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Wednesday, April 6, 2022
SB2695 SD2 HD1 a needless delay tactic for cryptocurrency
By Grassroot Institute @ 6:49 PM :: 1467 Views :: Small Business

SB2695 SD2 HD1 a needless delay tactic for cryptocurrency

from Grassroot Institute of Hawaii, April 4, 2022

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration April 4, 2022, by the House Committee on Finance.

To: House Committee on Finance
      Rep. Sylvia Luke, Chair
      Rep. Kyle T. Yamashita, Vice Chair

From: Grassroot Institute of Hawaii
            Ted Kefalas, Director of Strategic Campaigns

RE: SB2695 SD2 HD1 — RELATING TO CRYPTOCURRENCY

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB2695 SD2 HD1, which would establish a Blockchain and Cryptocurrency Task Force to study cryptocurrency in Hawaii, then make recommendations to the Legislature about the issue in time for the 2024 legislative session.

We applaud this effort to engage the Legislature concerning the legal status of cryptocurrency, but we are concerned that this bill will further delay a resolution to an issue that has already been studied at length.

As I am sure you all know,  Hawaii’s Money Transmitters Act[1] requires digital currency companies to hold cash assets equal to the amount of their virtual assets. Thus, a company that holds $1 billion in bitcoin and etherium also must have a $1 billion in cash reserves.

This requirement has made it nearly impossible for cryptocurrency companies to do business in Hawaii. Coinbase and Binance — the two largest cryptocurrency exchanges — do not operate in Hawaii. Nor do RobinHood Crypto, KuCoin, PayPal’s “Cryptocurrency Hub,” eToro, Bitstamp or any number of other popular and successful crypto companies. As a result, Hawaii has been largely left out of the cryptocurrency revolution.

In 2019, Gov. David Ige authorized a temporary “Digital Currency Innovation Lab,” a regulatory “sandbox” that allowed certain cryptocurrency companies to do business in Hawaii without being subject to the money-transmitter law’s double-reserve requirement. Since the lab’s inception, 61,000 Hawaii customers have been able to access digital currency and complete more than $611 million in transactions.

Unfortunately, the sandbox experiment will end at the close of 2022. Without further action, cryptocurrency will once again become inaccessible for Hawaii residents. Moreover, the state will lose access to the economic benefits of this rapidly expanding industry.

In 2017, Hawaii lawmakers in both chambers approved an exemption for cryptocurrency from the state’s Money Transmitters Act,[2] but the exemption was deleted in conference committee before the bill was enacted. Iris Ikeda, commissioner of the state Division of Financial Institutions, stated at the time that lawmakers should first study the issue via a “Decentralized Virtual Currency Working Group.”

“DFI believes that the most prudent approach would be to allow the DVC Working Group the opportunity to perform its review and to provide the Legislature with findings and recommendations prior to the creation of an exemption for decentralized virtual currency,” she said.[3]

Now that the issue has been studied via the Digital Currency Innovation Lab, lawmakers can feel confident about following the example of 20 other states by exempting cryptocurrency from the state’s Money Transmitters Act.[4] With this one change, Hawaii would go from one of the most burdensome states for cryptocurrency to one of the best.

After Wyoming exempted cryptocurrency companies from its double-reserve requirement in 2018, it was dubbed one of the country’s “most crypto-friendly” jurisdictions. [5]

Cryptocurrency is a developing industry that moves as quickly as the technology involved. Waiting more than two years before taking action would ensure that Hawaii falls further behind.

Recent amendments to the bill have addressed many of our concerns relating to the independence and possible politicization of the task force. However, there remains a risk that the task force as currently envisioned will be too heavily influenced by limited commercial interests. Given that five of the six members meant to represent commercial parties with an interest in cryptocurrency or blockchain are specifically from Hawaii-based institutions, there may be a bias toward the use of state regulation to discourage competition in the market.

Considering the global scope of the industry, it seems appropriate to seek input from economic experts in cryptocurrency, as well as from  industry representatives who do not have a financial interest in keeping Hawaii closed to other cryptocurrency companies.

The best approach would be to move forward with legislation that would simply exempt cryptocurrency companies from the state Money Transmitters Act.

However, since that appears to be no longer possible during the current legislative session, the second-best approach would be to support efforts to extend the life of the Digital Currency Innovation Lab for at least another year. This would give the Legislature time to settle on more ideal legislation.

If you go ahead with the idea for a task force, we hope any group created to study the issue will do so with a focus on helping Hawaii become one of the best states in the country for cryptocurrency business and investment.

Thank you for the opportunity to submit our comments.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

Link: Footnotes

  *   *   *   *   *

Even if fixed, HB2108 HD1 SD1 is wrong bill for cryptocurrency

by Grassroot Institute of Hawaii, April 4, 2022

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration April 5, 2022, by the Senate Committee on Ways and Means.

To: Senate Committee on Ways and Means
      Sen. Donovan M. Dela Cruz, Chair
      Sen Gilbert S.C. Keith-Agaran, Vice Chair

From: Grassroot Institute of Hawaii
            Ted Kefalas, Director of Strategic Campaigns

RE: HB2108 HD1 SD1 — RELATING TO DIGITAL CURRENCY LICENSING PROGRAM

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB2108 HD1 SD1, a 90-page tome that would establish a program for the licensure, regulation and oversight of digital currency companies.

The main problem with HB2108 is the vast and nearly unlimited powers over the cryptocurrency market granted to the commissioner of the Division of Financial Institutions. Nearly every regulation in the bill has a caveat that allows the commissioner to rewrite the law according to his or her will, which could centralize too much power in the hands of the commissioner and burden cryptocurrency companies with a high level of regulatory uncertainty.

HB2108 also has unclear language and includes too many hurdles that could cement Hawaii as one of the worst states in the nation for cryptocurrency and cut off residents from this emerging market.

We urge lawmakers to delete the areas of the bill that give the commissioner too much regulatory discretion.

We also urge lawmakers to erase the most burdensome regulatory aspects of this bill, or, better yet, simply exempt cryptocurrency from Hawaii’s money-transmitter law — considered by cryptocurrency companies to be the main stumbling block to operating here.

Among the issues with HB2108 HD1 SD1 that need to be addressed:

>> Its approach is banking-centric.

Much of the bill’s language was derived from model legislation provided in August 2021 by the Conference of State Banking Supervisors, of which Iris Ikeda, current commissioner of the Hawaii Division of Financial Institutions, is a board director at large.[1] So far, not one state has enacted any of its recommendations.[2]

Not surprisingly, HB2108 takes a banking-centric approach to cryptocurrency legislation, but many companies that use cryptocurrency are different from banks.

On page 10, the bill says it will not apply to, “Banks, bank holding companies, credit unions, savings banks, financial services loan companies, and mutual banks organized under the laws of the United States or any state.”

This presumably means that Hawaii financial institutions could buy, sell and exchange bitcoin and other cryptocurrencies without needing a special purpose digital currency license.

It is a welcome idea to afford banks the freedom to interact with the emerging cryptocurrency market without the need for a special license. However, it is odd that other companies would be required to get a special license to use cryptocurrency.

>> Exemptions should be broader.

Page 10 exempts from the licensing requirement any “non—custodial digital currency business activity by a person using a digital currency acknowledged as legal tender by the United States, or government recognized by the United States, or that has been determined to not be a security by a United States regulatory agency.”

This exemption is presumably meant to allow customers and businesses to use certain cryptocurrencies as a medium of exchange for goods and services, which is a good thing. However, the exemption applies to only digital currency “that has been determined to not be a security by a United States regulatory agency.”

The U.S. Securities and Exchange Commission has given unclear guidance about whether or not certain cryptocurrencies are securities. For example, the director of its Division of Corporate Finance said in 2018 that bitcoin and ether would not be treated as securities.[3] But recently, Gary Gensler, chairman of the SEC, wouldn’t say whether or not ether was a security, and has been hesitant to weigh in specifically on which other cryptocurrencies might not be securities.[4]

This unclear guidance would presumably be left to the state Division of Financial Institutions, and perhaps the courts, to interpret.

Additionally, Russia’s government has recently indicated its intent to recognize cryptocurrency as a form of currency, though it’s unclear which cryptocurrencies would be recognized.[5] The exemption as stated in HB2108 would seem to require interpretations of international law.

Additionally, the term “non-custodial digital currency business activity” would presumably include in the exemption many cryptocurrency exchanges that are non-custodial, such as SimpleSwap and ChangeNOW.[6]

It is certainly a welcome policy to allow non-custodial exchanges to operate in Hawaii without the need for a license, but it is odd that custodial exchanges such as Coinbase and Gemini would need a license, and more reason to simply exempt cryptocurrency from the state money-transmitter law altogether..

At the very least, lawmakers should broaden the exemption so any cryptocurrency could be used as a medium of exchange, such as by exempting “businesses and customers that use cryptocurrency as a medium of exchange for goods and services.”

>> Its tangible net worth requirement is not clear.

Section 16 of the bill, starting on page 48, would require licensees to meet a tangible net worth requirement of $500,000 “or in an amount determined by the commissioner necessary to ensure safe and sound operation.”

This language gives too much leeway for the commissioner to deny an application, since it is not clear by what metric the commissioner, or future commissioners, would rely on. The ratio in HB2108 should be stated more explicitly, and perhaps give guidance on what might be “necessary,” if the requirement were not $500,000.

Alternatively, lawmakers could simply cut the commissioner’s power to bypass the $500,000 requirement, which would provide cryptocurrency companies with more regulatory certainty.

>> It requires undue surveillance and lacks surveillance security.

In Section 8 of HB2108 HD1 SD1, starting on page 22, the bill says licensed cryptocurrency companies would be required to provide to the state massive amounts of surveillance data on customer financial transactions.

By contrast, Hawaii’s money-transmitter law, on page 12, requires licensees to submit only to the federal government, and not necessarily to the state, any reports that are required by the federal government.[7]

Hawaii’s government does not have a good track record for keeping its data systems secure, as evidenced by the multiple hacks that have occurred in recent years.[8] Requiring that cryptocurrency companies hand over vast amounts of financial information to the state is unnecessary and could create a “honeypot” for hackers to attack that would put Hawaii residents’ financial information in jeopardy.

If anything, HB2108 HD1 SD1 should duplicate the money-transmitter requirement that cryptocurrency companies file to the federal government reports required by the federal government.

>> Hawaii lawmakers once favored a simple exemption.

In 2017, Hawaii lawmakers approved at the full Senate and full House an exemption for cryptocurrency from the state’s Money Transmitters Act,[9] but the exemption was deleted in conference committee before the bill was enacted.

Commissioner Ikeda stated at the time that lawmakers should first study the issue via a “Decentralized Virtual Currency Working Group”:[10]

“DFI believes that the most prudent approach would be to allow the DVC Working Group the opportunity to perform its review and to provide the Legislature with findings and recommendations prior to the creation of an exemption for decentralized virtual currency.”

Now that the issue has been studied via the Digital Currency Innovation Lab, it is the perfect time to exempt cryptocurrency from the state’s Money Transmitters Act, as has been done in 20 other states.[11]

Conclusion

HB2108 HD1 SD1 would cement into place some of the most burdensome cryptocurrency regulations in the nation, in addition to causing confusion and overly broad powers to the commissioner.

If the members of the two committees considering this bill are committed to using it as the vehicle to help Hawaii participate more fully in the worldwide cryptocurrency market, the Grassroot Institute of Hawaii recommends that all the burdensome aspects of the bill — such as the nearly unlimited power of the commissioner to rewrite the law, dubious surveillance requirements and high fees — be deleted. This bill also needs to be written more plainly to prevent needless confusion.

For the record, we believe a much better option would be for the Legislature to support an approach that would simply exempt cryptocurrency from Hawaii’s money-transmitter law and truly open the door to cryptocurrency exchange companies in Hawaii.

Thank you for the opportunity to submit our comments.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

Link: Footnotes

  *   *   *   *   *

Testimony: Cryptocurrency resolution better than nothing, but needs a fix

by Grassroot Institute of Hawaii, April 4, 2022

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration April 5, 2022, by the House Committee on Consumer Protection and Commerce.

To: House Committee on Consumer Protection & Commerce
      Rep. Aaron Ling Johanson, Chair
      Rep. Lisa Kitagawa, Vice Chair

From: Grassroot Institute of Hawaii
            Ted Kefalas, Director of Strategic Campaigns

RE: HCR115/HR115 HD1 — REQUESTING THE DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS’ DIVISION OF FINANCIAL INSTITUTIONS AND THE HAWAII TECHNOLOGY DEVELOPMENT CORPORATION TO EXTEND THE DIGITAL CURRENCY INNOVATION LAB PILOT PROJECT

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HCR115 and HR115, which urges the state Department of Commerce and Consumer Affairs to extend the Digital Currency Innovation Lab pilot project for two more years.

In 2020, Hawaii launched the “Digital Currency Innovation Lab,” a regulatory “sandbox” that allowed certain cryptocurrency companies to do business in Hawaii without being subject to the double-reserve requirement of the state’s Money Transmitter Act. Since the lab’s inception, 61,000 Hawaii customers have been able to access digital currency and complete more than $611 million in transactions.

Unfortunately, the sandbox experiment will end at the close of 2022. Without further action, cryptocurrency will once again become inaccessible for Hawaii residents. Moreover, the state will lose access to the economic benefits of this rapidly expanding industry.

In 2017, Hawaii lawmakers in both chambers approved an exemption for cryptocurrency from the state’s Money Transmitters Act,[1] but the exemption was deleted in conference committee before the bill was enacted.

Iris Ikeda, commissioner of the state Division of Financial Institutions, stated at the time that lawmakers should first study the issue via a “Decentralized Virtual Currency Working Group.”

“DFI believes that the most prudent approach would be to allow the DVC Working Group the opportunity to perform its review and to provide the Legislature with findings and recommendations prior to the creation of an exemption for decentralized virtual currency,” she said.[2]

Now that the issue has been studied via the Digital Currency Innovation Lab, lawmakers can feel confident about following the example of 20 other states by exempting cryptocurrency from the state’s Money Transmitters Act.[3] With this one change, Hawaii would go from one of the most burdensome states for cryptocurrency to one of the best.

After Wyoming exempted cryptocurrency companies from its double-reserve requirement in 2018, it was dubbed one of the country’s “most crypto-friendly” jurisdictions. [4]

Cryptocurrency is a developing industry that moves as quickly as the technology involved. The delay caused by the Legislature’s inaction may cause Hawaii to fall further behind.

The best approach

The best approach would be to move forward with legislation that would simply exempt cryptocurrency companies from the state Money Transmitters Act.

However, since that appears to be no longer possible during the current legislative session, the second-best approach would be to extend the life of the Digital Currency Innovation Lab, and perhaps even encourage the state Department of Commerce to broaden the scope of the lab and allow greater participation. This would allow the Legislature to further observe the effect of the lab in action while settling on more ideal legislation.

One change recommended

There is just one change that we would suggest to improve the language of this resolution:

Currently, the resolution asks that the lab be extended for two years or “until legislation is enacted that provides for a digital currency licensure program, whichever occurs first.”

As noted above, a licensure program is only one of the ways in which the state could allow for the growth of cryptocurrency in the state. A better alternative would be to forgo a licensing program and simply exempt cryptocurrency companies from the state Money Transmitters Act.

Given that this topic is still under heavy discussion, that the landscape of cryptocurrency could change over the next several years, and that action at the federal level could override state law on the issue, it would be advisable to change the phrase, “until legislation is enacted that provides for a digital currency licensure program,” to, “until it is no longer necessary.”

Thank you for the opportunity to submit our comments.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

Link: Footnotes

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