Regulation
Are states like Illinois rushing cryptocurrency laws to avoid the next FTX?
Bloomberg Best of the Year 2023: Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives… [+] Exchange, leaves the courthouse in New York, United States, Thursday, February 16, 2023. Photographer: Stephanie Keith/Bloomberg
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In the context of continued consideration of federal legislation to regulate cryptocurrency markets, it appears that states are crafting local policies in an attempt to fill the void. It appears that states like California, New Jersey and now Illinois are rushing through legislation for cryptocurrency markets in response to the fallout from FTX, where in 2022 the third-largest exchange failed and its CEO Sam Bankman-Fried was found guilty of fraud. A new bill in Illinois introduced two weeks ago called Digital Assets Regulation Act (DARA) could be an example.
DARA was already introduced and considered in Illinois in 2023, where it ultimately failed to pass at the end of the session. There was a similar bill trajectory in California, where the Digital Financial Assets Act that California Governor Gavin Newsom signed into law in 2023 was the same bill he vetoed in 2022. Since 2015, only New York has had a BitLicense regime where a specific license is required in the state to operate cryptocurrency. Last year, New Jersey introduced legislation similar to the BitLicense that ultimately failed to pass.
“The FTX scandal in 2022 will likely push states to come up with their own crypto systems due to lack of federal action. This is unfortunate, as it could create a similar patchwork of different state licensing regimes, which is already a challenge with money transmission licenses (MTLs),” said Lee Brachter, co-chair of the US Blockchain Coalition (USBC). The USBC is a national organization that focuses on multi-state issues impacting cryptocurrencies and blockchain and recently merged with the Global Blockchain Business Council (GBBC).
Illinois State Capitol Building with the statue of Abraham Lincoln and a blue sky.
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Details on the DARA bill in Illinois
The introduction of the DARA bill two weeks ago by state Senator Laura Ellman (D-IL) appears to highlight the concern expressed by Brachter about how states may feel compelled to act in light of the void left by federal lawmakers and the pressure to create legislation based on the FTX failure. I spoke to a new organization called the Illinois Blockchain Association about DARA. According to their analysis so far, the new bill includes broad definitions that could impact more than just centralized exchanges, such as DeFi and basic blockchain networks.
“Although well intentioned, DARA goes too far. It seeks to regulate not just those entities, but almost anyone working in blockchain in Illinois,” said Nelson Rosario, executive director of the Illinois Blockchain Association. Rosario went on to say: “No one disagrees that certain types of companies, namely centralized firms that take custody of client funds, should be subject to a comprehensive regulatory system. Many people are working on that very thing today in Washington.”
Olta Andoni, General Counsel and Chief Compliance Officer of Enclave Markets, shared some of her specific concerns about DARA. Andoni said: “I think it definitely has a broader scope than BitLicense because of the broad definition of ‘digital asset business’.” According to Andoni this definition “… will be applicable to all structures simply by operating and touching digital assets without even taking custody of them”. Andoni stressed that she likes the exclusion of software developers from the definition of digital asset businesses, but she believes there is room for much more misinterpretation about what software deployment will include.
“This bill, just like last year’s proposal, came out of nowhere. I don’t think the IL crypto lawyers were consulted on either version… I’m a big supporter of working on the definitions of the proposed draft to make it workable, but I don’t think the IL legislators will have much appetite for that ”, Andoni said. Crypto policy could face a state-level crisis if other states begin crafting policies without having the industry at the table. This could be the result of a loss of confidence in the industry following the fallout from FTX. State Senator Laura Ellman (D-IL), author of the DARA bill, did not respond to a request for comment.