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"Instead of being trailblazers, we might be going backwards."
This is a special update to Saturday's article on the state legislature's inability to pass a bill that would have created a license to allow cryptocurrency exchanges to operate in Hawaii. If cryptocurrency is of no interest to you, please skip this issue!
When House Bill 2108 was "deferred indefinitely" on Friday, there were only two things we knew for certain: Hawaii would not have a first-of-its-kind license specifically for digital currency companies, and a "regulatory sandbox" (the Digital Currency Innovation Lab) that allowed some companies to service Hawaii customers would end on June 30.
We will (most likely) get a new, broader blockchain and cryptocurrency task force, but the task force can't keep the pilot program going, and will ultimately produce draft legislation that would have to wind its way through the Capitol in 2023. Or more likely 2024.
Not surprisingly, both crypto enthusiasts and critics had a lot to say, and had a lot of questions, especially as many of them engaged in the political process for the very first time to help HB2108 advance successfully through both the House and Senate. Disappointment and disillusionment were the theme of the weekend.
Yet I also heard reassurances and earnest hope from people in the know that there might still be a way forward, at least for the 120,000 Hawaii residents who poured $860 million into cryptocurrency exchanges — exchanges that were told they had to "disengage customers, return funds, close accounts and cease operating."
We have a little information on the record on why lawmakers — or at least those on the conference committee — decided to let HB2108 die this session. I'm hopeful that a "town hall" can be scheduled to more fully clear the air.
But the one person I wanted to talk to was Iris Ikeda, Commissioner of the Division of Financial Institutions within the Department of Commerce and Consumer Affairs.
She was the person credited with creating the DCIL sandbox when several earlier attempts at legislation failed. She was the person who requested and reviewed the data provided by participating crypto companies. And she was the person who drafted HB2108, based on her extensive regulatory experience and her DCIL research.
Perhaps most importantly, she is the person through whom any solution to the current roadblock must pass.
What follows is an extensive question-and-answer session. Yes, it's detailed and wonky, but that's what many crypto enthusiasts are looking for.
"I'm not really sure what was really going on behind the scenes."
Q: How are you?
A: Pretty good.
Q: I can't imagine life in your seat, especially leading up to all the adventure on Friday.
A: Yeah, it was quite the adventure. And I'm actually glad they didn't hold it over one more time. I think they were thinking about, before the committee meeting started, rolling it to 8 o'clock [p.m.] and by that point I was like, 'No, just kill it or pass it.'
Q: I bet you were really tired. So, what is your reaction to the deferral of the bill? What do you think happened?
A: I'm not really sure what was really going on behind the scenes. They must have been unsure about something that they probably could not articulate to me. We've been in contact, I've been in contact with both Chair [Rep. Aaron] Johanson and [Rep.] Baker and Senator Misalucha, and no one had really articulated anything in particular that they were concerned with. Judging from the outreach that we have done, both through the DCIL and separately that I've done by myself, I hadn't heard from any of the participating companies — and some of the other companies that are not participating — that they had that much heartache from the bill itself. And so, I'm not really sure what the legislature was thinking.
Q: I got the broad sense that they felt it was a little complicated. They had comments on the cost of the license, to which I think you responded. It seems like you would have been open to tweak the bill to address any specific feedback, but they didn't have anything specific. What do you think was the hardest pill for someone to swallow about the proposed license? Was there anything that you felt you had the strongest pushback?
A: I don't think so. Once we settled on the fees, and compromised about how to pay those annual fees, I didn't really see anything else that I really couldn't give in on. I know some of the companies did not want us to do examinations, and I said that that was a hard no. Some companies did not want us to ask them for any information outside of the examinations. Again, that was a hard no. Those two things were on my mind for consumer protection. It's hard for me, being part of a department called 'commerce and consumer protection,' it would be hard for me to give up that sort of authority. It's possible that those were the things that were holding up the bills, they did not want to have consumer protection, or for DFI to have the consumer protection authority that I was looking for.
Q: Did you get the sense that the proposed licensing scheme was a complete nonstarter, a 'hard no' from any of the DCIL participating exchanges or the non participating exchanges?
A: I didn't get that sense at all, and I was kind of surprised. A lot of them, as we were having our conversations with them, said that they thought licensing was a good idea. Like, really? I hadn't really expected that. But I think that it does level the playing field, and everyone then knows what all the rules are going to be. As long as you can fit your business model into the rules, I think that everyone was comfortable with that.
Q: This bill HB 2108 is only the latest attempt by your office to introduce legislation to created some path forward. This year wasn't the only year you've done that, right?
A: Right. But this is the first year that it got this far.
Q: What were some of the approaches in previous years? There were bills in the past to simply exempt exchanges from the money transmitter law, for example, but I don't think there was a proposed licensing scheme before?
A: The licensing scheme previously was a little bit different than what it is right now. Over time, we learned a lot from the DCIL, and I hope that I got a little bit smarter about what it is that we needed for consumer protection. Since 2015 or '16, I've had two bills competing, so it kind of looked like I didn't know which way I wanted to go. One was a licensure bill, and one was an exemption bill to specifically say that virtual currency transactions were not money transmission, or exempted from the money transmission law. In my mind, these were the two big options, right? Either we're gonna license this, or we're just going to exempt it. And the legislature had chosen not to do either one for many years. Hence, the DCIL was created, just so we could study it and provide some information to the legislature. Judging from what happened, I guess it was not enough information.
"Our bill had gained some national coverage as the 'Frankenstein Bill.'"
Q: I took notice when Representative Johanson said, 'If we're going to be first in the nation, we want to get it right.' But a lot of people feel as if we're already the last in the nation. Help me understand that statement. Is it that other states have made modifications to their existing money transmitter laws? Is it true that there are no established digital currency exchange license regimes yet?
A: Yes. New York has a 'BitLicense,' but that license is really different from what I was proposing. They, they want to license not just the digital currency companies, but the type of coins that are being transacted. On their website, they have like a list of — I don't know, how many coins that they have — that are that have been deemed okay. They actually regulate a lot more than what our bill had professed to do. Our bill had gained some national coverage as the 'Frankenstein Bill.' Anytime you create something new, you're taking what you think are the best parts of other states or federal government laws or rules, which is what I did. I don't know if they thought that was a good idea, but at least people got it, that I was taking some of the provisions that I thought were the best for consumer protection from these other agencies.
Q: So opart from New York, there's not really much in terms of a separate licensing scheme. They all modified their money transmitter requirements?
A: Right. And even the BitLicense, it kind of looks like money transmission law, they just call it something different. As I said, both in our testimony and in the preamble to the bill, these transactions we have learned through the DCIL is unlike money transmission. They're their own thing, and I think that they should be given its own scheme.
Q: A lot of the testimony, and some of the legislators, said we should wait to see what the federal government does, especially after Pres. Biden issued an executive order on cryptocurrencies.
A: I think that the federal government will do something eventually, I just don't know how quickly they're going to act. A lot of times they're studying what happens in the various states. The states, as I said in one of the hearings, is really the big sandbox for the federal government to take a look at different approaches. Our approach has had some interest, and the Philadelphia Fed is doing a study on stable coins for the Federal Reserve Bank. I've talked to them before about what our study was showing, and even though it was very different from what they're doing, I think that the use cases that we had and the type of questions consumers were asking were helpful to them as they're doing their research. It's probably a little bit disappointing to them that we didn't pass this particular law, although it's still on the books for them to take a look at it and see what could have happened.
"The one good thing coming out of this is to separate those two ideas from each other."
Q: The other bill that survived is the task force bill. Half of its objectives are tied to the DCIL. They have to acknowledge that they don't want to reinvent the wheel and start from scratch, as the DCIL accomplished a lot. Do they really need more information?
A: Yeah. And the taskforce bill is broader than just the DCIL. They wanted to study blockchain, which I told them was something entirely different than cryptocurrency. I think that that was not clear to the legislators. Even some of the advocates were kind of mixing up the two or using the words interchangeably when, in fact, they are two separate types of ideas and have two separate uses. So I think that maybe the one good thing coming out of this is to separate those two ideas from each other.
Q: Your interest is in the currency, stored value, asset class world, not blockchain to register real estate property deeds or anything like that. It's just specifically the monetary aspect.
A: Right. That's really what we do. I think that there's some uses in any agency for blockchain to be used for data capture. I could see that for real estate or for shipping or medical history, that sort of thing. It's possible that there are other uses. I'm just not very familiar. But for licensing, I don't know how useful that would be.
Q: So this task force has one year to get some additional information on top of what the DCIL collected and they will be proposing another attempt at legislation — is that what your understanding is?
A: They were tasked with proposing other laws or uses for both blockchain and cryptocurrency. Because the DCIL is probably going to dissolve, I'm not sure how much more information that particular part of their study is going to come up with, but we'll have our two years worth of information.
Q: And the DCCA is part of the task force?
A: Yes. It's 15 members, including the director of budget of finance and his or her designee, the director of DCCA and the designee, and the commissioner of financial institutions is specifically named. So DCCA actually has two representatives on the task force."
"There could be potentially great consumer harm from closing down the DCIL."
Q: A lot of the concern that people have surrounds the sunsetting of the DCIL, which will proceed as prescribed when it was first set up. You've already notified these exchanges that this has to happen. What are the implications of that specifically?
A: I think that that will cause some disruption with the consumers. They all knew that the DCIL was going to close June 30 and that they had until the end of the year to do something with whatever the holdings that they had. I think that consumers thought that something would happen to allow them to continue. I am trying to figure out what, if anything, can be done to mitigate some of the consumer harm. But I feel like the disclosure that we gave everyone before they did the transaction was pretty clear.
Q: The DCIL FAQ said the two options to continue were to exempt exchanges from the money transmitter license or create a new license. Neither of those things happened and the DCIL has to end. But you said you were looking at possible solutions. Have they presented themselves in any way? Is there a glimmer of hope at all? Or should everyone just be preparing to pack their bags?
A: We are still early in our thought process. I feel like we have until at least June to provide some guidance to the participating companies, who will then let all of their customers know. As you know, Ryan, I have a lot of creative ideas. And so hopefully I can come up with something creative to mitigate some of the potential consumer harm from all of those consumers who thought that there would be some pathway for them to continue.
Q: I haven't received any notification from Gemini yet that anything has happened. Are they also holding off because they think there might be a creative solution from Commissioner Ikeda?
A: It's possible that they're waiting to see what's going to happen, because I think everyone can see that there could be potentially great consumer harm from closing down the DCIL and having all of their customers cut off, or start to cash in all of their digital currency. And it's going to drive the market somehow, right? I'm not sure if it's going to drive it up or down, but I think the valuation is certainly going to change if that many people are going to start transacting all at once. So there's that to consider also.
Q: With the end of the DCIL, and without a specific path forward right now, what happens on July 1? Are we back under the money transmitter act interpretation of licensing for cryptocurrency companies? Where we were in 2017, when Coinbase said, 'We're out'?
A: It's really kind of interesting that instead of being trailblazers, we might be going backwards to where we were.
Q: Do you feel the DCIL was worthwhile, even with the potential consumer harm you may not be able to mitigate?
A: Yeah, I think that it was. The reason why I started that was to gather some information and do some research into what consumers thought about cryptocurrency, what they wanted to use it for, how it was being used, how the companies were securing all of this — what security standards they use, if they were following any of the anti money laundering laws, what did they do to identify any of the consumers. Those are all of the things that I think were very helpful. We required a lot of that stuff, but no one pushed back. And they were all in for this, having us take a look at their financial statements, having us take a look at their anti money laundering policies and some of the transactions, and looking at their audits. And all of these things were part of the licensure. As I said in a lot of my testimony, the provisions that we had in the license was exactly what all of the companies were doing right now that were participating in the Digital Currency Innovation Lab. So it wasn't going to be that much different than what they were operating under now, just that we would have official supervisory authority over them.
Q: I don't know if you're able to speak to this, but there is actually a significant population participating in cryptocurrencies outside of the DCIL sandbox. So they're all probably breathing a sigh of relief, thinking they're not affected. They'll just keep living in their their limbo land, but without having their accounts shut down.
A: I don't know what the future is going to bring for all of the people participating. As for all of the people that are operating outside of the DCIL, we have been made aware of some of the companies that have been operating outside the DCIL, and we have warned some of them that we know that they're probably conducting unlicensed activity. Even if the only license that we have is money transmission, they are operating outside of that license, because they're not in the DCIL. And we do have the prerogative of enforcing some administrative action on them.
Q: For customers of DCIL exchanges, I guess we will all have to wait with bated breath for what might you might come up with?
A: Again, I'm not sure what that is, but I hope to have something by the beginning of June, so that folks can know what exactly they should be doing. We clearly said that our experiment was going to end, our research project. didn't think our research project was going to be that successful in that so many people would be participating, especially knowing that it was just a finite period of time.
Q: Well, I'm hopeful that you can come you can come up with something to to minimize harm. And I guess we go through this circus again next year?
A: Yeah, and hopefully there'll be a better outcome next year. Definitely we're continuing to think of some way for the mitigation for consumers. But at the end of the day, if there's nothing that is palatable, we did tell everyone.