Few topics have been more heavily debated in the past year than the validity, value and overall outlook of Bitcoin and other cryptocurrencies. Although Bitcoin and other emerging virtual currencies have been around for years they remain largely unregulated, as do the activities that support them – exchanges, wallets, etc. However, with the spike in investor interest and the rapid escalation in the creation of new virtual currencies state lawmakers are starting to consider ways to regulate these activities.
In 2014, New York was the first state to adopt a “BitLicense” requirement. Essentially, anyone involved in a “virtual currency business activity” in New York must apply to obtain a license to conduct such activities. In addition, several other states, including Alabama, Connecticut, New Hampshire, North Carolina and Washington, have adopted legislation designed to address the regulation of virtual currency activity.
California is now stepping into the mix. The state has introduced the Virtual Currency Act (A.B. 1123), which would require anyone involved in a “virtual currency business” in the state to first register with California’s Commissioner of Business Oversight.
The California Virtual Currency Act defines a “virtual currency business” as any business “maintaining full custody or control of virtual currency in this state on behalf of others.” This seems to suggest only businesses such as cryptocurrency exchanges or wallets that provide virtual currency accounts would need to register through this process. Nonetheless, the definition is very broad and encompasses “any type of digital unit that is used as a medium or exchange or a form of digitally stored value.”
However, there are carve-outs for certain stored value units including:
In addition, based on the current version of the Act, hedge funds would be excluded from the license requirement since they would own virtual currencies or related assets on their own balance sheets and not for the benefit of their investors, per se.
Finally, the Act excludes certain virtual currencies that regulators and/or consumers are already familiar with and that exist in a closed circle of value such as points that may be redeemed for rewards than for cash.
Those that are required to obtain a license will need to do a number of things:
There will also be a provisional license that can be obtained by those involved in a virtual currency business that has less than $1 million in outstanding obligations by paying a $500 fee, if the activity is found by the Commissioner to be low risk to consumers.
Based on the information submitted by an applicant, the Commissioner will evaluate whether the applicant has (and will have) such capital as the Commissioner determines is sufficient to ensure the “safety and soundness” of the applicant and maintain consumer protection.
In determining the minimum amount of capital that must be maintained by an applicant, the Commissioner shall consider a variety of factors, including, but not limited to:
The Virtual Currency Act is heavily opposed by many involved in this space, including digital nonprofits, for a number of reasons, not the least of which being the broad definition of “virtual currencies” as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value.” Those active in the space do want to guard against fraud and investment scams, but they do not want to be unnecessarily inhibited from innovation with respect to the way new virtual currencies are created, disseminated, exchanged and valued.
A previous version of the Act was abandoned after facing similar opposition. If the Act were to pass this time, it would come into effect on July 1, 2018.
Jennifer Post is a partner in the firm’s Corporate and Securities group and advises a range of clients on virtual currency issues.
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