Since cryptocurrency was born (in 2009), the typical regulatory approach in the United States has been to treat the technology as an unwelcome invader. It was smeared as a tool of criminals. It was then denounced as a ponzi scheme that would inevitably collapse. And even now, this remains a trope among the ruling class.
U.K. Prime Minister Theresa May repeated this only recently. “In areas like cryptocurrencies, like Bitcoin, we should be looking at these very seriously,” said May obliquely in a television interview. The law may need to move against cryptocurrency needed “precisely because of the way they are used, particularly by criminals,” a word politicians use to designate anyone engaged in permissionless activity.
Death to the Old Way
Now that the reality dawned that this stuff is real, every effort has been made to get the technology to behave like the old technology. This is a problem because the great merit of this new echosphere is precisely that it departs from the old way.
This problem has been a persistent one since at least 2013, when the US Treasury Department imposed regulations that made life impossibly difficult for companies providing services for Bitcoin. The result has been far fewer cryptocurrency exchanges – and hence less competition – than there would otherwise be.
And the pressure for regulation has only intensified since then, with every agency in Washington weighing in on the question of what is crypto and how it shall be treated. This whole “go away” approach reached a terrible point when New York passed the BitLicense regulation in 2013, an impossible framework that exploded compliance costs. The market bit back. Companies fled the state, names that have since become epic in the space: Bitfinex, BitQuick, BTCGuild, Genesis Mining, GoCoin, Kraken, LocalBitcoins, and Poloniex.
They all left New York.
Now entrepreneurs in this space are wondering whether they are even welcome in the US at all. Facebook has banned ads related to blockchain technology and cryptocurrency. Google has followed in short order. There have been no official explanations but observers do not doubt that the moves come in response to pressure from US regulators, who have lately come to suspect that many digital assets in this space are really forms of financial securities that need to comply with existing regulations.
The Wyoming Way
In the midst of all of this, at least one state is going in a different and opposite direction. Wyoming has a thin population base, astonishing natural beauty, and a wonderful crew of politicians and regulators who believe in independence, innovation, and technological progress. Thanks to some wise activism from knowledgeable people in the space, the legislature just passed a series of bills that will make Wyoming something of a safe space for crypto.
HB 19: A Bitcoin bill. This bill exempts cryptocurrency from the Wyoming Money Transmitter Act. This was passed to reverse the damage of a 2015 interpretation of this act by the Wyoming Division of Banking that drove cryptocurrency exchanges from the state. Coinbase had been forced to suspend operations. Now they and many other companies are free to come back.
HB 101: Blockchain records bill. This modifies Wyoming's Business Corporations Act to allow for blockchain-based records storage, shareholder management, and shareholder votes. It is a copy of Delaware's Distributed Ledger Shares Bill (SB69) passed last summer July 2017 to give the state the technological edge in using blockchain as a method of documenting and securing ownership rights.
HB 126: Series LLC bill. This is a specialized form of corporate governance contract that is favored by decentralized protocols, with, according to Bitcoin Magazine, “a compartmentalized series of members/managers, transferable interests or assets, and distributions to members.”
SF 111: Crypto property tax exemption bill. This one is pretty simple. It exempts cryptocurrency from state property taxes.
HB 70: Utility token bill. This is the bill that could have the most significance in the long run, given the direction innovation is taking place. This legislation defines the meaning of a utility token in a way that would make it exempt from securities regulation. It adds three conditions: 1) The token has not been marketed as an investment opportunity, 2) the token is exchangeable for goods or services (services must be in place before tokenization), and 3) the issuer has not entered into a repurchase agreement or an agreement to locate buyers for the token.
All have become law.
This suite of legislation, and HB70 in particular, have liberated the token market and provide for some legal certainty regarding their specialized status. The law shows awareness that cryptotokens are genuinely different from securities of the traditional sort, which are shares of the company that pay dividends.
Tokens are protocol shares that enable enterprises to use democratic means of providing a service and then raising capital for the funding of the service provision, while promising a real service in return for token ownership in the protocol. Of course people buy them in hopes of their price rising but they are not marketed as investments as such, pay no dividends, and grant no controlling interest in the affairs or management structure of the firm.
Whether and to what extent this legislation will contradict the SEC is another matter. Earlier in 2017, the SEC put out a sheet vaguely threatening to crack down but not specifying in what way or against what. The issue is whether tokens can be defined as securities, and, if so, find that exchanges are a violation of selling non-regulated securities to unaccredited investors.
According to Brave New Coin, this crackdown will not take the form of going after individual tokens but rather whole exchanges to make an example out of one or several. The SEC has no problem with accredited investors who buy unregulated securities (through, e.g., hedge funds), but, the website quotes a securities regulation expert who says the SEC “doesn’t want accredited investors flipping cryptocurrencies to unaccredited investors. Since the exchanges currently allow for this to happen, the SEC wants them regulated.”
For Your Protection?
On a personal note, I’m always startled when I hear these kinds of reasons for regulation, as if it is really true that they believe that their purpose is really to protect consumers. Ask any consumer in this space and you will get an earful: I don’t need protection. I can make my own decisions. If I win, good, if I lose, too bad. The SEC generally doesn’t help either way. Even with extreme regulation, the Bernie Madoffs of the world still exist, and the regulators rarely consider what kinds of innovations and opportunities they are driving away from financial markets. As for the exception granted to qualified investors, this looks more like a privilege for the rich to which anyone poor or of moderate means is denied access.
Thus do the initiatives by Wyoming represent a much-welcome injection of good sense and entrepreneurial thinking into the whole subject of crypto-innovation. However, these laws might run headlong into Wyoming’s new laws. Who will prevail in this struggle? The conflict only adds to the trend toward state vs. federal laws conflicts affecting many states, such as Colorado’s legalization of marijuana and California’s sanctuary laws concerning immigration.
These cases highlight the problem with one-size-fits all legislation in a country that is structured according to a decentralized governance model. Do states have the right and privilege of managing themselves or must they always defer to regulators in Washington? This is the core of the issue.
In the meantime, the crypto community has been buoyed by the fact that at least one state understands what innovation looks like and what it needs. Innovation is an unpredictable process that requires a hands-off approach by government regulators. As the old French slogan said, Laissez faire et laissez passer, let the merchants alone and let goods pass.
Nota Bene: The Wyoming Blockchain Coalition, particularly its president and chairman Caitlin Long, has done great work to educate people in Wyoming about the benefits of becoming a crypto-friendly state.