ABA House of Delegates approves novel virtual currency draft legislation

American Bar Association Journal - February 9, 2018
By: 
Jason Tashea

The American Bar Association's House of Delegates approved a draft uniform law regarding virtual currency businesses for states to adopt.

Drafted by the National Conference of Commissioners on Uniform State Laws, the Uniform Regulation of Virtual-Currency Business Act is draft legislation intended to create a statutory structure for regulating “virtual currency business activity,” according to the act’s prefatory note.

The vote took place during the ABA Midyear Meeting in Vancouver, British Columbia.

Many involved with cryptocurrency “are not enamored much in the way of regulation,” according to Fred Miller, the chair of the committee that drafted the legislation. He says, however, that there was near unanimity from advocates, business people and lawyers regarding the need for this type of legislation.

Miller notes that the bill does not regulate the underlying technology of virtual currency, called blockchain, often described as a distributed ledger. Instead, the draft law focuses on licensing businesses associated with virtual currencies, like money transmitters and money services. In that regard, the draft law is similar to the Uniform Money Services Act, which deals with traditional currency businesses.

To date, state governments have had mixed responses to cryptocurrencies and related businesses. While some have taken a hands-off approach, others have created elaborate licensing schemes.

In one example, New York created the BitLicense regulatory scheme in 2015. It has received broad criticism for being over the top, according to Miller. As of last month, only three companies had received BitLicenses.

Miller says that the criticism of the New York law was one reason the draft legislation did something novel: it created tiered regulation.

The system will trigger certain levels of regulation depending on a company’s earnings. Entities with under $5,000 of business activity will be exempt from regulatory oversight. Those operating between $5,000 and $35,000 will require a “light license”, explains Miller. The full regulatory scheme is triggered once a business breaches the $35,000 threshold.

“We wanted to allow some regulation and allow some experimentation and innovation as well,” says Miller.

To date, the draft legislation has been introduced in Hawaii and Nebraska, according to the Uniform Law Commission’s website.

State Sen. Mike Gabbard, D-Hawaii, said in an email that his state needs “a new virtual currency regulatory framework to address the innovations happening with virtual currency.” Sen. Gabbard sponsored a version of the draft legislation, however, it was defeated in committee. A similar state House bill still has the potential to become law this legislative session.

At the federal level this week, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing regarding cryptocurrencies. Called to testify were Securities and Exchange Commission chairman Jay Clayton and Commodity Futures Trading Commission chairman J. Christopher Giancarlo.

While neither agency head called for specific legislative changes, both agreed that their agencies, alongside other state and federal regulators, need to collaborate “to recognize where the gap is” in current law, according to Giancarlo.

In the last six months, the CFTC allowed futures trading of bitcoin and the SEC has brought numerous actions regarding fraudulent initial coin offerings (ICOs), a cryptocurrency-based fundraising mechanism, which Chairman Clayton says are securities.

In his testimony, however, Chairman Clayton says no ICOs have registered with the SEC.

The Senate Committee Chairman, U.S. Sen. Mike Crapo, R-Idaho, ended the hearing by inviting both chairmen back once they better understood the regulatory landscape and what updates may be needed to current federal law regarding cryptocurrencies.

Back in Vancouver, the ABA House of Delegates also approved four other draft acts on the matters of directed trusts, guardianship, parentage and protected series LLCs.