Easing Regulations for Blockchain Firms That Don’t Handle Consumers’ Money (H.R. 528)
Do you support or oppose this bill?
What is H.R. 528?
(Updated September 18, 2019)
This bill — the Blockchain Regulatory Certainty Act — would affirm that blockchain developers and service providers that don’t handle consumer funds don’t need to register as money transmitters at either the state or federal level, since their only function is to validate the network’s integrity by providing more security for those who use digital assets.
This idea of a “safe harbor” for non-custodial blockchain developers and service providers is akin to how internet service providers (ISPs) can’t be held responsible for their users’ actions, and are instead considered a “service.”
Entities eligible for safe harbor would include miners, which validate network integrity, and multi-signature providers of asset security.
Argument in favor
Regulatory complexities and state-by-state variation in money transmitter regulation laws are a barrier to blockchain’s growth in the U.S. Since they don’t handle customers’ money, there’s no reason for non-custodial blockchain entities to register as money transmitters. Codifying this in law would boost U.S. blockchain and cryptocurrency competitiveness.
Argument opposed
Individual states already have laws regulating money transmitters’ registration requirements, and it’d be overreach for the federal government to override those state-level regulations. Additionally, it’s not clear cryptocurrency exchange and blockchain entities should be required to register as money transmitters under existing law.
Impact
Non-custodial blockchain entities; miners; and multi-signature providers of asset security.
Cost of H.R. 528
A CBO cost estimate is unavailable.
Additional Info
In-Depth: Rep. Tom Emmer (R-MN) reintroduced this bill from the 115th Congress to provide clarity to blockchain entities that never take control of consumer funds by affirming that they don’t need to register as money transmitters. Emphasizing blockchain's importance to the U.S. economy's future, Rep. Emmer said:
“The United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth. These technologies hold untold promise for our economy and for all Americans.”
When he introduced this bill alongside two other bills supporting the blockchain industry in the 115th Congress, Rep. Emmer said:
“The United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth, which is why I am introducing these bills. Legislators should be embracing emerging technologies and providing a clear regulatory system that allows them to flourish in the United States.”
Coin Center, the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies such as Bitcoin and Ethereum, has advocated for a safe harbor of this type since 2016. Coin Center’s Jerry Brito argues:
“State money transmission licensing laws are broadly drafted and carry harsh penalties for failure to comply. There is no reason for these laws to ever apply to persons who facilitate cryptocurrency use but who do not hold other people's coins. Only custodians present a risk of loss that would be sensibly addressed through licensing. But clarifying this particular interpretation of each state's unique money transmission statute is a slow and inconsistent process… A federal safe harbor would instantly make the entire US a welcoming home for developers and technologists who are designing, building, and operating the fundamental infrastructure behind cryptocurrency and open blockchain networks.”
The U.S. Commodity Futures Trading Commission (CFTC) supports this bill’s legislative approach. The CFTC’s Commissioner, Rostin Benham, argued that crypocurrencies are “here to stay,” saying that:
“[V]irtual currencies may – will – become part of the economic practices of any country, anywhere. Let me repeat that: these currencies are not going away and they will proliferate to every economy and every part of the planet.”
Tim Prentiss, a writer and editor for ETHNews, is skeptical about this bill’s necessity. He argues that the relevance of the federal law that makes it a crime to operate a money transfer service without a license — which forms the need for this legislation — is unclear. However, despite Prentiss’ view, it’s worth noting that some crypto exchange operators have been charged under the statute.
Of Note: 47 state and territorial governments regulate money transmission by requiring money transmitters to be licensed and compliant with various bonding, minimum-capital, and other consumer-protection requirements. Operating without a license can lead to severe state and federal fines, penalties, and criminal sanctions.
Generally, these regulatory requirements are “extraterritorial,” meaning that they’re based on the customer’s location, rather than the business’ location. Thus, online money transmitters need to obtain licenses for every state and territory where they have customers.
Further complicating matters, the definitions of “money transmission”, “money”, and “monetary value” vary from state to state. As a result, the set of activities that constitute “money transmission” vary from state to state, and digital currencies may or may not fit these various definitions of “money,” and various digital currency businesses may or may not fit these definitions of “money transmitter.” This regulatory patchwork creates a “looming threat of prohibitory, permission-based regulation and licensing,” which makes it harder for U.S.-based non-custodial blockchain entities to plan and grow.
Explicitly making non-custodial blockchain entities exempt from licensing would remove this barrier to their growth in the U.S. This is important for U.S. competitiveness in the global cryptocurrency innovation race, where many say it’s beginning to fall behind.
Since these businesses don’t hold customer funds, they don’t pose a solvency risk to customers. Moreover, to the extent that they present some consumer protection risks, those risks are best addressed through other legal and regulatory regimes, such as state and federal Unfair, Deceptive, or Abusive Acts and Practices Law (UDAAP) and contract law.
Media:
- Sponsoring Rep. Tom Emmer (R-MN) Press Release (116th Congress)
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Sponsoring Rep. Tom Emmer (R-MN) Press Release (115th Congress)
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Coin Center (In Favor)
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ETHNews
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Medium
- BitsOnline
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Coin Center (Context)
Summary by Lorelei Yang
(Photo Credit: iStockphoto.com / matejmo)
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