or issuing payment instruments or stored value solely in the form of convertible virtual currency or receive convertible virtual currency for transactions to another location” from the state’s money transmission regulation. See H.B. 436, 2017 Leg.,165th Sess. (N.H. 2017). The law took effect August 1, 2017.
The only blockchain or virtual currency specific regulation in New Jersey is a recently enacted statute, effective December 12, 2017, titled the Uniform Fiduciary Access to Digital Assets Act that expressly authorizes an estate’s executor under certain circumstances to manage digital assets, including virtual currencies, of a decedent. N.J.S.A. 3B: 14-61.1.
New Jersey has also issued guidance that it would conform to the federal tax treatment of virtual currency, meaning that virtual currency would be treated as intangible property and subject to sales tax. See Technical Advisory Memorandum, N.J. Division of Taxation, Convertible Virtual Currency (TAM– 2015–1(R)) (July 28, 2015).
There are no blockchain or virtual currency specific regulations enacted or pending in New Mexico at the time of publication. It should be noted, however, that for years New Mexico had been one of only a few states to not have enacted a money transmitter statute. Effective January 1, New Mexico now requires money transmitters to obtain a license before transmitting money, although the statutes application to virtual currency exchangers is uncertain. N. M. S. A. 1978, § 58-32-201.
The New York State Department of Financial Services established a comprehensive regulatory framework for virtual currency businesses called “BitLicense” that requires operations related to transactions involving any form of virtual currency to obtain a license from the state. 23 NYCRR 200. Before being granted a license, the state requires applicants to have strict compliance and supervisory policies and procedures in place, including, among other things, anti-money laundering/know-your-customer and cybersecurity programs in place. 23 NYCRR 200.
Since its enactment in 2015, the regulatory scheme has been the subject of much criticism and has resulted in an exodus of businesses fleeing the state because of the costs and regulatory hurdles associated with the BitLicense. In late 2016, Theo Chin, a well-known Bitcoin entrepreneur filed a petition to the Supreme Court of New York challenging the authority of the state’s Department of Financial Services to use the Bitcoin community as guinea pigs to test new banking regulations, arguing that under Article 78 of the State of New York regulations must be preceded by a law enacted by the Legislature. Information about the pending case, including briefings by the parties, can be found at https://www.article78againstnydfs.com/raw.php.
Several new bills regarding blockchain have been introduced in the New York Legislature, many seen as attempts to soften or study the negative impact the BitLicense had on blockchain and virtual currency innovation in the state. On March 13, 2018, the New York Cryptocurrency Exchange Act (A9899) was introduced. If enacted, the Bill would amend create a more manageable auditing system for virtual currency businesses that is intended to replace the BitLicense scheme and do away with its fee-based licensing requirement in favor of one earned by an audit.
Other legislation pending before NY’s legislature: AB8780 revises New York’s technology law by defining "blockchain technology" and "smart contract;" AB8792 directs the state board of elections to study the use of blockchain to prevent voter fraud; A08793 creates a task force to study whether blockchain can be used to store state records; and AB8783 creates a digital currency task force to determine the impact of cryptocurrencies on New York financial markets.
North Carolina has expanded its Money Transmitters Act to cover activities related to Bitcoin and other virtual currencies. 2017 North Carolina Laws S.L. 2017-102 (H.B. 229). The law defines virtual currency traders as money transmitters and requires they obtain a license. 2017 North Carolina Laws S.L. 2017-102 (H.B. 229). The law provides several exemptions, however, including for virtual currency miners as well as for software companies implementing blockchain services such as smart contract platforms, smart property, multi-signature software and non-custodial and non-hosted wallets. 2017 North Carolina Laws S.L. 2017-102 (H.B. 229). The law also imposes additional insurance requirements on virtual currency transmitters to address “cybersecurity risks.” 2017 North Carolina Laws S.L. 2017-102 (H.B. 229).
There are no blockchain or virtual currency specific regulations enacted in North Dakota at the time of publication. A bill advocating a study to determine whether a bitcoin license should be required for virtual currency transmitters was introduced but failed to pass a vote.
Ohio has no clear regulatory framework for virtual currencies, but it has amended the state’s Liquor Control Law to impose an unusual ban on the use of virtual currencies for the purchase of alcohol. See Janet H. Cho, Cleveland Heights Merchants Banking on Bitcoin to Draw Global Spotlight; Skeptics Warn of Risks (April 24, 2014).
Oklahoma took a clear stance on its treatment of Bitcoin with an official comment to a statute that states that Bitcoin transferees are not afforded the same protections as those afforded to the transferees of money. Okla. Stat. Ann. § 1-9¬332. The Oklahoma legislature also determined that a seller who accepts bitcoin does not take the cryptocurrency free of an existing security interest. Okla. Stat. Ann. § 1-9-332.
Oregon has no clearly defined position or regulations regarding the blockchain and virtual currency industry. However, an international Bitcoin exchange, CEX.IO, named Oregon as one of the states it was unable to work with because it required additional money transmitter licenses for Bitcoin companies. See PYMTS, Bitcoin Regulation Roundup Regulator Divide and “Life on Bitcoin,” (May 29, 2015).
Pennsylvania had signaled interest in amending its money transmitter laws to include virtual currencies within the state’s definition of “money”, but the effort has reportedly stalled. There are no blockchain or virtual currency specific regulations pending or enacted in Pennsylvania at the time of publication.
There are no blockchain or virtual currency specific regulations enacted in Rhode Island at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in South Carolina at the time of publication. It should be noted, however, that for years South Carolina had been one of only a few states to not have enacted a money transmitter statute. Effective June 9, 2017, South Carolina now requires money transmitters to obtain a license before transmitting money, although the statutes application to virtual currency exchangers is uncertain. A266 2016 Gen. Assemb., 121st Sess. (S.C. 2016).
There are no blockchain or virtual currency specific regulations enacted or pending in South Dakota at the time of publication.
There are no blockchain or virtual currency specific regulations enacted or pending in Tennessee at the time of publication, however the state has issued guidance clarifying that it does not consider virtual currency to be money under its Money Transmitter Act and therefore, no license is required. Memo, Tenn. Dep’t of Fin. Inst., Regulatory Treatment of Virtual Currencies under the Tennessee Money Transmitter Act (Dec. 16, 2015).
According to Tennessee’s Uniform Unclaimed Property Act, "property" includes virtual currency. Tenn. Code Ann. § 66-29-102.
Two blockchain-related bills were recently introduced at the time of this publication. Tennessee House Bill 1507, if passed, will recognize the legal authority to use blockchain technology and smart contracts in conducting electronic transactions. Blockchain signatures will be recognized as legal electronic records. H.B. 1507, 110th Gen. Ass. 2nd Reg. Sess. (Tenn. 2017). Another bill, if passed, will prohibit trustees of any defined contribution plan or related investment vehicle established as a health benefit by the state insurance company from investing in any cryptocurrency. S.B. 2508, 110th Gen. Ass. 2nd Reg. Sess. (Tenn. 2017).
Texas was the first state to release an official position on bitcoin with Memorandum 1037 clarifying that no money transmitter’s license is required to sell Bitcoin. Memo, Tx. Dep’t of Banking, Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act (April 3, 2014). The memo, developed by the Texas Department of Banking, states that Bitcoin and other virtual currencies will not be treated as legal money in Texas. Memo, Tx. Dep’t of Banking, Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act (April 3, 2014).
There is an effort among some of the state’s lawmakers to codify the state’s hands-off approach to virtual currency through a proposed constitutional amendment that would protect the right to own and use digital currencies. H.J.R 89, 85th Leg., Reg. Sess. (Tx. 2017). If passed, the amendment would alter Article 1 of the Texas constitution to include the right to use any “mutually agreed upon medium of exchange.” H.J.R 89, 85th Leg., Reg. Sess. (Tx. 2017).
In 2015, Utah enacted a bill that allows its residents to pay taxes with virtual currencies. H.C.R. 6, 2015 Leg., Gen. Sess. (Utah 2015). This bill encourages widespread use of the virtual currency and makes provisions for the council to examine whether the state could minimize risks if Bitcoin or other virtual currencies become a new norm of payment. H.C.R. 6, 2015 Leg., Gen. Sess. (Utah 2015).
Virtual currency is explicitly included in the definition of "property" in Utah’s Revised Uniform Unclaimed Property Act. Utah Code Ann. § 67-4a-102.
Vermont applies its money transmission laws to virtual currency. On May 1, 2017 Vermont amended its money transmitter law to allow companies to hold virtual currency as a permissible investment. H.B. 182, 2017 Gen. Assemb., Reg. Sess. (Vt. 2017). Digital currency businesses with money transmitter licenses are required to hold a certain amount of permissible investments and this law makes it clear that virtual currency counts as a permissible investment.
The state also enacted a bill that recognizes blockchain data in the court system. H.B. 868, 2016 Gen. Assemb., Reg. Sess. (Vt. 2016). This law makes a fact or record verified through blockchain technology “authentic” for use in court proceedings. H.B. 868, 2016 Gen. Assemb., Reg. Sess. (Vt. 2016). The state has also enacted a bill that mandates a study on how blockchain technology will affect the state’s job market and ability to generate revenue. S.B. 135, 2017 Leg., Reg. Sess. (Vt. 2017). The results of the study are due November 30, 2017. S.B. 135, 2017 Leg., Reg. Sess. (Vt. 2017).
The Virginia Bureau of Financial Institutions requires companies that deal in virtual currencies to obtain a money transmission license. VA Code Ann. § 6.2-1900.
A Joint House Resolution was introduced that, if enacted, would establish a one-year joint subcommittee consisting of seven legislative and five nonlegislative members to study the potential implementation of blockchain in state recordkeeping. H.J.R. 153, 2018 Reg. Sess. (Va. 2018).
Along with New York, Washington has emerged as one of the most heavily regulated states for the virtual currency industry. The state includes virtual currency within its definition of money transmission in its Uniform Money Services Act. H.B. 1327, 63rd Leg., Reg. Sess. (Wash. 2013). In July 2017, the state adopted more stringent regulations of virtual currency, passing Senate Bill 5031. S.B. 5031, 65th Leg., Reg. Sess. (Wash. 2017). The bill places virtual currency exchange operators under the state’s money transmitter rules and requires them to comply with the same licensing requirements as traditional money transmitters. The state’s regulatory scheme has been the subject of much criticism from within the virtual currency industry and has caused a number of popular exchanges, including Poloniex, Bitstamp, Kraken, and Bitfinex to leave the state over the costs associated with complying with the Washington’s licensing requirements.
In January 2018, the Washington House introduced a bill that would amend the Washington Unclaimed Property Act to explicitly include virtual currency as property. According to the bill, "virtual currency" means "a digital representation of value used as a medium of exchange, unit of account or store of value that does not have legal tender status recognized by the United States."
There are no blockchain or virtual currency specific regulations enacted in West Virginia at the time of publication. A bill has been introduced by lawmakers that is expected to pass that will amend the state’s existing anti-money laundering statute to expressly include cryptocurrencies like Bitcoin in its definition. H.B. 2585, 2017 Leg., Reg. Sess. (W. Va. 2017). A second bill was introduced that, if enacted, would require the Joint Committee on Government and Finance to study Bitcoin. H.B. 29, 83rd Leg. Re. Sess. (W. Va. 2018).
There are no blockchain or virtual currency specific regulations enacted or pending in Wisconsin at the time of publication. Despite the lack of guidance, the state has refused to issue money transmitter licenses to virtual currency businesses and requires an agreement if a company deals in virtual currency stating that the company will not use virtual currency to transmit money. See State of Wis. Dep’t of Fin. Inst., Sellers of Checks, available at https://www.wdfi.org/fi/ lfs/soc/. The state has also made it clear that the purchases of taxable goods or services made with virtual currencies are subject to state sales tax, just like any other purchase, but that the virtual currency itself is not subject to sales tax because they are not tangible personal property. See 1-14 Wisconsin Department of Revenue, Sales and Use Tax Report, at 5 (2014).
Wyoming has emerged as one of the most crypto-friendly jurisdictions in the United States. In March 2018, H.B. 70, known as the "Utility Token Bill" was signed into law. The Bill exempts "Utility Tokens" from the state’s securities laws provided the issued token and its issuer meet the following requirements:
(i) The developer or seller of the token, or the registered agent of the developer or seller, files a notice of intent with the secretary of state[;]
(ii) The purpose of the token is for a consumptive purpose, which shall only be exchangeable for, or provided for the receipt of, goods, services or content, including rights of access to goods, services or content; and
(iii) The developer or seller of the token did not sell the token to the initial buyer as a financial investment.
Under the statute, the part (iii) requirement is only met if:
(A) The developer or seller did not market the token as a financial investment; and
(B) At least one (1) of the following is true:
(I) The developer or seller of the token reasonably believed that it sold the token to the initial buyer for a consumptive purpose;
(II) The token has a consumptive purpose that is available at the time of sale and can be used at or near the time of sale for use for a consumptive purpose;
III) If the token does not have a consumptive purpose available at the time of sale, the initial buyer of the token is prevented from reselling the token until the token is available for use for a consumptive purpose; or
(IV) The developer or seller takes other reasonable precautions to prevent buyers from purchasing the token as a financial investment.
H.B. 70’s liberal approach is facially at-odds with recent statements from the Federal Securities and Exchange Commission which, at least informally, has stated a belief that all tokens are likely securities. See, e.g., https:// www.coindesk.com/sec-chief-clayton-every-ico-ive-seen-security/. Accordingly, because of federal supremacy, Wyoming’s statute does not give complete safe harbor to issuers of "Utility Tokens."
Republished with permission from Thomson Reuter’s “Payment Systems and Electronic Fund Transfers Guide”.