States Caught Up in the Cryptocurrency Craze

Virtual currencies have made headlines in the last few years as speculative markets in the currencies, also referred to “digital currencies” or “cryptocurrencies,” have skyrocketed and plunged. Bitcoin is the most famous of these cryptocurrencies, but public policymakers have been slow to understand the full implications of the cryptocurrency craze, and what role, if any, public policy should take.

Virtual currencies have been around since at least the 1990s, but didn't break into the mainstream until 2009, when an anonymous programmer developed bitcoin as a peer-to-peer electronic cash system. Bitcoin has no centralized authority managing the currency and is created through virtual mining, where computers are awarded coins for performing progressively complex algorithms. Once a user has coins, they can be transacted, but each transaction is recorded in a virtual ledger known as “blockchain.” Bitcoins can be traded on cryptocurrency exchanges. Last December, speculation inflated the value of one bitcoin to a high of $19,783. Since then, the bubble has deflated a bit, and a coin is now worth half of what it was during its peak.

With more people mining, trading, and using bitcoin as legal tender, states have begun to wrestle with new public policy issues arising from the currency. States have introduced legislation touching upon many issues related to virtual currencies, including regulation, taxation, and its use as a form of payment. Here is a look at some of the state legislation lawmakers have introduced in the last year.

Regulating virtual currency businesses

Some lawmakers have concluded that virtual currency businesses are here to stay, but a regulatory framework needs to be in place for the currency to flourish. Bills in Connecticut (CT HB 5496), Hawaii (HI SB 2129), and Nebraska (NE LB 987) would adopt a model bill proposed by the National Conference of State Legislatures (NCSL) called the Regulation of Virtual Currency Businesses Act. These bills would regulate the virtual-currency business and provide for registration for virtual-currency businesses that handle more than $5,000 per year, with tiers of registration depending on business volume.

New York has already set up its own “BitLicense” regulatory framework that has been subject to much criticism. The law, enacted in 2015, regulates virtual currency exchanges and “wallet” services, requiring a $5,000 fee. The framework has caused some confusion and been cited as the reason a few virtual currency businesses left the state. This year, a proposed bill (NY AB 9899) would create even more regulation, requiring regular audits of “any person, corporation, partnership or other entity that conducts cryptocurrency business activity.”

Lawmakers have introduced legislation in California (CA AB1123) that would require companies that store, transmit, exchange, or issue digital currencies to enroll in a “Digital Currency Business Enrollment Program” with a $5,000 fee. The measure would exempt banks, licensed money transmitters, and merchants using virtual currencies as a means of payment. Lawmakers scrapped a provision from an earlier version of the bill that required licensure similar to the New York law.

New Jersey lawmakers have proposed a regulatory framework (NJ AB 1906) for virtual currency businesses that would require regulation, security measures, and consumer protections. The bill would allow payment of virtual currencies for state taxes and would make such businesses eligible for tax incentive programs reserved for state businesses.

Legislation in Vermont (VT SB 269) would regulate blockchain, cryptocurrency, and financial technology. The Vermont bill would also allow the formation of digital currency limited liability companies, while also levying a tax of $0.01 per transaction on virtual currency businesses.

Other states have sought to regulate virtual currency business through existing laws regulating money transmitters. Washington state passed a law last year (WA SB 5031) that subjects virtual currency businesses to money transmitter laws, requiring the same licensure, regulation, and bonding requirements. Colorado (CO HB 1220) and Hawaii (HI SB 2225) proposed a similar bill this year. However, New Hampshire (NH HB 436) and Wyoming (WY HB 19) passed laws explicitly stating that virtual currency businesses are exempt from money transmitter laws.

Other legislation on virtual currencies

Of course, for many states, virtual currency's most attractive benefit is its potential as a source of new tax revenues. In addition to the New Jersey bill mentioned above, Connecticut lawmakers have proposed legislation (CT HB 5001) to levy a transaction tax on virtual currencies of a yet-to-be-determined amount. The IRS's current position is that virtual currencies are property and subject to federal property taxes, but virtual currency accepted as payment for goods and services is subject to income taxes. A new law in Wyoming (WY SF 111) would exempt virtual currencies from state property tax laws.

Some states have also embraced virtual currency to pay for state services. Bills in Arizona (AZ SB 1091), Georgia (GA SB 464), Illinois (IL HB 5335), New Jersey (NJ AB 1906), and New York (NY AB 9782) would allow state agencies to accept virtual currency as payment. A Virginia bill (VA H.B. 687) would allow political campaigns to accept contributions in virtual currencies.

Concerns about virtual currencies being used in money laundering prompted Florida to pass a bill (FL HB 1379) in 2017 prohibiting the practice. Lawmakers in Nebraska introduced a similar bill this year (NE LB 691). The speculative markets have also caused concerns about investments in the currency, with Hawaii (HI SB 2853) and Tennessee (TN SB 2508) proposing banning certain investments in virtual currencies. Many states are still uncertain what to do about virtual currencies, so Connecticut, Maryland, New York, North Dakota, and Virginia have proposed setting up task forces or study commissions on the subject.

This is likely just the beginning of an emerging field of public policy. Bitcoin may or may not be here to stay, but there is certainly an appetite for virtual currencies. How states deal with virtual currency businesses will be subject to policy debates for the next few years.