Regulation
Are states like Illinois rushing crypto laws to avoid the next FTX?
Bloomberg Best of the Year 2023: Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives… [+] Exchange, leaves court in New York, U.S., Thursday, February 16, 2023. Photographer: Stephanie Keith/Bloomberg
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Amid ongoing consideration of federal legislation to regulate cryptocurrency markets, states appear to be developing local policies to try to fill the void. It appears states like California, New Jersey and now Illinois may rush to pass legislation on crypto markets in response to the fallout from FTX where in 2022 the third largest exchange failed and its CEO, Sam Bankman-Fried, was convicted of fraud. . A new bill in Illinois, introduced two weeks ago, called Digital Assets Regulation Act (DARA) could be an example.
DARA was previously introduced and considered in Illinois in 2023, where it ultimately failed to pass by the end of the session. There was a similar trajectory for a bill in California, where the Digital Financial Assets Act that California Governor Gavin Newsom signed into law in 2023 was the same bill he vetoed in 2022. Since 2015, only New York had a BitLicense regime where a specific license to operate with cryptocurrency is required in the state. Last year, New Jersey introduced legislation resembling the BitLicense that ultimately did not pass.
“The FTX scandal in 2022 will likely prompt states to come up with their own crypto frameworks due to the lack of federal action. This is unfortunate because a similar patchwork of different state crypto licensing regimes could be created, which is already a challenge with Money Transmitter Licenses (MTL),” said Lee Brachter, co-president of American Blockchain Coalition (USBC). USBC is a national organization focused on multi-state issues impacting cryptography and blockchain and recently merged with the Global Blockchain Business Council (GBBC).
Illinois State Capitol building with Abraham Lincoln statue and clear blue sky.
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Details on the DARA bill in Illinois
The introduction of the DARA bill two weeks ago by State Sen. Laura Ellman (D-IL) appears to highlight the concern Brachter expressed about how states might feel compelled to act in light of the void left by federal lawmakers and the push to create legislation based on FTX’s failure. I spoke with a new organization called the Illinois Blockchain Association regarding DARA. Based on their analysis so far, the new bill includes broad definitions that may impact more than just centralized exchanges, such as base-layer DeFi and blockchain networks.
“While well-intentioned, DARA goes too far. It aims to regulate not only these entities, but almost everyone working in blockchain in Illinois,” said Nelson Rosario, executive director of the Illinois Blockchain Association. Rosario went on to say: “No one disputes that certain types of companies, particularly centralized companies that hold client funds, should be subject to a comprehensive regulatory system. There are a lot of people working on this very topic in Washington today. »
Olta Andoni, General Counsel and Chief Compliance Officer of Enclave Markets, shared some of her specific concerns regarding DARA. Andoni said: “I think it definitely has a broader scope than BitLicense because of the broad definition of “digital asset business.” According to Andoni, this definition “…will be applicable to all structures simply by exploiting and touching digital assets without even taking custody of them.” Andoni stressed that she appreciates the exclusion of software developers from the definition of commercial activities related to digital assets, but believes there is room for much more misinterpretation about what the release of software will include.
“This bill, like last year’s, came out of nowhere. I don’t think IL’s crypto lawyers were even consulted for either version… I’m a strong supporter of working on the proposed draft definitions to make it feasible, but I don’t think lawmakers d They will have a lot to do. appetite for it,” Andoni said. Crypto policy could face a crisis at the state level if other states start developing policies without the industry at the table. This could be due to a loss of confidence in the industry after the FTX fallout. State Sen. Laura Ellman (D-IL), the author of the DARA bill, did not respond to a request for comment.