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Lawmakers in states from Florida to California are drafting new legislation to regulate the crypto industry, seeking to fill the gaps left by Congress. 

Some states are eyeing stricter rules for the industry after the high-profile collapses including Terra-Luna and FTX, while others looking to clamp down on a potential central bank digital currency, or make it easier for decentralized autonomous organizations to incorporate. 

“As the saying goes, states are the laboratories for democracy. Increasingly, as comprehensive federal crypto legislation continues to prove elusive, states are stepping into the void,” said Alex Grieve, a vice president at the Washington, D.C. government affairs firm Tiger Hill Partners, via text. “The result is a mixed bag: some are overly antagonistic (as this has become politically popular in some instances); some are generally supportive of crypto and entrepreneurs building innovative companies in it.”

Lawmakers in Congress have introduced a laundry list of their own crypto regulation bills, but it’s not yet clear which bills might actually pass — or when.

In the meantime, states are working to write new laws after the crypto industry chaos of 2022, said Aaron Kaplan, the founder and co-CEO of Prometheum, a company that is creating market for compliant security tokens overseen and regulated by the Securities and Exchange Commission. 

“States are taking actions to try to protect their constituents, the investors who live there, the average people,” Kaplan said. “Instead of a democratization of finance … You saw a democratization of the scam. They were able to use the internet and the catchy branding and FOMO to basically get the retail public, as many people as they could, to participate. And as a result, when everything turned upside down those are the people who were most injured. And those are the people who the those legislators in those states represent. So there’s obviously going to be a reaction.”

Here are six state-level crypto bills to watch.

New York: Attorney general floats stricter crypto regulation

New York Attorney General Letitia James, a Democrat, unveiled legislation last week that could force crypto firms to repay customers who are victims of fraud the same way that banks do. 

“For too long, fraud in the cryptocurrency industry has caused investors to lose hundreds of billions, with low-income investors and people of color suffering the most,” James said on Twitter.

The bill would also “prevent people who create crypto assets from also owning crypto platforms,” James said, and stop crypto firms from borrowing or lending investor assets. The bill is still in its early stages: A group of Democratic state lawmakers praised the bill in a press release, but it wasn’t clear who might officially sponsor the legislation.

Florida: Lawmakers send CBDC ban to governor’s desk

The Florida state House and Senate passed a bill to ban central bank digital currencies last week. Republican Gov. Ron DeSantis, a potential presidential candidate, promoted the legislation earlier this year. The bill would update the state commercial code to ban CBDCs.

“Florida rejects the idea of a central bank digital currency,” DeSantis said at a recent press conference. “You could just get fined, and they’ll just take it right out of your digital currency, without any due process or anything like that. And so it gives the government a huge amount of power over your economic self sufficiency and independence.”

If the bill becomes law, it could face a court challenge thanks to a so-called supremacy clause in the U.S. Constitution. The clause establishes that federal law generally takes precedence over state law.

California: Lawmaker files state’s first-ever legal framework for DAOs

Matt Haney, a Democrat in the California state Assembly, recently filed a bill aimed at creating a legal framework for decentralized autonomous organizations, or DAOs. 

The legislation “creates a new legal framework to regulate, tax, and legitimize DAOs in California and sends a strong signal that California intends to stay at the forefront of the innovation economy,” according to a press release. 

The legislation would update California’s corporations code to include tech enabled by DAOs, blockchain networks and smart contract protocols. DAOs would be allowed to incorporate in California under the bill, and could pay taxes and operate within “proper legal parameters.”

Texas: Could require that exchanges show proof of reserves

A proof-of-reserves bill is on the move in the Texas state legislature. The Texas House passed GOP state Rep. Giovanni Capriglione’s bill last month, which would require digital asset exchanges to show proof of reserves.

Capriglione filed the bill in January after crypto behemoth FTX was accused of commingling customer funds and filed for bankruptcy protection. The legislation would also prohibit exchanges from mixing customer and corporate funds.

“Multiple companies have betrayed the public trust by commingling investor digital assets with corporate assets,” Capriglione said when he filed the bill at the beginning of the year. 

New Jersey: Eyeing crypto regulatory framework

New Jersey could put its own spin on New York’s BitLicense framework with a bill sponsored by a trio of Democratic state assembly members. 

“The act would radically change the regulatory landscape for cryptocurrency-focused businesses providing services to New Jersey residents,” lawyers at Lowenstein Sandler said in a bill analysis.

The legislation would grant crypto oversight and licensing to the New Jersey Bureau of Securities, which marks a “significant shift” in the way state government has regulated crypto and blockchain firms. The New Jersey Department of Banking Insurance has typically regulated the company as money transmitters.

Illinois: Bills could put strict new rules on crypto industry

The Illinois Department of Financial and Professional Regulation rolled out two bills in February that are “designed to protect Illinois residents from financial fraud and abuse and establish regulatory oversight of cryptocurrencies and the broader digital asset marketplace.” Two lawmakers, both Democrats, sponsored the legislation in the state House and Senate. 

The Fintech-Digital Asset Bill would establish regulations for digital asset firms and modernize regulations for money transmission in the state, including requiring exchanges to obtain a license from the IDFPR to operate in Illinois. Meanwhile, the Consumer Financial Protection Bill would give the department more authority to enforce regulations.

The bill could be particularly stringent for decentralized finance projects, according to Web3 accelerator Alliance DAO. 

“This bill would kill DeFi in the State of Illinois,” Alliance DAO said in a bill analysis earlier this year. “Not only would decentralized protocols not be able to qualify for licensure, it would be impossible for them to meet some of the licensure requirements.”

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The number of staked ether has climbed to 19.55 million, a new all-time high, as ETH staking deposits surpassed withdrawals.

Aragon’s governance crisis began to subside Wednesday after the DAO builder’s cofounder proposed buybacks, seemingly siding with a key talking point of activist investors.

Binance continues to be the dominant crypto derivatives trading platform.

Robinhood reported cryptocurrency trading revenues declined 30% during the first quarter of this year to $38 million. During the same quarter in 2022, the company reported trading revenues of $54 million.

The drop in revenues comes despite a rebound in the prices of bitcoin and ethereum in recent months.

In the fourth quarter of last year, Robinhood’s cryptocurrency transaction revenue slipped 24% to $39 million, far below the company’s bumper second quarter of 2021 when revenues for digital-asset trading hit $233 million.

Robinhood also reported that its crypto assets “under custody” dipped by 42% year-on-year to $12 billion.

 

Robinhood CEO Vlad Tenev, however, has been persistently bullish about the long-term prospects for crypto. In March, the company rolled out a digital wallet, which supports both the Polygon and Ethereum networks, to its iOS customers around the world. There is currently a waitlist for Robinhood’s Android wallet, which is supposed to become available later this year.

In the wake of the collapse of FTX, which caused many users to lose money, Robinhood has tried positioning itself as a safe and secure platform for people who want to trade crypto. At the end of last year Tenev said his company gained some market share after FTX’s demise.

(Updates with chart from earnings presentation, details on crypto under custody.)

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The plan to implement fees on all of Uniswap’s version two liquidity pools, and some of its version three pools, would funnel money to the protocol’s treasury and token holders.

A rare joint committee hearing in the U.S. House of Representatives highlighted strong consensus around the need for new rules for crypto and other digital assets, while also showcasing where bridges still need to be built between differing visions of what those policies should look like. 

Despite some clear hurdles toward new rules, industry advocates and crypto holders may be encouraged by statements showing a clear and urgent desire to act from senior members of both political parties. 

“The Securities and Exchange Commission needs to modify its rules for broker dealers and securities exchanges,” Rep. Patrick McHenry, the Republican chair of the House Financial Services Committee, said during that committee’s unusual joint hearing with the House Agriculture Committee.

The Commodity Futures Trading Commission also needs more authority to regulate non-security digital assets, like bitcoin, McHenry argued, adding that SEC disclosure rules should be modified for digital assets that fall under that regulator’s regime. 

Only through new laws passed by Congress and signed by President Joe Biden can those changes happen, continued McHenry, making his case for urgency to pass digital asset legislation this year. 

“Those things have to happen because the CFTC and the SEC alone can’t do this,” said McHenry. “Congress must act.” 

Agreement on need for crypto action

The top Democrat on the committee McHenry chairs, Rep. Maxine Waters, agreed that legislation should happen and noted the bipartisan cooperation between herself and McHenry in developing a comprehensive regulatory framework for stablecoins. 

“Treasury and our financial regulators also identified further gaps in oversight in the crypto markets, such as limits in the SEC’s authority to go after frauds like FTX, even when they operate just off the coast of Florida,” Waters said in an opening statement for Wednesday’s hearing. “These should be bipartisan concerns, and legislation to address them should have a path to the President’s desk.”

“I hope this Congress we can quickly return to developing legislation together,” she added. 

Though House Republicans don’t need Democratic votes to pass a bill out of their chamber, sign-off from Waters and other Democrats, especially the Treasury Department, could raise the odds of a bill passing the Democrat-controlled Senate significantly. 

Congress working toward compromise

McHenry, one of the most effective vote counters in the House, has indicated he wants to draft legislation that will become law, meaning working to compromise with the Biden administration and congressional Democrats, rather than crafting an ideologically pure bill that would die on the vine in the Senate after a show vote in the House. He named consumer protection as a top priority in passing new legislation, in an appeal to skeptical Democrats. 

Although Waters suggested cooperation in her opening statement, she made clear her parameters for what she would go along with: regulation for stablecoins, increasing the SEC’s ability to go after overseas firms, and giving the CFTC more power over spot markets for digital commodities like bitcoin. 

But she made clear that re-drawing lines of jurisdiction over a majority of the tokens created since the 2017 initial coin offering bubble isn’t on the table for her. 

“There’s a broader effort underfoot to establish an entirely new market structure for cryptocurrencies and their issuers. I think that we should first hit pause and consider whether our security and commodity market structure is sufficient to address these issues,” the California Democrat said. 

Years-old questions still need answering

Despite support for congressional action, including from the Biden administration, longstanding questions over when a token or coin no longer fits neatly into existing financial asset definitions remain a central problem. 

“I think that inflection point, it’s a challenging one,” said Matthew Kulkin, a former CFTC official and current partner at WilmerHale, which has digital asset industry clients. “It’s sort of easy to draw out the two ends of the spectrum in terms of the token being offered to raise capital, versus something that’s highly commoditized and hedged in the derivative markets, but that point in-between is a challenging one to try to draw a bright line.”

Tim Massad, a former chair of the CFTC, argued that even if government defines a digital asset as a commodity it could still also fall under securities law, or vice versa, as happens with financial derivatives. Massad pitched a self-regulatory organization, similar to what exists in traditional financial markets, on top of existing government regulation. 

New York Stock Exchange Chief Operating Office Michael Blaugrund argued that similar rules governing his stock exchange should apply to firms facilitating crypto trades. That notion received some pushback from crypto industry panelists, who fear that exchanges would have to choose between listing digital commodities like bitcoin or digital securities, as markets regulators see the vast majority of tokens, if they were to register as national securities exchanges. 

The ideas put forward by both witnesses and committee members, however, highlighted areas of potential overlap to create new rules for crypto and stablecoins in the U.S. Whether industry and digital asset owners will embrace those new rules or want to be left to their own devices figures to be another ongoing question as debate continues. 

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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The largest of the claims includes a $20.4 billion claim against Alameda Research LLC, which details nearly $20 billion in unpaid partnership taxes.