Hawaii’s issue with Bitcoin businesses has an obvious and easy solution.

This week Coinbase, one of the world’s largest and most trusted digital currency companies, announced that it would be suspending operations in Hawaii. The move follows a decision made by the state’s Division of Financial Institutions to impose unreasonable solvency requirements on the company. Coinbase’s Juan Suarez describes the situation:

In September of last year the DFI informed Coinbase that it imposed a policy which would set Hawaii apart from nearly every other state in America and which will make it impossible for Coinbase to operate there: Coinbase and other digital currency businesses will be required to maintain cash reserves (or similar, liquid assets referred to as “permissible investments”) in an amount equal to the aggregate face value of digital currency funds held on behalf of customers. In other words, if Coinbase holds one bitcoin for a Hawaii customer, the practical outcome of this policy will require Coinbase to also hold the equivalent cash value of that bitcoin, currently well over $1,000, as redundant collateral.

This policy is obviously untenable. No digital currency business — and frankly, no commercially viable business anywhere — has the capital to supplement every customer bitcoin with redundant dollar collateral.

Coinbase is being asked to hold not only their customer’s bitcoin, but also the equivalent value in cash (or some other liquid asset). Unfortunately Hawaii does not recognize digital currencies as an acceptable liquid asset for this purpose. That means Coinbase has a reserve requirement at least double that which would be expected of any other business that holds customer funds. Clearly this is a huge burden to place on a small startup in a burgeoning industry. It should come as so no surprise that Coinbase chose to leave the state rather than attempt to comply with such an onerous rule.

Solvency requirements are an important consumer protection tool and permissible investments rules help businesses manage those requirements. In our State Digital Currency Principles and Framework we lay out how and why these rules need to be updated to reflect the modern technology landscape:

To protect consumers, Digital Currency Transmitters, as with licensed money transmitters, should be required to have sufficient capital reserves on hand to guarantee the solvency of the institution. In money transmission licensing, these reserves can usually be satisfied by holding cash. California, for example, lists cash as an eligible security for the purposes of capital requirements in money transmission licensing. Allowing the transmitter to hold cash avoids a situation where the business must hold illiquid assets alongside and in duplication to any liquid (i.e. cash) assets held in order to quickly make good on outstanding payment orders. Digital currency transmitters should face similar standards. If the business holds digital assets in the form and amount deposited by their customer, it should not also have to hold duplicative reserves in some other form.

Bitcoin and its fellow digital currencies are inherently liquid assets that must be recognized as permissible investments. Cryptocurrency solvency can be proved instantly and in real-time, which could make them superior to even cash for this purpose. States which do not see this will find themselves falling behind the times.