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Testimony: SB2695 SD2 HD1 a needless delay tactic for cryptocurrency

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration April 4, 2022, by the House Committee on Finance.
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To: House Committee on Finance
      Rep. Sylvia Luke, Chair
      Rep. Kyle T. Yamashita, Vice Chair

 From: Grassroot Institute of Hawaii
            Ted Kefalas, Director of Strategic Campaigns

RE: SB2695 SD2 HD1 — RELATING TO CRYPTOCURRENCY

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB2695 SD2 HD1, which would establish a Blockchain and Cryptocurrency Task Force to study cryptocurrency in Hawaii, then make recommendations to the Legislature about the issue in time for the 2024 legislative session.

We applaud this effort to engage the Legislature concerning the legal status of cryptocurrency, but we are concerned that this bill will further delay a resolution to an issue that has already been studied at length.

As I am sure you all know,  Hawaii’s Money Transmitters Act[1] requires digital currency companies to hold cash assets equal to the amount of their virtual assets. Thus, a company that holds $1 billion in bitcoin and etherium also must have a $1 billion in cash reserves.

This requirement has made it nearly impossible for cryptocurrency companies to do business in Hawaii. Coinbase and Binance — the two largest cryptocurrency exchanges — do not operate in Hawaii. Nor do RobinHood Crypto, KuCoin, PayPal’s “Cryptocurrency Hub,” eToro, Bitstamp or any number of other popular and successful crypto companies. As a result, Hawaii has been largely left out of the cryptocurrency revolution.

In 2019, Gov. David Ige authorized a temporary “Digital Currency Innovation Lab,” a regulatory “sandbox” that allowed certain cryptocurrency companies to do business in Hawaii without being subject to the money-transmitter law’s double-reserve requirement. Since the lab’s inception, 61,000 Hawaii customers have been able to access digital currency and complete more than $611 million in transactions.

Unfortunately, the sandbox experiment will end at the close of 2022. Without further action, cryptocurrency will once again become inaccessible for Hawaii residents. Moreover, the state will lose access to the economic benefits of this rapidly expanding industry.

In 2017, Hawaii lawmakers in both chambers approved an exemption for cryptocurrency from the state’s Money Transmitters Act,[2] but the exemption was deleted in conference committee before the bill was enacted. Iris Ikeda, commissioner of the state Division of Financial Institutions, 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.[3]

Now that the issue has been studied via the Digital Currency Innovation Lab, lawmakers can feel confident about following the example of 20 other states by exempting cryptocurrency from the state’s Money Transmitters Act.[4] With this one change, Hawaii would go from one of the most burdensome states for cryptocurrency to one of the best.

After Wyoming exempted cryptocurrency companies from its double-reserve requirement in 2018, it was dubbed one of the country’s “most crypto-friendly” jurisdictions. [5]

Cryptocurrency is a developing industry that moves as quickly as the technology involved. Waiting more than two years before taking action would ensure that Hawaii falls further behind.

Recent amendments to the bill have addressed many of our concerns relating to the independence and possible politicization of the task force. However, there remains a risk that the task force as currently envisioned will be too heavily influenced by limited commercial interests. Given that five of the six members meant to represent commercial parties with an interest in cryptocurrency or blockchain are specifically from Hawaii-based institutions, there may be a bias toward the use of state regulation to discourage competition in the market.

Considering the global scope of the industry, it seems appropriate to seek input from economic experts in cryptocurrency, as well as from  industry representatives who do not have a financial interest in keeping Hawaii closed to other cryptocurrency companies.

The best approach would be to move forward with legislation that would simply exempt cryptocurrency companies from the state Money Transmitters Act.

However, since that appears to be no longer possible during the current legislative session, the second-best approach would be to support efforts to extend the life of the Digital Currency Innovation Lab for at least another year. This would give the Legislature time to settle on more ideal legislation.

If you go ahead with the idea for a task force, we hope any group created to study the issue will do so with a focus on helping Hawaii become one of the best states in the country for cryptocurrency business and investment.

Thank you for the opportunity to submit our comments.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] “Money Transmitters Act,” Hawaii Revised Statutes 489D.

[2] SB949 of 2017.

[3] Iris Ikeda, Division of Financial Institutions commissioner, “Testimony on SB949, SD1 HD1,” Hawaii State Legislature, March 31, 2017. See also, “Conference Committee Rep. No. 78,” Hawaii State Legislature, April 27, 2017.

[4] 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.

[5] Chris Matthews, “How Wyoming became the promised land for bitcoin investors,” MarketWatch, April 24, 2021; “What do Wyoming’s 13 new blockchain laws mean?” Forbes.com, March 4, 2019; HB0019 of 2018 Wyoming Legislature; and Erik Kuebler, “Wyoming House unanimously approves two pro-blockchain bills.” Bitcoin Magazine, Feb. 20, 2018.

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