Uniform Law Commission Progressing on Model State Bill for Virtual Currency Business Regulation

The current draft of the ULC committee's model legislation would regulate virtual currency businesses that work as exchanges between government-established money and virtual currency “along the lines of money transmitters” and businesses that store virtual currency “in a manner that would give them the opportunity to facilitate or prevent the movement of virtual currency,” committee reporter Sarah Jane Hughes, an Indiana University Maurer School of Law professor, said in an interview. Hughes spoke with us in her personal capacity rather than on behalf of the ULC committee. Businesses that don't meet accepted guidelines of having a trusted intermediary role in virtual currency transmissions wouldn't be regulated under the ULC's most recent draft, Hughes said.

The ULC committee is “getting much closer” to a consensus on the definitions of what constitutes both virtual currency and a virtual currency business under the model bill after last weekend's meeting in Palo Alto, California, Hughes said. The bill's definitions had been the subject of considerable debate because virtual currency stakeholders want to ensure that any bill doesn't regulate businesses that aren't directly related to the transfer of virtual currencies, said Coin Center Research Director Peter Van Valkenburgh, who observed the ULC committee's meeting and provided industry feedback. The virtual currency committee has been working to ensure that potentially regulated businesses don't include industry bystanders like companies that provide bitcoin mining software or hardware or those that only mine for virtual currency without making any transfers, Van Valkenburgh said.

Virtual currency activities that aren't directly related to money transmission “traditionally haven't been regulated because they're so brand new that there's never been a chance to regulate them before,” Van Valkenburgh said. “Unlike money transmission, those businesses aren't going to pose a risk” to users' virtual currency funds. “A miner isn't going to run off with your bitcoin. A software designer isn't in possession of the private keys that control a bitcoin, so if they go out of business it doesn't mean you've lost your bitcoin.” It's also important that model legislation be able to cover all virtual currencies instead of using language that applies only to bitcoin, Van Valkenburgh said.

The process of reaching a consensus on the actual “nuts and bolts” of a model law treating virtual currency businesses as money transmission services will be less difficult because many states already have laws governing money transmission services and those laws tend to be relatively similar, Van Valkenburgh said. Hughes said she believes many provisions in the actual bill text still require consideration, including how a virtual currency business would obtain a money transmission license and how a business would handle issues related to reserve funds and availability of assets. “Those are all dicey issues, though I'd imagine that from Coin Center's perspective they're much less important than what the definitions will be,” she said.

The ULC committee does need to answer other “difficult questions” related to the model bill, including what requirements a virtual currency business will need to meet in terms of the safety of a customer's virtual currency assets, Van Valkenburgh said. “Do we require that a virtual currency business have a one-to-one reserve requirement or adopt a fractional reserve system like banks?” he said. The ULC committee also will need to consider how to handle consumer protection issues, either by requiring virtual currency businesses to buy a surety bond that could be used to pay back customers if a business defaults or to institute minimum capital requirements, Van Valkenburgh said. Surety bonding is common among money transmission businesses but may not be sufficient to pay back the funds of all of a business' customers, while minimum capital requirements may be “bad for small startups,” he said.

Coin Center and some other virtual currency stakeholders are actively supporting the ULC committee's work, in part because it would provide the possibility of relative certainty in states' regulation of virtual currency businesses and potentially forestall other states from following New York in instituting alternate regulatory regimes, Van Valkenburgh said. “We'd love to see uniformity at the state level,” he said. The New York State Department of Financial Services instituted its BitLicense regulatory framework in June over unified virtual currency stakeholder opposition (see 1410220023 and 1412220038). California, North Carolina and other states have also explored either legislation or regulatory guidance on virtual currency issues but haven't gotten as far as New York, Van Valkenburgh said. “This industry is not in a position to aggressively oppose any state efforts, which is why we saw [New York's] BitLicense happen and why we've seen interest elsewhere.”

Virtual currency stakeholders aren't uniformly enthusiastic about the ULC committee's work, though few actively oppose it. Former Bitcoin Foundation Global Policy Counsel Jim Harper, a Cato Institute senior fellow, told us he continues to believe that it's “premature to be regulating this nascent technology and industry.” The prevailing view is that the blockchain technology that backs up bitcoin is only useful as a payment system, but other uses of the technology are beginning to emerge, he said. “I love the idea of ULC coming together” to explore virtual currency issues, in part because the commission's work on those issues has been “more careful and more open” than what occurred in New York's creation of BitLicense, “but I still don't think it will reach the bar” needed.

The ULC is more than a year into its work on the Regulation of Virtual Currency Businesses Act, but it's unclear how long it will be before the model bill reaches a stage where the full ULC membership can vote on it. The ULC typically employs a “pretty long and thorough process” of drafting and vetting model bills, with the entire process sometimes taking up to four years to complete, ULC Legislative Program Director Katie Robinson said. The drafting process itself takes about two years, and although the Regulation of Virtual Currency Businesses Act Committee has made “quite a bit of progress,” it's not clear when the model bill will come up before the full ULC, Robinson said. Van Valkenburgh and other stakeholders noted some behind-the-scenes efforts to “fast-track” the bill, though one industry lobbyist noted that it may become clear whether the bill is on a fast track to ULC consideration only after the committee's April meeting. Most draft bills must go through readings at two of the ULC's annual summer meetings before members cast a final vote, Robinson said. Hughes didn't comment on the model bill's timeline.