Testimony: HB2108 cryptocurrency bill simply too complicated

The following testimonies were submitted by the Grassroot Institute of Hawaii for consideration Feb. 8, 2022, by the Senate Committee on Consumer Protection and Commerce. First is the written testimony by Joe Kent, Grassroot Institute of Hawaii executive vice president, followed by the oral testimony via Zoom of Ted Kefalas, institute director of strategic campaigns.

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

From: Grassroot Institute of Hawaii
oe Kent, Executive Vice President


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB2108, an 81-page tome of a bill that would establish a program for the licensure, regulation and oversight of digital currency companies.

We appreciate the goal of creating a pathway for cryptocurrency companies to operate in Hawaii. However, HB2108 has unclear language and too many hurdles that could cement Hawaii as one of the worst states in the nation for cryptocurrency and cut residents off from this emerging market.

We urge lawmakers to delete the most burdensome regulatory aspects of this bill, or, better yet, support  HB2287 and its companion SB2697, which would exempt cryptocurrency companies from Hawaii’s money-transmitter law — considered by cryptocurrency companies to be the main stumbling block to operating here.

Among the issues with HB2108 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, commissioner of the Hawaii Division of Financial Institutions, is a board director at large. So far, not one state has enacted any of its recommendations.

Not surprisingly, HB2108 takes a banking-centric approach to cryptocurrency legislation, but many companies that use cryptocurrency are different from banks. For example, the bill could be interpreted as requiring food establishments to obtain a “special purpose digital currency license” in order to accept cryptocurrency as payment.

On page 4 of the bill, “digital currency business activity” is defined as “exchanging, transferring, or storing digital currency,” but Section 2 of the bill, which starts on page 8 and outlines exclusions to its proposed regulations, does not include food establishments.

On page 10, HB2108 says it will not apply to financial institutions that are “chartered or licensed by chapter 412.”

Hawaii’s Chapter 412 defines a Hawaii financial institution as a bank, savings bank, savings and loan association, depository financial services loan company, nondepository financial services loan company, trust company, credit union or intra-Pacific bank.

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.

>> Its tangible net worth requirement is unclear.

Section 16 of the bill, starting on page 45, would require licensees to meet a “tangible net worth” requirement. However, it is unclear exactly how much money that “tangible net worth” would have to be.

Section 23, subsection 2, on page 65, states that a license can be revoked if the “licensee’s tangible net worth becomes inadequate.” But, again, the bill doesn’t specify exactly what would be inadequate or adequate.

The CSBS model legislation, while overly burdensome, at least clarifies a tangible net worth requirement, stating that “A licensee under this [Act] shall maintain at all times a tangible net worth of the greater of $100,000 or 3 percent of total assets for the first $100 million.”

But this ratio is not clear in HB2108, and should be stated explicitly.

>> Its reserve requirement is not clear.

In a House Committee on Finance hearing on Jan. 18, 2022, Iris Ikeda said that the bill would require licensed cryptocurrency companies to have a “one-to-one” reserve ratio, also known as a double reserve. However, this “one-to-one” ratio is not clearly specified in the bill.

If the reserve ratio requirement is indeed one-to-one, that should be specified in the bill.

HB2108 also does not make it clear whether cryptocurrency can be used as a “permissible investment,” and this effectively could create a “double reserve” requirement, such as exists in Hawaii’s current money-transmitter law, whereby a company holding $1 billion of cryptocurrency would also need to hold $1 billion of cash.

This problem exists because Hawaii’s money-transmitter law does not allow cryptocurrency to be used as a permissible investment. Thus, cash must be used, effectively creating a double- reserve requirement. In 2017, this double-reserve requirement prompted Coinbase, the world’s leading cryptocurrency exchange, to leave Hawaii.

If the intent is to encourage cryptocurrency exchange companies in Hawaii, HB2108 should state clearly whether cryptocurrency can be used as a permissible investment in the calculation of its reserve requirement.

>> Its explanation for determining “tangible net worth” is not clear.

Section 16, page 45, of the bill states that licensees must meet a “tangible net worth” requirement, then offers a convoluted explanation of how that net worth would be calculated.

Specifically: “A licensee engaged in digital currency business activity may include in its calculation of tangible net worth digital currency, measured by the average value of the digital currency in U.S. dollar equivalent over the prior six months, excluding control of digital currency for a person entitled to the protections pursuant to section 14.”

This explanation would seem to suggest that the company net worth is calculated against the average price of cryptocurrencies over the previous six months, which could be problematic for cryptocurrency companies.

For example, the average price of Bitcoin over the past six months was $50,114. But the price on Feb. 4, 2022 was $40,709, which is a 20% decrease. Thus, if a company had $1 billion in Bitcoin today, it presumably would need $200 million of additional cash to account for the drop in value and meet the tangible net worth requirement.

This would effectively require cryptocurrency companies to hold excessive amounts of cash as a buffer, which would effectively be similar to a double-reserve requirement. This also could result in cryptocurrency exchange companies exiting or avoiding the state.

>> It is unclear whether customers need to be licensed.

On page 4 of HB2108, the definition of “digital currency business activity” includes “transferring” digital currency. On page 7, the definition of “transfer” includes moving digital currency to a hard wallet. On page 13, it is stated that a license would be required for “digital currency business activity.” Taken together, these three statements make it appear that someone would need a license to transfer cryptocurrency to their own wallet.

However, a statement on page 8 seems to exclude “the exchange, transfer, or storage of digital currency … regulated by the Electronic Fund Transfer Act of 1978, 15 U.S.C. Section 1693 through 1693r, the Securities Exchange Act of 1934, 15 U.S.C. Sections 78a through 78oo, or the Commodity Exchange Act, 7 U.S.C. Sections 1 through 27f.”

And in Section 2, subsection 8, page 10, the bill says “a person that (A) Does not receive compensation from a person for: (i) Providing digital currency products or services; or (ii) Conducting digital currency business activity” also is excluded.

So essentially, the bill is not clear about whether cryptocurrency customers would need to be licensed. And, of course, the default should be against requiring customers to obtain a cryptocurrency license, because that would be excessively burdensome.

>> It requires undue surveillance and lacks surveillance security.

In Section 8 of HB2108, 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.

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. 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 should duplicate the money-transmitter requirement that cryptocurrency companies file to the federal government reports required by the federal government.

>> Its license fees seem discriminatory and unreasonably high.

HB2108 requires licensees to pay an annual fee of $50,000. By contrast, the annual fee for money transmitters is only $2,000.

Ideally the fees for both should be equal, and preferably both at the lower amount, if Hawaii wishes to encourage more entrants in the emerging cryptocurrency market.


HB2108 as written could cement into place the most burdensome cryptocurrency regulations in the nation, in addition to causing confusion.

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 its unreasonable net worth requirements, dubious surveillance requirements and high fees — be deleted. This bill also needs to be written more plainly, to prevent needless confusion.

For the record, however, we believe a much better option would be for your committees to shift their support from HB2108 to HB2287 and its companion in the Senate, SB2697, both of which 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.


Joe Kent
Executive Vice President
Grassroot Institute of Hawaii

Oral testimony:

Rep. Aaron Ling Johanson, Chair: Next we have Ted Kefalas with the Grassroot Institute of Hawaii, offering comments.

Ted Kefalas: Aloha chair, vice chair, and members of the committee. My name is Ted Kefalas. I’m the director of strategic campaigns for the Grassroot Institute of Hawaii.

We believe HB 2108 is well-intentioned but places overly strict regulations on digital currency. Hawaii is currently one of the worst states in the nation for cryptocurrency investors, and this bill would not move us in the right direction.

I would also like to point out that HB 2108 is derived from model legislation provided by the conference and state banking supervisors and not one state has enacted its recommendations so far. In addition, there are many other regulations in this bill that remain unclear. For example, would food or retail establishments need to be licensed in order to accept cryptocurrency payments, or would a typical crypto enthusiast or investor need a license in order to make a transaction with a friend?

A much more ideal scenario would be to take a more hands-off approach in these early stages. For these reasons we strongly support a different bill HB 2287, which would simply exempt digital currency from Hawaii’s money transmitter law, and align Hawaii with a similar framework to 20 other states in the country. Mahalo for allowing me to deliver testimony this afternoon.

Chair: Thank you, Ted.

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