Our Principles and Framework for State Digital Currency Regulation

How lawmakers can protect digital currency consumers without harming innovation.

The New York Department of Financial Services will soon release what will be the first-of-its-kind digital-currency-specific regulation, the BitLicense. And following in its wake, a growing number of states have begun the process to either amend their existing money transmission licensing laws or to write their own technology-specific laws. Coin Center filed several comments with DFS in the BitLicense proceeding, and now we are engaged with lawmakers in CaliforniaNew Jersey, Pennsylvania, Connecticut, and elsewhere to ensure that as they write new law, that they understand blockchain technology and do not inadvertently hamper innovation.

As we have engaged with more and more state policymakers, the need became apparent for a clear set of principles that identifies what activities should be regulated, and which should not, as well as a framework laying out the basic structure for a licensing regime that not only protects consumers, but importantly does not harm to innovation. To that end, we have developed our State Digital Currency Principles and Framework, which we’re updating today.

The guiding principle is clear, and comes from the Conference of State Banks Supervisors draftPolicy on Virtual Currency Regulation:

[T]ransmitting, exchanging, and/or holding of value on behalf of another . . . place the activity provider in a position of trust. This position of trust is the basis for most financial services laws and regulations, and should be applied regardless of the medium of value.

Bottom line: Licensing should only apply to those that are taking custody of a consumer’s funds. The tricky part then becomes, how do you define custody, especially given multisig technology? What about non-financial applications that may involve custody, but only of a de minimis amount? These are questions that we answer in the report, and we provide model language for the essential components of a sound digital currency statute.

Our principles and framework is the basis for the advice we have been lending to policymakers over the past few months, including our recent suggestions to the California Assembly on their pending bill. Each state will independently travel this craggy and dimly-lit terrain. The state that reaps the benefits of new technologies, new jobs, and enhanced financial inclusion will be the state that first discovers a path worth following. We hope this report will help in that endeavor.