Testimony: SB3076 would encumber cryptocurrency, not liberate it

The following testimony was submitted by Joe Kent of the Grassroot Institute of Hawaii for consideration on Feb. 8, 2022, by the Senate Committee on Commerce and Consumer Protection and Senate Committee on Energy, Economic Development and Tourism. Kent’s oral testimony to the committees via Zoom follows.

To: Committee on Commerce and Consumer Protection
      Senator Rosalyn H. Baker, Chair
      Senator Stanley Chang, Vice Chair

To: Committee on Energy, Economic Development, and Tourism
      Senator Glenn Wakai, Chair
      Senator Bennette E. Misalucha, Vice Chair

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


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB3076, an 88-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, SB3076 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 SB2697 and its companion HB2287, 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 SB3076 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.[1] So far, not one state has enacted any of its recommendations.[2]

Not surprisingly, SB3076 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, SB3076 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.[3]

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,[4] 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 SB3076, 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.[5] 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.

SB3076 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,[6] 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.[7] 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.[8]

If the intent is to encourage cryptocurrency exchange companies in Hawaii, SB3076 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 SB3076, 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 SB3076, 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.[9]

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.[10] 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, SB3076 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.

SB3076 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.


SB3076 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 SB3076 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.


Joe Kent
Executive Vice President
Grassroot Institute of Hawaii

[1]CSBS Leadership,” Conference of State Banking Supervisors, accessed Feb. 5, 2022.

[2]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.

[3] 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.”

[4]CSBS Model Money Transmission Modernization Act. See also, CSBS Uniform Money Transmission Modernization Act,” p. 34.

[5]FIN Info Briefing — Tue Jan 18, 2022 @ 1:30 p.m.,” YouTube video, Hawaii House of Representatives, Jan. 18, 2022 at 51’:51”.

[6] “Money Transmitters Act,” HRS489D.

[7] “Money Transmitters Act,” pp. 3-4.

[8] Juan Suarez, How Bad Policy Harms Coinbase Customers in Hawaii,” Coinbase, Feb. 27, 2017.

[9] “Money Transmitters Act,” p. 12.

[10] Peter Boylan, Cyberattacks hit at least 3 Hawaii government systems in past week,” Honolulu Star-Advertiser, Dec. 14, 2021, and Sam Spangler, Hawaiian Electric attacked daily by hackers as White House warns of ransomware,” KHON2, Hawaii News Now, June 8, 2021.

Oral testimony:

Senator Roslayn Baker, Chair: We also have testimony on this matter from Grassroots Institute of Hawaii, Joe Kent.

Joe 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 [Iris] Ikeda [of the state Division of Financial Institutions] had 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 [bill] 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 modeled after 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.

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