Connecticut and Bitcoin: A legislative question mark

The law is supposed to give us something written and perspicuous to rely on as we go about planning our affairs and our futures. Connecticut’s Public Act 15-53 creates no such transparency or certainty.

As you can see by visiting our state tracker, we’re watching several states craft legislation that would create licensing regimes for digital currency businesses. New York’s BitLicense has been the big news story thus far. We’ve laid out our issues with the BitLicense, and we’ve explained why California’s pending legislation is nearer the mark. We’ve seen other bills in Pennsylvania, New Hampshire, North Carolina, and New Jersey. But the bill, now passed into law, in Connecticut is a different story. That’s because Connecticut’s new law doesn’t create any specific policy, it leaves all questions regarding consumer protection and licensing to the discretion of a regulator. Does your business need a license in Connecticut? What will you be required to do to get that license? The law won’t tell you or even give you a hint; it’s all up to a regulator and his particular decisions regarding your case.  And that’s different from the way state law there treats money transmitters.

Before I give you more specifics about the new law, I need to explain a few things about licensing generally:

The Licensing  Landscape

Digital Currency Licensing Bills Can Be a Good Thing for Bitcoin Businesses. Nearly all states already require money transmitters to be licensed before they can take customers in the state. Being amoney transmitter is variously defined, but it nearly always includes something like, “storing or accepting money or monetary value for transmission as a business.” Monetary value tends to have loose definitions that could easily be interpreted as encompassing bitcoin and other cryptocurrencies (and no ardent supporter of the technology wants to be caught arguing that a bitcoin doesn’t have monetary value). So, while there is a bit of a myth that Bitcoin isn’t regulated, the reality is that a bitcoin business could already face a difficult licensing regime right now, even in states where no digital currency specific laws have passed. Whether or not that happens depends on the willingness of regulators to interpret existing laws in a certain manner. And that brings us to . . .

Licensing Requirements Can Come Explicitly from a Statute or They Can Come From a Rulemaking or Regulatory Interpretation. Texas regulators, for example, gave some guidance early on that bitcoin exchanges would need to license as money transmitters under the requirements of existing law, but pure digital currency businesses would, for the time being, not need to license. No statute was passed and no rulemaking made; the regulator simply explained how existing law applied to existing business activities. New York, as many already know, chose to make a formal rule (but not pass any new legislation) that has become known as the BitLicense. Finally, California, for example, has legislation pending that would create a digital currency-specific licensing regime much like the BitLicense (although, we believe, less onerous and more well-reasoned) but the specifics are spelled out in legislation that legislators will vote on, rather than created by a regulatory process of notice and comment or informal guidance.

So to round it all out, there are essentially three ways that licensing regimes can be set up:

  • Existing Law -> Regulatory Guidance Offered (i.e. Texas)
  • Existing Law -> Rulemaking (i.e. New York)
  • New Law (i.e. California)

And we’ve got background law—money transmission regulation—that may already require bitcoin companies to license as money transmitters, if a regulator chooses to interpret it that way, explicitly or not.

Which approach works best?

We’ve put our support behind new legislation, the third way explained above. We believe that these technologies and the manner we choose to regulate them are important enough to warrant carefullegislative scrutiny. We also believe that the resultant law will be better able to guide businesses and entrepreneurs than the present, murky, de facto regime predicated, as it is, on regulators reinterpreting existing money transmission law or offering potentially arbitrary and revocable guidance.

To make a long story shorter: this is just as much about process as it is about substance. The legislative process in California is an excellent example of a cautious and considerate approach complete with democratic accountability and the adversarial process that accompanies legislation. It is no surprise then that, thus far, the California bill is substantively the most appropriate approach.Good process leads to good substance.

So, what’s the situation in Connecticut?

That brings us to Connecticut’s newly passed Public Act No. 15-53 [PDF], now on the Governor’s desk. There is effectively no substance at stake in this Act. The legislation is about process, the kind of process we’ve discussed so far in this post. Rather than explain what businesses or activities would or would not require licensing, and explaining what obligations or conditions a bitcoin business would need to meet in order to become licensed, the Connecticut Act simply describeshow Connecticut regulators can demand licensure. The bill is about process.

And that process is not a good one, for three reasons:

  1. The act explicitly enables the state’s Banking Commissioner to determine—seemingly on a case by case basis—whether a particular bitcoin business needs a license and whether they can have one or not. This is a marked contrast to the Connecticut law for money transmitters. That lawdefines and specifies the criteria that the Commissioner must use to determine whether a money transmitter can have a license.
  2. Act 15-53 also frees the Commissioner to impose any bonding requirement he deems necessary as a condition to licensing a digital currency business. It could be millions of dollars; the law doesn’t specify. Again, this contrasts with traditional money transmission in Connecticut where the statute specifies and caps the amount of the bond that can be determined necessary by the Commissioner.
  3. Finally, 15-53 allows the Commissioner to impose whatever conditions he wants on a business seeking license. What those conditions can and cannot conceivably be is not discussed in the law; it’s left entirely to the discretion of the Commissioner. No such permissive process exists in the case of regulatory determinations for traditional money transmitters.

So, we can’t even analyze the substance of the licensing regime that is being created in Connecticut, because, legally-speaking, the substance will be whatever the Commissioner wishes it to be in the case of each and every potential applicant. The statute that has passed in Connecticut is effectively a blank check for the Commissioner so that he, and he alone, can determine, case by case if need be, which digital currency businesses will be allowed to operate in the state and which will not—something that traditional money transmitters don’t face.

This discriminatory approach potentially creates an uneven playing field between companies that do exactly the same thing but that simply use different technologies. We believe that Connecticut’s legislature intends for this law to provide greater clarity and certainty for innovative businesses and wants Connecticut to be known as a state that is welcoming to digital currency innovation. We welcome that goal. Unfortunately, the disparate way the law treats the licensing of digital currency businesses sends the opposite message.

To be clear, we have no reason to believe that Connecticut’s Banking Commissioner are or will be unreasonable; it’s very likely that he will do the right thing. But the law is intended to spare us from relying on the good-faith of government officials. The law is supposed to give us something written and perspicuous to rely on as we go about planning our affairs and our futures. Connecticut’s Public Act 15-53 creates no such transparency or certainty. It is an invitation to worry, or, should we be optimists, have faith in an unexplained and non-prescribed process. It is a legislative question mark, the sort an entrepreneur, technologist, or investor would rather not see hanging over her future prospects.

This is effectively a law that creates a non-process. The results could be arbitrary, opaque, and antagonistic to innovation. Experimenting with new technology simply isn’t worth it when an official has been given the authority to shut down your operations without even offering a legal rationale. Connecticut’s digital currency consumers—whether because they are the early adopters, the underbanked, or the innovators—deserve a law with substance.