The collapse last month of Bahamas-based cryptocurrency exchange FTX led to renewed calls for stricter digital currency regulations at the state level.
State lawmakers in California and New York are teeing up legislation for the 2023 session aimed at better protecting consumers from the nascent industry. Lawmakers elsewhere are watching closely to see what Congress does, and weighing whether their state rules need beefing up.
“We’re working directly with the executive [branch] to figure out what the proper guardrails are and what we’re not doing and what we should be doing,” said New York Assemblyman Clyde Vanel (D), chair of the Subcommittee on Internet and New Technology.
In California, Assemblymember Timothy Grayson (D), chair of the Banking and Finance Committee, recently introduced a crypto oversight bill designed to address “fraud, abuse, and other predatory practices that have caused significant harm to California consumers and investors.”
It is a renewed effort for Grayson, who authored a crypto licensing and regulation bill that passed the Assembly nearly unanimously but Gov. Gavin Newsom (D) vetoed in September. In his veto message, Newsom called for a “more flexible approach.”
The Consumer Federation of California decried the veto as a win for “rich crypto bros and big tech” at the expense of consumers.
“If anything, the last few months … buttress our case for strong consumer protection, legislation and regulation,” said Robert Herrell, executive director of the CFC, which sponsored the vetoed California law.
Herrell pointed to New York as the “gold standard” in crypto regulation. In 2015, New York’s Department of Financial Services began issuing so-called BitLicenses. There are now 22 companies with BitLicenses, and the state is preparing to impose an assessment on the licensees, like banks pay, to cover the cost of state supervision and examination.
“The ability to collect supervisory costs will help the Department continue protecting consumers and ensuring the safety and soundness of this industry,” Adrienne Harris, New York’s Superintendent of Financial Services, said in an announcement this month.
Vanel, the New York lawmaker, said his state’s existing crypto regulatory regime has held up well during the recent turbulence in the industry.
“We’ve been on it, and New Yorkers have been protected in this space,” Vanel said.
But Vanel also thinks there is more New York can do. One of his proposals is to enact a state requirement that crypto companies disclose how much they pay celebrities and other influencers to promote their products and services.
“The issue is, famous or not, there should be disclosure. We should know that you are getting paid to do this,” Vanel said.
While New York is unique in issuing BitLicenses, cryptocurrency has been a trending topic in state legislatures for several years. In 2022, more than 140 crypto-related bills were introduced in 37 states, according to tracking by the National Conference of State Legislatures.
Connecticut state Rep. Jason Doucette (D), a self-described “crypto-skeptic” who chairs the Banking Committee, backed legislation during this year’s session that would have required virtual currency companies to register with the state and established new consumer protections.
The bill did not pass, but Doucette noted that Connecticut already has the ability to regulate digital currency companies through its existing money transmission laws.
“Given recent events, obviously, we have to continue to look at those statutes as often as possible to make sure we’re addressing advances in the market and what’s happening,” Doucette said.
Others, though, are wary of state-level efforts to corral the industry.
“It’s very difficult for an individual state to regulate [cryptocurrency] in any meaningful way,” said Colorado state Sen. Chris Hansen (D), chair of Senate Appropriations Committee.
Hansen sponsored a bill signed into law this year to study the feasibility of allowing security tokens, a form of digital asset, for state capital financing. Hansen said his goal is to reduce the cost of borrowing and open the door to a broader class of investors in state projects.
Hansen said he is a believer in blockchain technology, which undergirds the cryptocurrency industry, but remains skeptical about crypto itself and called the FTX collapse a “setback.”
“It’s a brand-new area with a lot of potential, but obviously we need to find the right balance [of] transparency and consumer protection,” Hansen said.
Colorado and Utah took steps this year to accept digital currency to pay taxes. But at a recent 2023 legislative preview event, Tim Storey, executive director of the National Conference of State Legislatures, predicted that because of FTX that idea will not take off next year.
“I think that’s now got a wet blanket on it,” Storey said.
Colorado, Wyoming, California, Florida and Texas were ranked by the Ascent as the five best states for crypto investors.
Wyoming — dubbed the “Delaware of digital assets” — in particular has rolled out the welcome wagon for the industry by passing more than 30 laws since 2018 to encourage blockchain and cryptocurrency investment in the state.
That includes passage in 2019 of a measure allowing the state to issue special charters for “crypto banks,” which are non-lending banks that hold digital assets.
Senate Minority Leader Chris Rothfuss (D), co-chair of the state’s Select Committee on Blockchain, Financial Technology and Digital Innovation Technology, defended Wyoming’s aggressive foray as prudent and said the laws have been designed to ensure regulatory oversight of the industry.
“Nothing I have seen in any of the collapses recently gives me pause that we’re doing anything wrong,” Rothfuss said. “In fact, it tells me that we’re on the right track because we have put in place safeguards and protections that would have prevented such problems.”
State Sen. Dan Furphy (R), a retired banker and member of the Blockchain select committee agreed, but noted “FTX is a good example of what can go wrong.”
“I’m a little cautious on all of this and want to make sure we’re doing the right thing, and so far I think we have done the right thing in our state,” Furphy said.
In March, Gov. Mark Gordon (R) vetoed a bill that would have allowed Wyoming to issue its own stable token — a type of virtual currency — that would have been backed by the dollar and held in trust by the state on behalf of the token holder. Despite the veto, both Rothfuss and Furphy said a revised version of the bill is likely to come back in 2023.
“We’re going to continue to try to pursue that angle,” Furphy said.