The following testimony was submitted by the Grassroot Institute of Hawaii for consideration Feb. 18, 2022, by the Senate Committee on Ways and Means.
To: Committee on Ways and Means
Senator Donovan Dela Cruz, Chair
Senator Gilbert Keith-Agaran, Vice Chair
From: Grassroot Institute of Hawaii
Joe Kent, Executive Vice President
RE: SB3025 SD1 — RELATING TO DIGITAL CURRENCY LICENSING PROGRAM
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on SB3025 SD1, a 90-page tome that would establish a program for the licensure, regulation and oversight of digital currency companies.
The main problem with SB3025 is the vast and nearly unlimited powers over the cryptocurrency market granted to the commissioner of the Division of Financial Institutions. Nearly every regulation in the bill has a caveat that allows the commissioner to rewrite the law according to his or her will, and that could centralize too much power and burden cryptocurrency companies with a high level of regulatory uncertainty.
SB3025 also has unclear language and includes too many hurdles that could cement Hawaii as one of the worst states in the nation for cryptocurrency and cut off residents from this emerging market.
We urge lawmakers to delete the areas of the bill that give the commissioner too much regulatory discretion. We also urge lawmakers to erase the most burdensome regulatory aspects of this bill, or, better yet, support SB2697 and its companion HB2287, which would simply exempt cryptocurrency from Hawaii’s money-transmitter law — considered by cryptocurrency companies to be the main stumbling block to operating here.
Among the issues with SB3025 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, SB3025 SD1 takes a banking-centric approach to cryptocurrency legislation, but many companies that use cryptocurrency are different from banks.
On page 11, SB3025 SD1 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.
>> Exemptions should be broader.
Page 10 exempts from the licensing requirement “non-custodial digital currency business activity by a person using a digital currency acknowledged as legal tender by the United States, or government recognized by the United States, or that has been determined to not be a security by a United States regulatory agency; or a financial institution chartered or licensed by chapter 412.”
This exemption is presumably meant to allow customers and businesses to use certain cryptocurrencies as a medium of exchange for goods and services, which is a good thing. However, the exemption applies to only digital currency “that has been determined to not be a security by a United States regulatory agency.”
The U.S. Securities and Exchange Commission has given unclear guidance about whether or not certain cryptocurrencies are securities. For example, the director of its Division of Corporate Finance said in 2018 that Bitcoin and Ether would not be treated as securities. But recently, Gary Gensler, chairman of the SEC, wouldn’t say whether or not Ether was a security, and has been hesitant to weigh in specifically on which other cryptocurrencies might not be securities.
This unclear guidance would presumably be left to the state Division of Financial Institutions, and perhaps the courts, to interpret.
Additionally, Russia’s government has recently indicated its intent to recognize cryptocurrency as a form of currency, though it’s unclear which cryptocurrencies would be recognized. The exemption as stated in SB3025 would seem to require interpretations of international law.
Additionally, the term “non-custodial digital currency business activity” would presumably include in the exemption many cryptocurrency exchanges that are non-custodial, such as SimpleSwap and ChangeNOW.
It’s certainly a welcome policy to allow non-custodial exchanges to operate in Hawaii without the need for a license, but it’s odd that custodial exchanges like Coinbase and Gemini would need a license, and more reason to simply exempt cryptocurrency from the state money transmitter law altogether, such as in SB2697 and HB2287.
At the very least, lawmakers should broaden the exemption so any cryptocurrency could be used as a medium of exchange, such as by exempting, “Businesses and customers that use cryptocurrency as a medium of exchange for goods and services.”
>> Its tangible net worth requirement is not clear.
Section 16 of the bill, starting on page 48, would require licensees to meet a “tangible net worth” requirement of $500,000 “or in an amount determined by the commissioner necessary to ensure safe and sound operation.”
This language gives too much leeway for the commissioner to deny an application, since it’s not clear by what metric the commissioner, and future commissioners, would rely on. The ratio in SB3025 should be stated more explicitly, and perhaps give guidance on what might be “necessary,” if the requirement were not $500,000.
Alternatively, lawmakers could simply cut the commissioner’s power to bypass the $500,000 requirement, which would provide cryptocurrency companies with more regulatory certainty.
>> It requires undue surveillance and lacks surveillance security.
In Section 8 of SB3025 SD1, starting on page 23, 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, SB3025 SD1 should duplicate the money-transmitter requirement that cryptocurrency companies file to the federal government reports required by the federal government.
Hawaii lawmakers once favored a simple exemption.
In 2017, Hawaii lawmakers approved at the full Senate and full House an exemption for cryptocurrency from the state’s Money Transmitters Act, but the exemption was deleted in conference committee before the bill was enacted. Commissioner Ikeda stated at the time that lawmakers should first study the issue via a “Decentralized Virtual Currency Working Group”:
“DFI believes that the most prudent approach would be to allow the DVC Working Group the opportunity to perform its review and to provide the Legislature with findings and recommendations prior to the creation of an exemption for decentralized virtual currency.”
Now that the issue has been studied via the Digital Currency Innovation Lab, it’s the perfect time to enact an exemption, as provided in SB2697 and HB2287 which would exempt cryptocurrency from the state’s Money Transmitters Act, as has been done in 20 other states.
SB3025 SD1 would cement into place some of the most burdensome cryptocurrency regulations in the nation, in addition to causing confusion and overly broad powers to the commissioner.
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 the nearly unlimited power of the commissioner to rewrite the law, dubious surveillance requirements and high fees — be deleted. This bill also needs to be written more plainly, to prevent needless confusion.
For the record, we believe a much better option would be for your committees to shift their support from SB3025 SD1 to SB2697 and its companion in the House, HB2287, 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.
Executive Vice President
Grassroot Institute of Hawaii
 “CSBS Model Money Transmission Modernization Act,” Conference of State Banking Supervisors, Jan. 6, 2022. See also, “CSBS Uniform Money Transmission Modernization Act,” Conference of State Banking Supervisors, August 2021, pp. 45-52.
 412:1-109, which states, “A Hawaii financial institution may be a bank, resulting bank as defined in article 12, savings bank, savings and loan association, depository financial services loan company, nondepository financial services loan company, trust company, credit union, or intra-Pacific bank.”
 William Hinman, “Digital Asset Transactions: When Howey Met Gary (Plastic),” U.S. Securities and Exchange Commission, June 14, 2018. See also, “SEC Declares Bitcoin and Ether as Non-Securities,” Cassels, June 26, 2018.
 Chris Matthews, “SEC’s Gensler won’t say whether ether is a security, amid crypto market slide,” MarketWatch, Jan. 11, 2022.
 Sebastian Sinclair, “Russia Moves to Recognize Crypto as a Form of Currency,” Blockworks, Feb. 9, 2022.
 “Best Non-Custodial Crypto Exchanges to Use in 2022,” Bitcoinist, December 2021.
 Peter Boylan, “Cyberattacks hit at least 3 Hawaii government systems in past week,” Honolulu Star-Advertiser, Dec. 14, 2021. Sam Spangler, “Hawaiian Electric attacked daily by hackers as White House warns of ransomware,” KHON2, June 8, 2021.
 Iris Ikeda, Commissioner of the Division of Financial Institutions, “Testimony on SB949, HD1, SD1,” Hawaii State Legislature, March 31, 2017. See also, “Conference Committee Rep. No. 78,” Hawaii State Legislature, April 27, 2017.
 States that do not require a money-transmitter license for virtual currency transactions include Arizona, Arkansas, California, Colorado, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, North Dakota, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia and Wisconsin. See “Cryptocurrency laws by state,” Shipkevich Attorneys at Law, 2020.