In this article, BPI Visiting Fellow and Consumer Choice Center Deputy Director Yaël Ossowski illuminates the evolution of state level Bitcoin policy. As legislators focus on Bitcoin, they attempt to balance policy with various entrenched interests.
Because it separates state from money, Bitcoin is inherently a political animal.
Bitcoiners may not want to interact with the state, but the state wants to contend with Bitcoin.
And while there is much at stake at the federal level of the US government – the SEC, CFTC, FinCEN, OCC, Congress, presidential executive orders, agency rulings – there has been a silent march through state institutions, resulting in policies (attempted or enacted) affecting Bitcoin and the people and entities that embrace Satoshi’s innovation.
Documenting fully this is an exhaustive exercise, but it is worth understanding how states are dealing with Bitcoin’s rise. These legislative attempts don’t affect the Bitcoin protocol itself, but rather how an individual citizen will be able to interact with Bitcoin, whether sovereignly or otherwise.
Some states have embraced Bitcoin activities as first-movers (Wyoming, Texas, Montana, New Hampshire, etc.) while others have done everything possible to restrict it (New York, Hawaii). Many others are still to be determined.
As a crude summary, there are generally three issue areas where regulations touch Bitcoin at the state level: exchange, energy, and taxation.
Save for Nebraska, every state legislature is bicameral with a House and Senate, similar to the federal government. There is the executive branch, run by a governor and his cabinet, and a number of state agencies headed by either career bureaucrats or gubernatorial appointees.
State House Representatives and State Senators have thus far been the primary movers of Bitcoin policy at the state level. Lately, however, agency heads – especially state banking supervisors and state securities regulators – have flexed their muscles.
Rather than a simple ranking, it is best to examine state policy on Bitcoin through the lens of the various licenses, programs, and tangential laws.
And that brings us to the body of state intervention that interacts the most with Bitcoin and cryptocurrencies more broadly: money transmitter licenses.
Money Transmitter Licenses
A money transmitter or transmission license (MTL) is the primary engagement between crypto exchanges and state regulators. For a Bitcoin exchange or brokerage to legally offer services to residents in a given state, it must comply with state laws on how “money transmitting” businesses are regulated.
These license holders must submit information to the state in order to remain compliant, hence firms require Know Your Customer data collection such as your social security number, name, date of birth, and more.
This is separate from the federal Money Service Business license from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which considers money laundering, narcotics, and terrorism funding and usually partners with chain surveillance firms for data retrieval.
State MTLs grant Bitcoin firms the ability to exchange fiat and Bitcoin to customers, and are thus a core part of the regulatory stack for any company that wishes to serve clients.
Recently, when South Dakota and Texas residents were told they could no longer use certain Bitcoin exchanges and brokerages, that stemmed from that Bitcoin firm — or their contracting custodian — losing their money transmission license.
Except for Montana, every state in the union has a procedure requiring registration of entities that offer “money services”: banks, fintech institutions, mortgage companies, money managers, and virtual currency businesses such as exchanges or brokerages.
My organization, the Consumer Choice Center, has drafted a model policy to introduce reciprocity of money transmitter licenses — meaning that if an exchange or firm has one state’s MTL, it should be easily accepted and applicable in another state.
The application process for a money transmission license varies, but often it will usually require a significant amount of liquid assets denominated in US dollars (sometimes up to $5 million) or a surety bond, a debt security held by a third-party in case of future claims by customers on the license holder, which can also range into the millions.
New York state’s BitLicense — the most comprehensive in the country — requires a very high barrier for any firm that deals with cryptocurrencies. Not more than 30 companies have successfully received a BitLicense, and most Bitcoin-only firms have opted to stay out of New York rather than complying with the law, which is a strong enough signal. The bond requirements, net worth stipulations, and various reporting requirements often prove too costly for compliance. Not to be outdone, New Jersey’s version of the BitLicense has thus far sailed through legislative committees, and is expected to pass this session.
These stipulations, depending on the state, mean that an upstart Bitcoin brokerage will need significant cash just to begin legally selling Bitcoin. If an exchange wants to serve customers in all 50 states, it will take significant time and money, lawyer billing hours, and conversations with lawmakers and regulators. It may also require an open review of their operational security and IT.
Ohio and Washington, for example, require third-party audits of computer systems and custodial services if firms deal with virtual currency.
While that may seem rather stringent, some states have decided to sidestep this requirement for digital currency businesses that only buy and sell Bitcoin directly to customers.
The states of Indiana, Kansas, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, Texas, and Utah have independently determined that fiat to Bitcoin (or cryptocurrency) exchange between two parties (company and customer) do not meet the standard for money transmission, and therefore do not require licenses. The same for purely peer-to-peer Bitcoin transactions. Tennessee only requires a money license if an exchange also allows you to sell your Bitcoin.
If you’re a resident of any of these states — plus the aforementioned Montana — you’ve likely had easy access to most Bitcoin exchanges and services.
The rationale for this determination depends on the state. Either they do not qualify Bitcoin as “money” — and thus there is no need to offer a money transmitter license — or they do not consider virtual currency on/off ramps between two entities as “transmission” of money. These definitions, however, are slowly changing due to the influence of a few organizations.
Conference of State Bank Supervisors
In recent years, efforts by state banking supervisors (the principal bank regulators in each state) have aimed to unify the application process of money transmission licenses, namely through the Nationwide Multi-State Licensing System and Registry (NMLS).
This website serves as the primary application portal for virtual exchanges and brokerages wishing to offer services to customers in multiple states (as well as mortgage dealers). The Multistate MSB Licensing Agreement Program now comprises 31 out of 50 states, giving any applicant a simplified application procedure that is determined by the NMLS governing board.
While it is up to each state’s banking supervisor to review these applications and grant them, the NMLS is the official entry point and communication portal for Bitcoin companies in these 31 states wishing to apply for a money transmission license.
What makes this application process unique is that NMLS is not a government agency or institution held accountable in any democratic fashion. This registry is technically run by the Conference of State Bank Supervisors, a $120 million nonprofit organization governed by a rotating set of state banking supervisors.
While the CSBS is nominally a leadership and training organization for banking supervisors and their staff, it has in recent years taken a lead role in crafting model policy to further “regulate and unify” exchange of Bitcoin and other cryptocurrencies through money transmission licenses. Its first model legislation on Bitcoin was proposed back in 2014.
Its latest attempt is the Model Money Transmission Modernization Act. This bill aims to simplify money transmitter legislation in any state that adopts it, establishing rules on the information to be collected, the rights of customers if they are defrauded, and various definitions on so-called “virtual currencies”. It also specifically exempts node runners and noncustodial services. It is fairly boilerplate.
Where some take issue with the model bill — and the various versions that have been introduced or adopted — is that it takes great pains to claim decentralized virtual currency as “not money” (Section 13.03 (b)(9)). Previous versions of this bill defined “money” to also represent legal tender in foreign countries, but considering El Salvador’s embrace of Bitcoin as legal tender in 2021, this was amended.
The more problematic aspect of this scenario — and one we see all too often in lobbying — is that state banking supervisors are supposed to follow the law and policies written by state legislatures rather than crafting the legislation themselves. That conflict of interest is very clear, and should be made apparent in states where these bills are introduced.
For all intents and purposes, the state banking supervisors do not yet want to consider Bitcoin as legal tender in the banking system. They will have to follow rather than lead.
Uniform Law Commission
Another nonprofit organization with significant sway in the realm of Bitcoin policy at the state level is the Uniform Law Commission, a 130-year-old organization that drafts model legislation to harmonize commercial state law. It is led by appointees from each US state and territory who must be licensed attorneys and counts thousands of lawyers as members.
The ULC partners with the American Law Institute to publish the Uniform Commercial Code, a comprehensive set of policies intended to offer each state a package of universal commercial rules to police business activity.
The latest amendment to the UCC, known as Article 12, is solely dedicated to virtual currencies such as Bitcoin and its crypto offspring. The UCC defines these as “controllable electronic records” — or CERs.
The bill section delves deeply into Bitcoin terminology — UTXOs, multisig, self-custody, custodians, etc. It makes clear that CERs — including Bitcoin — may be a medium exchange but are not “money” per US law.
“Money” means a medium of exchange that is currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization, or pursuant to an agreement between two or more countries. The term does not include an electronic record that is a medium of exchange recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by the government.
What this model language means, therefore, is that Bitcoin may be many things, but it is not money. It should still be, however, subject to money transmission licensing requirements.
Since January 1, 2023, 22 states have already introduced a version of Article 12 of the UCC. None have yet passed it.
If these bills make it into law, it is uncertain how it would affect Bitcoin and those who use it, but it likely wouldn’t be anything drastic.
Unlike previous commentary, these bills would not lay the groundwork for any type of Central Bank Digital Currency (CBDCs) either, but would rather try to restrict what states consider money going forward. This would open the path to more states opposing CBDCs rather than accepting them. Adoption of CBDCs will be a threat at the federal level, but would take significant time, and effort, to trickle down to state policy.
One more hopeful aspect of Bitcoin-specific legislation at the state level has been the introduction of so-called “regulatory sandboxes”. These programs allow firms — mostly innovative companies — to offer products and services for a set period of time before they’re forced to apply for a formal license.
In states that have passed such measures, such as Utah, Nevada, West Virginia, Wyoming, Florida, and North Carolina, that means Bitcoin-only businesses have ample room to quickly scale innovative solutions for customers.
The Libertas Institute was instrumental in pushing for the first-in-the nation statewide regulatory sandbox in its state of Utah, and they have a great write-up here. The rapid growth of regulatory sandbox programs will aid further adoption of Bitcoin and Bitcoin-adjacent firms for years to come.
‘No Action Letters’
Another positive development that has helped Bitcoin brokerages and firms offer more services are so-called “no action” letters issued by state securities regulators.
These formal letters recognize a firm’s ability to be “exempt” from additional burden of money transmitter licenses according to established criteria. Usually, this is because the firms are only facilitating direct exchange of fiat for Bitcoin (or vice versa) to the customer, or in purely peer-to-peer transactions.
A good number of these have been issued in states like Arkansas, California, and Idaho and have allowed relative ease for Bitcoin companies to operate there — at least where money transmitter licenses are concerned.
There is no formal process for obtaining one of these letters, but it is generally understood that a legal representative seeks an opinion from the securities regulator
However, these letters are just “promises” to not enforce particular laws on firms, meaning any particular policy or law change (or change in administration) could render them null and void.
Proof of Work
The effective ban on Bitcoin mining (hashing) in the state of New York in November 2022 is the most notable, but it won’t be the last for proof-of-work. That law was passed using environmental justifications, requiring onerous reporting standards that any commercial mining firm would be unable to meet or afford.
Other states and localities have also heard concerns about energy grid usage, and some public utilities have entertained discriminatory pricing for commercial miners. Preventing energy pricing nondiscrimination via model policy is a necessary step forward for protecting commercial mining specifically and hashrate more generally.
States such as Rhode Island, Kentucky, Missouri, Montana, Oklahoma, Wyoming and Mississippi have recently adopted various incentives to both protect proof-of-work and to entice Bitcoin miners to move to their states.
Several state-based advocacy organizations have been successful in advancing legislative appeal and model policy for protecting mining, establishing microgrids, tapping orphaned wells, and more, and most of the excitement has been in traditionally red states. These measures will continue to give confidence to commercial mining firms, as well as protecting solo miners.
While various jurisdictions will seek to restrict commercial Bitcoin miners, the healthy balance of states needing both revenue and investment will likely serve as a countermeasure to those efforts. The economic incentives, as well as the larger opportunity for investments and capital, create a more hopeful path forward for proof-of-work in the United States.
On taxation, we can see that most states have opted to follow the IRS’ definition of Bitcoin and other virtual currencies as simply “property”.
Filing for taxes on cryptocurrency transactions focuses more on the Bitcoin-to-fiat conversion than vice versa, meaning that capital gains taxes could apply if there are gains.
Montana, once again, is an exception to these rules, as is Wyoming. Both states exempt digital currencies from taxation and explicitly claim that any digital currency projects or firms won’t be treated as securities.
Thankfully, most states have not issued any other guidance or laws on taxation as of yet, only requiring businesses that receive Bitcoin and other digital assets to report that income in dollar denominations. HODLing without selling remains a tax-free strategy, but that determination is best offered by a tax advisor or attorney in your state.
Model policy that preempts county and local taxation and restrictive regulation, as we have outlined in our Smart Cryptocurrency Policies Act, would also be an interesting way to ensure broad state adoption of good Bitcoin policy.
Friends and Enemies
In my time advocating for consumer-friendly policies on Bitcoin at the federal and state level, as as as in Europe, it has been frustrating to see the hundreds of millions of dollars of “crypto” money spent advancing certain policy goals that would only benefit certain projects or exchanges rather than users of decentralized cryptocurrency protocols, like Bitcoin.
The millions spent by FTX and Sam Bankman-Fried to gain political influence, specifically with members of the US House and Senate Agriculture and Finance Committees — which respectively oversee the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) — are only the more recent lobbying dollars that come under scrutiny.
In 2022, over $22 million was spent in the nation’s capital by centralized coin companies, exchanges, crypto industry associations, and blockchain firms — and that only counts spending on lobbying contracts. It does not even consider the hundreds of millions more given to political campaigns, politically-connected foundations, PR agencies, and legal firms fighting various issues in court.
While this is an ordinary process — and one practiced by nearly every highly-regulated industry in the US — the fact remains that much of this has hinged on “classification” of digital assets and who the ensuing regulator would be, rather than how individual consumers and users of token projects or decentralized protocols like Bitcoin could benefit. The same is true at the state level.
On advocacy, we’ve also seen these same centralized coin companies deploy millions to support organizations like Greenpeace, which started a campaign to demand that the Bitcoin network “change the code” to switch from proof-of-work to proof-of-stake because of the carbon footprint of mining firms.
In all of these instances, the focus has been on elevating particular companies rather than consumers of those companies and consumers more broadly. This is actually where the focus and energy should be. The latter approach, coupled with education by organizations such as the Bitcoin Policy Institute, will end up helping Bitcoin adoption more than any lawsuit or agency letter.
On the other end, organizations such as Greenpeace, the Uniform Laws Commission, the Conference of State Bank Supervisors will use their resources to make Bitcoin adoption more difficult or to change it completely. Luckily, the protocol will continue to stand the test of time.
While various federal institutions bargain for regulatory oversight on Bitcoin and its crypto offspring, many states have led the way on empowering residents interested in owning, holding, and spending Bitcoin. Various regulatory measures, especially money transmitter licenses, do limit one’s ability to acquire Bitcoin from regulated entities, but thus far, greater education among state lawmakers has only led to better rules to allow the Bitcoin industry to grow.
While Bitcoin’s march through state policies is positive so far, there is ample reason to suspect that it could be upended at any time, whether or not the federal government enacts new laws.
The entrenched interests in state-level lobbying, banking, payment services, and environmental groups will continue to serve as a barrier, and they will likely have some wins, but this will only be achieved at a slow enough pace that will fail to keep up with the innovation and resourcefulness of Bitcoin entrepreneurs. Not to mention the protocol itself.
As states continue to evolve as “laboratories of democracy,” it is clear that those that remain open to the innovations offered by Satohi’s invention will end up better for it. I hope that message will continue to resonate.
Yaël Ossowski is a Visiting Fellow at the Bitcoin Policy Institute, deputy director at the Consumer Choice Center, and a co-host of the Fix the Money podcast.