The Stop-and-Start State of Virtual-Currency Regulation

Regulation of virtual currency at the state level is proving to be a stop-and-start affair. No other state has yet followed New York with its now famous “BitLicense” to regulate virtual currencies under existing law. But in North Carolina, a bill to update the state’s money-transmitter act could become the first state law to specifically recognize and put some regulations on virtual currency should it pass.

In California, however, a controversial proposed law to regulate virtual currency has been on hold for months.

This seemingly cautious approach by states may reflect the newness of digital currencies and the unfamiliarity of legislators with them, according to observers. Government officials and law-enforcement agencies have cast a skeptical eye on virtual currencies for several years, saying they don’t want to stifle innovation but they do want to keep a tight lid on the money-laundering potential the new payment forms could create for terrorists, drug dealers, and other criminals.

Some lawmakers believe virtual currencies should be regulated under the auspices of money-transmitter statutes that are on the books in 48 states. That was one reason the office of North Carolina’s commissioner of banks asked that state’s legislature to modernize and clarify provisions in the state’s existing money-transmitter law, enacted in 2001.

The resulting measure in the state Senate, S680, has drawn some praise in payments quarters for seeming to embrace the new payment forms and recognize the blockchain and distributed-ledger technology that is the foundation of Bitcoin and other virtual currencies. The state Senate’s Finance Committee held a hearing on the bill last week.

The Washington, D.C.-based Chamber of Digital Commerce supports S680, calling it a “blockchain-friendly bill.”

“On its face, the act promises to benefit jobs, innovation, and investment in North Carolina, and the technology and banking industry have both showed support for the bill,” Chamber founder and president Perianne Boring tells Digital Transactions News by email.

The text of the bill defines virtual currency as “a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account, or a store of value but only to the extent defined as stored value under [a state law], but does not have legal tender status as recognized by the United States government.”

The bill would clarify which uses of virtual currency would require a money-transmitter license, but would leave non-financial uses of the blockchain technology alone, according to the Chamber.

“After meeting extensively with the Legislature…we are satisfied that by defining the term ‘virtual currency’ and by articulating important exclusions for non-financial applications of blockchain technology and for the software underlying even the financial applications themselves—like the blockchains and distributed ledgers themselves—North Carolina’s Legislature has taken a bigger step forward than most other states in embracing this new technology head-on,” says Boring.

It is unclear how long the lawmakers’ fact-finding will go on and when S680 will be scheduled for a vote by the full Senate. It’s been 13 months since the North Carolina House of Representatives passed its companion to S680 on a 117-1 vote.

“Simple politics could be one explanation” for the delay, says Boring, “or it could also be that some members of the Senate are genuinely hesitant to regulate something they don’t yet fully understand, which is why we have come to North Carolina to brief various members and interested parties.”

Still, North Carolina seems to be ahead of California with proposed legislation to put some regulations on virtual currencies. The Virtual Currency Act was introduced in California’s Assembly in February 2015, but the controversial plan has been inactive since September, according to Coindesk, a digital-currency information service. Opponents said it threatened innovation and would require governmental permission for use cases not expressly okayed in the law.

Meanwhile, even though some digital-payments companies don’t want to do business in New York State because of the BitLicense regulations that took effect last year, others can live with them. Last week, the state issued its fourth BitLicense, to Ripple. The San Francisco firm uses new digital technologies to enable banks to transact directly with correspondent banks and thereby reduce settlement costs. Ripple will use the BitLicense for institutional functions, not consumer payments.