Testimony on SB3076 and SB3025: Transcript of hearing proceedings

The following is a transcript of the Feb. 8, 2022, proceedings before the Hawaii Senate Committee on Consumer Protection and Hawaii Senate Committee on Energy, Economic Development and Technology regarding SB3025 — “relating to special purpose digital currency licensure.” To see the Grassroot Institute of Hawaii’s written testimony on this measure, submitted by Joe Kent, institute executive vice president, go here. Kent’s oral testimony is featured in the text below. 

Sen. Rosalyn H. Baker [Chair of the Committee on Commerce and Consumer Protection]: Aloha, and good morning. Welcome to the Committee on Commerce and Consumer Protection. I’m joined this morning by the Committee on Energy, Economic Development and Technology.

Sen. Bennette Misalucha: And Tourism.

Baker: Tourism. OK. I always think of Sen. Wakai as technology. 

We have a number of items on our agenda. Before we get started, there are some housekeeping announcements that I am required to provide. This meeting is being live-streamed on YouTube. In the unlikely event that we have to abruptly end this hearing due to technical difficulties, the committees will reconvene to discuss any outstanding business tomorrow morning in conference room 229, tomorrow being the ninth, February 9th at 10 o’clock in the morning. A public notice will be posted on the Legislature’s website.

For testifiers who are participating remotely, your audio will be muted and video disabled until shortly before it is your turn to testify. I’ll be going down a list of individuals who’ve submitted written testimonies for each measure. We apologize if the closed captioning doesn’t accurately transcribe the names. 

If you’re interested in reviewing the written testimony, please go to the Legislature’s website, where you will find a link on the status page for each measure. We are also joined here in conference room 229 by Sen. Joy San Buenaventura.

On the Zoom, we have vice chair for the Committee on CPN, Sen. Stanley Chang. We also have Sen. Kurt Fevella, who gets to serve on every committee he likes in the senate. We have Sen. [Gil] Riviere, who is on my committee as well, Sen. Lynn DeCoite and Sen. Clarence Nishihara just joined us. Sen. Misalucha is here. Sen. Joy San Buenaventura is here. I think we are ready to proceed. Are we ready, members?

Misalucha: Yes.

[Discussion resumes concerning two other bills, then focuses on SB3025 and then SB3076.]

Baker: Thank you. Members, any other questions? If not, thank you all very much. Let’s move forward to the next item on our agenda. We’re going from an energy source to a different kind of source. 

Senate Bill 3025 is relating to a digital currency licensing program. This creates a licensing scheme for digital currency companies to be regulated by the Department of Commerce and Consumer Affairs Division of Financial Institutions, and continues to the study of use cases by the Hawaii Technology Development Corp. or appropriate funds. Our first testifier is Iris Ikeda, commissioner of DFI. Good morning, Iris.

Iris Ikeda: Hi, good morning and thank you for hearing these bills. My name is Iris Ikeda and I am the commissioner for the Division of Financial Institutions Department of Commerce and Consumer Affairs. We have been conducting a study with the Hawaii Technology Development Corp. called the Digital Currency Innovation Lab, where we invited companies to offer transactions to consumers.

After the first year of our research project, we drafted some new piece of legislation, after we thought that there might be some regulation that’s needed in this area. We did solicit feedback from a bunch of different stakeholders, including consumer businesses, folks that are participating in the DCIL. 

We had several drafts that were sent out for comment. Each draft was a little bit different, after reviewing and considering the comments from the different stakeholders. This particular bill is one of the earlier iterations of what is finally known as our department bill or our administration bill, which is Senate Bill 3076. We would prefer our administration bill. I’d be happy to answer any questions.

Baker: Thank you. We have Hawaii Technology Development Corp., Len Higashi.

Len Higashi: Aloha, Chairs, Vice Chairs, members of the committee. Len Higashi, Hawaii Technology Development Corp. As Iris mentioned, HTDC has partnered with DFI on this digital currency innovation lab. We believe that digital currency offers interesting economic development opportunities here in Hawaii, and recognize that its activities cannot move forward without enabling legislation this session. We appreciate you hearing this bill. We stand on our testimony and so forth. Thank you.

Baker: Thank you. Grassroots Institute of Hawaii, Joe Kent.

Joe Kent: Aloha, Chair and committee members. My name is Joe Kent and I’m the executive vice president of the Grassroot Institute of Hawaii. Respectfully, we believe that SB3025 has overly stiff regulations that could cement Hawaii for decades to come as one of the worst states for cryptocurrency. We are already the worst, if you measure it by how many companies don’t want to come here or have left us. But this bill, the licensure bill, could actually make it even worse than that.

Not to mention the bill is also unclear. My testimony outlines a lot of things that need to be clarified. For example, it’s unclear whether food establishments would need a license to accept cryptocurrency. Or other establishments. 

The tangible net worth requirement is unclear. The bill never defines exactly what the tangible net worth requirement is. The calculation for the tangible net-worth requirement is also unclear and would require excessive amounts of cash as a buffer.

It’s also not clear whether customers would need to be licensed or not. Also, the bill has a lot of undue surveillance, state surveillance requirements over customers’ finances. This could create a honeypot for hackers and Hawaii doesn’t have a good track record for not being hacked. 

The bottom line is this bill could prevent locals from engaging in this emerging market and diversifying our economy. Again, we’re already the worst state. Let’s lift the regulations to help us become better.

Baker: OK. Thank you very much. Let’s go to the next testifiers, the Libertarian Party of Hawaii’s Feena Bonoan; Ryan Ozawa of Hawaii Hui; and we’ll welcome the chair of Energy, Economic Development and Technology (EEDT) committee, Glenn Wakai, to join us. He was taking care of some other important business that was scheduled before we had this hearing. Good to see you, Glenn.

Glenn Wakai : Thanks for having me.

Baker: [laughs] Our next testifier on Senate 3025 is Gerard Silva in opposition, Katie Jackson in opposition, we have Spencer Toyama in support, Glenn Pablo in support, late testimony in support from Glenn Wakai, chair of the EEDT, and late testimony in support from Trung Lam, and late testimony in support from Stacey Sakai. Is there anybody else on the call that I missed calling? If not, members, any questions?

Misalucha: I have a question.

Baker: Sen. Misalucha.

Misalucha: For Iris Ikeda, please.

Baker: Iris, are you still there? There she is.

Misalucha: OK, Iris. At yesterday’s hearing, I was surprised to hear about the statistics, like 61,000 investors from Hawaii, unique investors, and about a billion [dollars] you said, right? in transactions. Certainly, I think crypto commerce is something that we need to regulate. 

One of the things that jumped out on me in reading some of the testimonies is that the way the bill is written, the cost to obtain a license could be anywhere from $100,000 to a million [dollars]. Isn’t that like a barrier to entry, and could you address that? Is that about what you have found in your …. I know you were looking at other states as well. What is a prevailing …?

Baker: The bill work that you’re referencing is not an admin bill.

Misalucha: Yes. OK. I guess my question will be for the next bill then.

Baker: You can ask it on this one and Iris can comment if she likes. But I just wanted to point out that the bill that we’ve just gone through is not an admin bill.

Misalucha: I guess it’s in the testimony though. It’s in Kate Jackson’s testimony, if you take a look at it, that she pointed out that the cost to obtain a license is $100,000 to a million [dollars]. I was aghast by that number. If you can address that?

Ikeda: Yes, thank you. I have not read her testimony but the application fee is $79,000, which is probably one of the highest in the state. As I said, this is a brand new licensing scheme and it’s actually based off of what we have learned from the DCIL, the Digital Currency Innovation Lab. I’m not sure where those numbers come from. The annual renewal fee is capped at $50,000.

Baker: We have another bill. Let’s go to that bill and see the differences because the next bill is Senate Bill 3076, related to special purpose digital currency licensure. This is the governor’s package bill. This would be Iris’ bill. Why don’t you start us off with your testimony, Iris?

Ikeda: Thank you. I know it’s a little bit confusing, and I think that’s because we sent out so many drafts and a lot of the companies I think might have been confused with many of the drafts that we sent out. Anyway, this is our admin bill and my name is Iris Ikeda. I’m the commissioner for the Division of Financial Institutions, Department of Commerce and Consumer Affairs. 

This proposed bill is a licensing scheme to license digital currency companies. As we learned during the Digital Currency Innovation Lab, which is our study, we believe that there needs to be a licensing scheme for these digital currency companies.

These companies, as we learned in the DCIL, are not doing strictly money transmission. There are aspects of money transmission. There are some aspects of securities of banking, of lending, of a whole lot of different activities that could go on. 

Anyway, this bill is just purely a licensing scheme for the companies. If the bill is enacted, this would be the first licensing structure of its kind. What it does is it blends aspects of other states’ laws that haven’t quite worked. I think you’ve heard reference to New York’s license. It has some problems. I only took a portion of that particular law. Wyoming has a bank charter, which does not have any banks currently chartered. 

Just taking parts of it that, I think, would be necessary for safety and soundness, and provide for consumer protection. The proposal is centered on consumer protection as is all of our other industries that we regulate as these transactions have proven popular in our research study in the DCIL. I believe that this is really a work in progress, and we have been continuously meeting with different stakeholders throughout the drafting of this bill.

I would like to propose two amendments to this bill, although it did make it into our testimony because our meeting was yesterday. We have a typo in the definition of tangible net worth. Tangible net worth means total assets excluding, and the word should be intangible, not tangible. It’s because the way that it’s currently worded, the tangible net worth would be zero, if it’s excluded, so we certainly don’t mean that.

Then on page 45, starting on line 21, to page 46, line 6, we want to amend the net worth requirement to be not less than $500,000 or an amount determined by the commissioner as necessary to ensure the safety and sound operation of the company. We believe that this would be clearer to the licensee and it would be easier for us to supervise. I would be happy to answer any questions.

Baker: OK. Thank you. We have testimony from Len Higashi, HTDC.

Higashi: Aloha, Chair, Vice Chairs, members of the committee. I just want to add, we stand on our testimony and support, but I do want to add our experience partnering with DFI over the past two years on this Digital Currency Innovation Lab. 

It’s very appropriate that we’re in a consumer protection and economic development joint committee, because we believe that, moving forward, it is a balance between those two. The industry is very exciting, but it’s also very complicated, and it’s changing.

There’s a lot of consumer education that needs to go on and we believe that having some form of regulation will be beneficial, so that we can find the balance between consumer protection and economic development. 

While we see different testimony offering different opinions, we believe we can start by having the agency in charge and having the commissioner regulate this. We’re supporting the proposal from the administration and are available for any questions. Thank you very much.

Baker: Thank you, Len. We also have testimony on this matter from Grassroots Institute of Hawaii, Joe Kent.

Kent: Thanks so much, Chair, and just a correction, it’s Grassroot Institute. I really appreciate you allowing me to testify today. My name is Joe Kent and I’m the executive vice president of the Grassroot Institute. We think this bill is well-intentioned. I’m so glad that Commissioner Ikeda has developed this study and looked into this matter thoroughly. 

However, respectfully, we still believe this protects consumers too much. If you create a nest of regulations, it’s very difficult to unwind it later on.

A much better approach would be to have a light touch approach and then if something is needed, then act on that. This would levy the very strict regulations right at the get-go and that could hamper the market in Hawaii, which has already been hurt. 

A few notes: This bill was derived from model legislation provided by the Conference of State Banking Supervisors. It’s model uniform legislation that has not yet been enacted in any state. The CSBS legislation does clarify the tangible net worth requirement.

I was glad to hear that Commissioner Ikeda suggested a few additions to the bill, although I wish I could remember exactly what she said at the moment, but I believe she said that the net worth requirement would be more clearly defined. I think she said something like “not less than $500,000,” so I hope we could ask her to clarify exactly what that was, because that is important. 

The bill does still have a lot of the other confusing issues. Do food establishments need to be licensed? Does Toys “R” Us need to be licensed if they accept cryptocurrency, for example? Do customers need a license? Does the state have to collect surveillance information over customers’ finances? 

These are all important questions and could be dealt with in future years. We strongly support a different bill which would take a light-touch approach, just like 20 other states, SB2697 would align Hawaii and default us to one of the best dates for cryptocurrency instead of this bill.

Baker: Thank you. River Financial Inc., Michael Watkins offered some comments. Nathan Harmon for Blockchain Solutions Hawaii submitted some late testimony. The Libertarian Party of Hawaii’s Feena Bonoan offered testimony in opposition. Sean Cover in opposition. Dar Holland in support. Jared Silva doesn’t like digital currency. Jeff Sabino offered some comments saying that he uses the blockchain technology. Katie Jackson in opposition. Liam Ball. Liam, are you there?

Liam Ball: Hi everyone. Can you hear me?

Baker: Yes, we can. Please proceed.

Ball: All right, Aloha. Thanks for having this bill on the table. I think the world of cryptocurrency. That whole industry is really exciting and a benefit to Hawaii residents. I [submitted] written testimony because I’m a plebe, I live on Maui, so I’m a consumer. I’m a customer of River Financial, actually. I just saw that they submitted testimony. I do think we need clear and simple regulation. I just wanted to contrast the licensing cost with that of a Hawaii real estate brokerage.

I just have a little data here for 2021. Hawaii Life Real Estate brokers transacted $3.69 billion worth of real estate deals. The licensing fee is $486. Just think of that in comparison to these proposed licensing fees for this licensure under the state, which I think would prevent a lot of innovators from entering the field. 

I support the intent of this bill. I support the great things that this could bring to the state. I think there are a number of amendments that would be necessary to make this work. Thank you so much.

Baker: OK. Thank you. We have some late testimony from Kevin Teruya in opposition. Is Kevin on the call? If not, members, are there any questions for Ms. Ikeda or any of the other testifiers that are on the call?

Misalucha: I’ll ask that question now.

Baker: Go ahead. Are you asking Iris?

Misalucha: Iris, right. Iris, please. I think Mr. Ball also mentioned about the barrier to entry as being the licensing fees. I’m just relying on one of the testimonies that I read here, that it could amount to hundreds of thousands of dollars. I wanted to just have you clarify whether that’s true and where would that put Hawaii relative to the other states?

Ikeda: Thanks for that question. This particular law would be the first one of its kind in any of the states. We would definitely be the leaders in the crypto licensing space. The license in the bill is $9,000 for the application, and the annual licensing fee based on the transactions would be somewhere between $10,000 a year to $50,000 a year, and that would be paid quarterly. We heard from companies that they could not pay the annual license fees at one time, and so we broke it out into quarters to accommodate a payment schedule.

Baker: Are there other states that have any kind of licensing fee? Or if Hawaii adopts a scheme, somewhat similar to what’s been testified to, we’d be the first and nobody else is in that space at all?

Ikeda: We would be the first state to have a law like this, as was pointed out in some of the other testimonies, New York has a BitLicense, but they haven’t been very successful. Wyoming has a bank charter. They also have not been successful in chartering a company. 

This is a different approach, taking what I’ve learned from talking with the regulators in those two other states as well as in some of the other states that are considering different pieces of the legislation.

The other states that have been mentioned are all using their money-transmitter law. Somewhere between 17 and 20 states exempt virtual currency or digital currency companies from money-transmission laws, making that no regulation for the digital currency companies. 

There are about 16 to 18 states that are silent in their law, but include virtual currency as part of money transmission. In all of those states, they charge different licensing fees. The highest one is about $7,000, and then the lowest ones are a couple hundred dollars. As I said, that’s for money transmitters.

Baker: Refresh our memory. What do we charge for money-transmitter license fees?

Ikeda: We charge $5,000 for the application and the annual fee is scaled by transactions up to $20,000.

Baker: OK. So what you’re proposing for the digital currency regulation, it’s greater than, because it’s new, but it’s not that out of line from what we’re charging for others, right?

Ikeda: In our opinion, it’s not unreasonably high, just because, as you said, this is new. It takes a lot of training and a different thought process as we’re looking at the different business models in each of these companies. 

As we’ve learned in the Digital Currency Innovation Lab, all of these companies use different platforms. We’re not regulating any of the platforms. We just want to understand what they are so that we can be assured that they are providing appropriate consumer protection.

Baker: OK. Members, any other questions?

San Buenaventura: Yes.

Baker: Sen. San Buenaventura?

San Buenaventura: Yes, thank you. Iris, I’m a little bit confused as to why this is the administration bill when it’s modeled after the New York law and you just testified that the New York law wasn’t that good a regulatory scheme. 

Why aren’t we doing what the other 16 to 18 states that just removed digital currency from the money-transmitter law, and do what, I guess, Grassroot said is doing a light touch, rather than fashioning it after something that you had testified to was not a good law?

Ikeda: Right. Just to clarify what I said, we took pieces from the different laws that didn’t work. Those states are still tweaking their law, but what I did was take pieces of different laws to create the licensing scheme that you see here. There is a bill to exempt virtual currency companies from the money-transmitter law. That would provide no consumer protection.

San Buenaventura: OK, thank you.

Baker: Anybody else have questions?

Misalucha: Just one more.

Baker: Sen. Misalucha.

Misalucha: Thank you. Iris, if you could kindly talk a little bit about the double reserves because that seems to be something that’s a sticking point to a lot of cryptocurrency exchanges, that they oppose it, oppose the admin bill because of that. Is there any way to get around that while still providing protection for our consumers?

Ikeda: Right. So as I said, the main focus of any of our licensing bills is for consumer protection and the permissible investments, the double reserves that you’re talking about. The way we have it in the administration bill SB3076 is a one-for-one based on the type of digital currency held by the various companies, so companies are holding Bitcoin, Ethereum and I would say they’re holding up to 25 or 30 different types of coins. That’s what they would have to hold their reserves for the customers, not U.S. dollars.

Misalucha: Right. But then like I said, that might be a barrier to entry for some folks who would have to tie up their capital in those reserves. So is there a way where that can be mitigated, the risk can be mitigated without having to do double reserves?

Ikeda: Yes. So I’m not sure why people are calling it double reserves because it’s only reserved one time with the like-kind digital currency. In the money-transmitter bill or in the money-transmitter law, it is a double reserve. You would have to hold the digital currency plus U.S. dollars. In the money-transmitter law, yes, that would be a double reserve. In our current bill you’re only reserving it one time.

Misalucha: Could you do capital reserves instead of . . . .

Ikeda: As I said, we’re suggesting a clarification to the net-worth requirement, which is the capital from what it is right now to a minimum of $500,000 to, you know, whatever the consumer or the commissioner determines is necessary for safe and sound operation. Some of these companies have billions of dollars worth of operations, and $500,000 is not going to protect too many consumers.

Misalucha: OK. So just to be clear, how much are we asking for capital reserves for money remittance companies?

Ikeda: The Legislature at that time only wanted $1,000.

Misalucha: That’s a big gap there. OK, thank you, Iris.

Baker: Any other questions on this measure? If not, members, this brings us to the end of our agenda. 


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