Some of the internet’s biggest companies — the likes of Amazon, Google and Facebook — were created from the ruins of the dot-com bubble. Likewise, the crypto ICO bubble seems to have many states rushing to put blockchain laws on the books in order to attract businesses.
Recently, the introduction of the “Digital Asset and Blockchain Technology Act” by New Jersey Assemblywoman Yvonne Lopez has raised very little attention in the mainstream media, but there are important factors to note when looking at the United States regulatory environment. Jay Patel, the founder of venture capital firm Edge196, spoke to Cointelegraph, expressing an opinion that this announcement signals that “blockchain companies are further reaching maturity in both ideas and financial engineering.”
Following in the footsteps
Unlike Wyoming’s comprehensive laws, which are designed to support the growth of blockchain companies to flourish while protecting consumers, the New Jersey bill follows the lead of its neighbors in New York in taking an equivocal stance on cryptocurrencies. The jury is out on whether the Empire State’s BitLicense is helping or hindering the growth of the digital currency market. In a wide-ranging conversation with Cointelegraph, SEC Commissioner Hester Peirce noted the power that states have in regulating cryptocurrency:
“States have complicated rules as well as different roles to play in the future of cryptocurrency. Currently, states are making decisions about how to use their own authority in a way that complements the SEC framework.”
Since its inception in 2015, only a handful of companies have been granted a BitLicense in New York, despite hundreds of companies doing business around digital money. The process is creating a bottleneck and business exodus, leading New York to consider changes and even potentially charging firms for governmental oversight. Bob Cornish, a partner in the Washington, D.C. office of the law firm Anderson Kill, told Cointelegraph:
“The proposed legislation from New Jersey is significant not for what it actually does but rather for its balancing of the need for regulation on the one hand, and the desire of the state to be able to attract businesses from New York. New Jersey certainly does not want to attract questionable industry participants, but certainly wants to appear more friendly than New York.”
New York’s recent report that the Department of Financial Services is undergoing a review of the four-year-old BitLicense has created even further confusion in the crypto marketplace. Two proposed changes affecting coin listings are currently under consideration by New York legislators, which the DFS has outlined in order to create a stronger step forward.
The first one states that approved coins will be listed on the DFS’s website and any licensee may choose to list them after notifying the department. Additionally, the DFS will propose a framework for the creation of coin-listing policies. Existing licensees should tailor their current frameworks and submit a coin-listing to be approved by the DFS. Once greenlighted, the company may self-certify new coin listings on an ongoing basis.
Being able to list on the DFS’s site and then self-certify is a positive step for currency issuers, as it makes the process much easier and more transparent. It could also help eliminate fraudulent claims. However, the proposed framework could hamper entities like Idex that allow for decentralized transactions, with anyone being able to add any token.
Therefore, atomic swaps will need to evolve to ensure compliance with this change, should it be approved. Utilizing a rating system like the Crypto Rating Council or requiring that users utilizing atomic swaps come from Know Your Customer and Anti-Money Laundering environments only, like SmartSwap does, will help bring decentralized exchanges closer to compliance. After exchanges and cryptocurrency technologists create projects at great expense and utilize the Crypto Rating Council, they still may run afoul from securities laws, as the SEC’s opinion may differ from that of the CRC on whether or not the token is a security.
Time to make amends
According to Commissioner Peirce, it is time for cryptocurrency entities to stop looking at the SEC as an enemy, but rather as a partner. Peirce states her team’s goals are “to provide useful information into the cryptocurrency space,” adding:
“If you are not sure about where your business stands, come talk to us at the SEC. The best way to approach us is through FinHub, and while we will not give legal advice, we will give you things to think about. So, give us a call and have a conversation.”
However, the issue of New York having such a low number of licensees still stands. Combined with struggles to afford oversight, what can New Jersey expect as it continues the trend toward heavy regulation of crypto companies?
Let’s break it down in terms of the New Jersey bill’s core. The bill defines digital assets as digital consumer assets, digital securities and virtual currency. Those who conduct business activities that involve the exchange of these currencies must be licensed. Those who apply for a license must meet 15 rigorous standards, including transparency of business operations; a history of criminal convictions; no litigations pending against them; adequate insurance coverage; as well as a detailed and verifiable history of any other business actions related to digital asset transfer.
Overall, the bill appears to mirror other states in its definition of crypto, transactions and licensing requirements. In an interview with Cointelegraph, Jonathan Jaranilla, a co-founder of LedgerAtlas — a company focusing on jurisdictional assistance for cryptocurrency — noted:
“New Jersey and other jurisdictions are playing the arbitrage game similarly to what the cannabis industry has seen — this is a good thing. States should take advantage of their opportunity to move fast, be innovative, and challenge their counterparts when creating guidelines and laws, especially for crypto.”
It is clear that the Financial Crimes Enforcement Network and other federal entities will hold all companies to the same high standard. Treasury Secretary Steven Mnunchin has further confirmed this by informing all entities transacting in Bitcoin, the pending Libra stablecoin or other cryptocurrencies will need to comply with federal guidelines.
Andrew Yang, who recently ended his bid for the U.S. Democratic presidential nomination, was one of the few candidates to address the issue of the conflicting regulation of cryptocurrencies in the U.S., citing that although there is no national regulatory framework for crypto, “states have come up with a patchwork of varying regulations that make it difficult for the U.S. cryptocurrency markets to compete with those in other jurisdictions, especially in China and Europe.”
Hearings on New York’s proposed changes closed on Jan. 27. The New Jersey bill is currently before the New Jersey Assembly’s Financial Institutions and Insurance Committee, which opened its two-year session on Jan. 14. As for the federal government’s issuance of new crypto regulations, it’s anybody’s guess when that will be revealed, as markets have been roiled by the current coronavirus epidemic.
The convergence of crypto regulatory activity at the state level in New York, New Jersey, Wyoming as well as at the federal level could move the crypto market in a new direction — or remain a patchwork of regulations that will continue to hinder the growth of the U.S. crypto market. But with the SEC as a partner to the cryptocurrency community, the shared future looks very strong.