Testimony: This cryptocurrency bill ultimately should be shelved

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration Feb. 24, 2022, by the House Committee on Finance.

To: Committee on Finance
      Rep. Sylvia Luke, Chair
      Rep. Kyle T. Yamashita, 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 HB2108 HD1, 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 HD1 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 SD1, 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 HD1 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, HB2108 HD1 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 5 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 HD1 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 gives too much power to the commissioner.

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 should be stated more explicitly, and perhaps give guidance on what might be “necessary,” if the requirement were not $500,000.

The CSBS model legislation, while overly burdensome, at least bases its tangible net worth requirement on statute rather than the opinion of the commissioner, stating: “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.”[4]

Alternatively, lawmakers could simply cut the commissioner’s power to bypass the $500,000 requirement, which would provide cryptocurrency companies with more regulatory certainty.

>> Its reserve requirement is not clear.

In a House Committee on Finance hearing on Jan. 18, 2022, Commissioner Ikeda said that the bill would require licensed cryptocurrency companies to have a “one-to-one” reserve ratio, also known as a double reserve.[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.

HB2108 HD1 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, HB2108 HD1 should state clearly whether cryptocurrency can be used as a permissible investment in the calculation of its reserve requirement.

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

On page 5 of HB2108 HD1, the definition of “digital currency business activity” includes “transferring” digital currency. On page 7, the definition of “transfer” could include moving digital currency to a hard wallet. On page 14, 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 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.[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, 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 HD1 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.

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,[11] 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,” she said.[12]

Now that the issue has been studied via the Digital Currency Innovation Lab, it is the perfect time to enact an exemption, as provided in SB2697 SD1 and HB2287, which would exempt cryptocurrency from the state’s Money Transmitters Act, as has been done in 20 other states.[13]

Scrap or amend the bill.

HB2108 HD1 as written could cement into place the most burdensome cryptocurrency regulations in the nation, in addition to causing confusion.

If the members of the committee 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. This could be done in the following way:

1) On page 23, delete Section 8 and replace it with the “Money laundering reports” language as listed on page 12 of Hawaii’s money-transmitter law:

(a) Every licensee and its authorized delegates shall file with the commissioner all reports relating to transactions in the State, as required by federal record-keeping and reporting requirements in Title 31 United States Code Section 5311 et seq., 31 Code of Federal Regulations Part 103, Section 125, and other federal and state laws pertaining to money laundering.

(b) The timely filing of a complete and accurate report with the appropriate federal agency shall satisfy the requirements of subsection (a), unless the commissioner notifies the licensee that reports of this type are not being regularly and comprehensively transmitted by the federal agency.

2) Reduce by at least half the fees starting on page 37, Section 11.

3) On page 48, in Section 16, replace Section (a) with the following language derived from the CSBS Uniform Money Transmission Modernization Act:

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, 2 percent of additional assets for $100 million to $1 billion, and 0.5 percent of additional assets for over $1 billion.

Also add the following statement:

Digital currency is deemed a permissible investment for the purposes of calculating tangible net worth under this chapter.

4) On page 15, delete subsection (4).

5) On page 18, delete subsections (f) and (g).

6) On page 40, delete subsection (4).

7) On page 45, delete the phrase starting on line 19: “and any additional disclosure the commissioner determines reasonably necessary for the protection of persons.”

8) On page 51, line 10, change “seven” to “three.”

9) On page 59, delete Section 20 and replace it with Section 17 of Hawaii’s Money Transmitters Act.

For the record, however, we believe a much better option would be for your committee to shift its support from HB2108 to HB2287 and its companion in the Senate, SB2697 SD1 , 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,” Conference of State Banking Supervisors, Jan. 6, 2022. See also, “CSBS Uniform Money Transmission Modernization Act,” Conference of State Banking Supervisors, August 2021, p. 34.

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

[6] HRS489D.

[7] HRS489D-4, pp. 3-4.

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

[9] HRS489D “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.

[11] SB949 of 2017.

[12] 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.

[13] 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.

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