Deciphering the Patchwork of State-Level Crypto Regulations

April 16, 2024
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Deciphering the Patchwork of State-Level Crypto Regulations

2023 was a milestone for crypto legislation at the state level, with over 80 bills spanning 26 states. These bills largely focused on more technical and nuanced aspects of the crypto space, suggesting that state legislatures are becoming increasingly comfortable legislating specific facets of the industry.

In some ways, they have effectively developed a legislative blueprint for targeting different aspects of crypto, perhaps, most notably, Bitcoin ATMs.

The Emergence of a Blueprint for Bitcoin ATM Regulation

One notable trend is the development of a legislative blueprint for regulating Bitcoin ATM operators, as evidenced by legislation passed in both Connecticut and California. It seems with the passage of legislation in these states, legislators in other states feel comfortable authoring similar bills, despite in many cases admittedly knowing little to nothing about these kiosks or how they work. That notwithstanding, a blueprint has emerged for other states to follow, with Minnesota, Illinois, and Rhode Island already attempting to craft similar legislation specific to Bitcoin ATMs.

The Divide Between Red and Blue States

However, Bitcoin ATMs weren’t the only area of focus. Several bills addressed central bank digital currencies (CBDCs), potential tax breaks, and incentives for crypto mining. Interestingly, a growing divide has emerged between red and blue states in their approach to crypto legislation.

It’s worth observing that blue states tend to introduce more prescriptive legislation, such as mandatory disclosure language and customer fee and transaction caps, whereas red states lean more towards anti-CBDC legislation and bills that would positively impact crypto miners.

California’s Digital Financial Assets Law (DFAL)

California’s Digital Financial Assets Law, or DFAL, is a prime example of recent state-level crypto legislation. DFAL consists collectively of Assembly Bill 39 (AB 39), which regulates crypto exchangers at large, and Senate Bill 401 (SB 401), which outlines specific requirements for Bitcoin ATM operators.

In conjunction with laying out a regulatory framework for the licensing of crypto exchangers, AB 39 included a specific chapter addressing both issuance of, and support for, stablecoins, Ciccolo highlights an interesting takeaway from Assembly Bill 39: the bill includes a specific chapter. To our knowledge, no other state has specifically addressed stablecoins through legislation.

While SB 401 created a legislative blueprint for regulating crypto kiosks that other states have and likely will continue to follow, it appears that AB 39 has not yet inspired stablecoin legislation in other states. However, we believe that it’s only a matter of time before state legislators across the country author stablecoin bills. 

Concerns About California’s Licensing Process

Throughout the legislative process, California lawmakers engaged members of the crypto industry, consumer advocacy groups, other stakeholders, and members of the general public. The specific requirements set forth in both AB 39 and SB 401 reflect a compromise between these constituencies and lawmakers. While not perfect – no legislative ever is – it’s hardly worth our time to adjudicate these pieces of legislation. A much more productive use of our time as an industry must turn to their implementation and the oversight, which is mandated to the California Department of Financial Protection and Innovation (DFPI).   

Here, the DFPI, would-be license applicants, and the crypto industry face tremendous headwinds. California is currently grappling with a substantial budget deficit, and government agencies and offices across the Golden State are being asked to do more with less. This while the DFPI is essentially building its crypto regulatory framework from scratch. This has led many to rightfully question the adequacy of staffing and resources necessary for an effective licensing application review and oversight of crypto companies under DFAL. 

The Move Towards More Technical Crypto Legislation in 2024

As we look to the future, it’s clear that crypto legislation is becoming increasingly technical and nuanced. States like Wyoming and New Hampshire are at the forefront of this trend, exploring legal structures for decentralized autonomous organizations (DAOs). This move signifies a shift towards even more complex and specialized crypto legislation in 2024 and beyond.

DAOs represent a highly technical aspect of the crypto world that is not yet widely understood, even within certain crypto industry circles. These organizations are essentially self-governing entities that operate on blockchain technology, with rules and decision-making processes encoded into smart contracts. The decentralized nature of DAOs presents unique legal challenges, as they don’t fit neatly into existing regulatory frameworks designed for traditional corporate structures.

Wyoming and New Hampshire’s efforts to establish legal guidelines for DAOs are both fascinating and crucial for the future of the crypto industry. By taking on this challenge, these states are paving the way for greater clarity and certainty in the legal treatment of DAOs. This, in turn, could encourage more businesses and entrepreneurs to explore the potential of this innovative organizational or business formation model.

It’s highly likely that other states will follow the lead of Wyoming and New Hampshire in the coming years. As the crypto industry continues to mature and expand, the need for clear, comprehensive legislation that addresses the unique characteristics of DAOs and other complex crypto concepts will only grow. States that are proactive in tackling these issues will be well-positioned to attract crypto businesses and foster innovation within their borders, providing much-needed clarity and peace of mind to the industry.

The increasing focus on technical aspects of crypto legislation is not limited to DAOs. We’re likely to see many more states addressing a wide range of topics such as stablecoins, smart contracts, wallets, and other advanced blockchain applications in the near future. This trend underscores the growing recognition among state legislators that the crypto industry is not monolithic, and that effective regulation requires a nuanced approach.

As we move into 2024 and beyond, it will be essential for businesses, lawmakers, and compliance experts to stay informed about the latest developments in crypto legislation. By working together to create regulatory frameworks that are both comprehensive and adaptable, we can foster an environment that encourages innovation while also protecting consumers and ensuring the integrity of the crypto ecosystem.

The Politicization of Crypto Legislation

In recent years, the crypto legislative landscape has become increasingly politicized, with a growing divide between red and blue states. This polarization is evident in the types of bills and regulations being introduced across the country.

Red states tend to pass pro-crypto legislation, prioritizing a hands-off approach that fosters innovation and attracts businesses. These states often introduce laws that protect crypto assets from overregulation and provide incentives like tax breaks for crypto miners to stimulate economic growth.

On the other hand, blue states generally take a more prescriptive approach under the banner of consumer protection. They are more likely to impose stricter requirements on crypto businesses, such as mandatory licensing for all business models, and mandatory implementation of specific compliance measures aimed at preventing scams and protecting consumers.

This growing politicization of crypto legislation is creating an even larger patchwork of regulations across the country, which can be challenging for businesses to navigate. Companies operating in multiple states may find themselves subject to a wide range of conflicting rules and requirements, making compliance a daunting task.

It’s important to note that this politicization is not absolute, and there are instances of bipartisan cooperation on crypto legislation. Some lawmakers recognize the need for a more nuanced approach that balances innovation with consumer protection, regardless of their political affiliation. However, the general trend towards a red state/blue state divide on crypto policy is concerning and could have long-term implications for the industry.

To address this challenge, it is essential for lawmakers, businesses, and compliance experts to work together towards a more harmonized approach to crypto regulation. By fostering dialogue and collaboration across state lines and political divides, we can create a regulatory framework that provides clarity and certainty for businesses while also protecting consumers and promoting responsible innovation.

Ultimately, the politicization of crypto legislation underscores the need for ongoing education and engagement with policymakers at all levels of government. As the crypto industry continues to evolve, it will be crucial to advocate for sensible, evidence-based regulations that support the growth of this transformative technology while also addressing legitimate public policy concerns.

The Role of Compliance Experts in Shaping Crypto Legislation

As the crypto industry continues to evolve, compliance experts play a crucial role in shaping public policy and regulatory frameworks. These professionals actively engage with lawmakers, industry representatives, and consumer protection organizations to provide insights and guidance on the complexities of the crypto space.

By working closely with these stakeholders, compliance experts help to bridge the gap between the crypto industry and regulators. They offer a deep understanding of the regulatory landscape and can translate complex technical concepts into actionable policy recommendations. This collaboration is essential for creating a regulatory environment that balances innovation with consumer protection, two concepts that we’ve long believed are not mutually exclusive.

Adapting to the Evolving Landscape of Crypto Legislation

The state-level crypto legislative landscape is rapidly evolving, with 2023 witnessing a surge in bills addressing various aspects of the industry. As legislators become more comfortable tackling nuanced areas like Bitcoin ATMs and stablecoins, the stage is set for even more technical bills in the 2024 session. However, the increasing politicization of crypto legislation has led to a divide between red and blue states, creating a challenging regulatory patchwork for businesses to navigate. To position themselves for success, companies must prioritize compliance best practices and stay informed about the latest developments in state-level crypto policies.

Compliance experts will continue to play a vital role in shaping the future of crypto legislation by working closely with lawmakers, industry representatives, and consumer protection organizations. As the industry matures, this collaboration will be essential for creating a regulatory framework that promotes innovation while ensuring the safety and security of consumers.

As state-level crypto legislation continues to evolve, navigating the complex and often contradictory regulatory landscape can be daunting. In this challenging environment, having a trusted compliance partner is more important than ever. BitAML offers cutting-edge insights and services to guide you through the ever-changing world of crypto regulations. Set up a free consultation today.


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