Bitcoin was once referred to as the “wild west” of finance. The benefit of privacy that makes cryptocurrencies popular with free-market libertarians, also attracts a criminal element. The federal government has made strides using anti-money laundering laws to shut down shady exchanges and bring criminal charges against their operators. These efforts will help stabilize and boost the legitimate market for virtual currencies. On the other hand, the IRS’s heavy-handed tax treatment is impeding their widespread adoption, which, along with their underlying blockchain technology will bring transformational benefits in health care, intellectual property rights, and banking. While federal regulators and lawmakers are otherwise still trying to figure out how to approach cryptocurrencies, states like Nevada, Illinois, and Delaware are moving ahead with forward-thinking legislation. New York, on the other hand, is setting up roadblocks.
In New York, current legislation requires companies that take place in virtual currency activities to register for a ‘BitLicense’. This license allows a business to receive or transmit virtual currency, buy and sell virtual currency as a customer business, and participate in other related activities. This misguided effort to attempt to crack down on virtual currency crime by forcing companies to adhere to strict guidelines has driven business out of the state. This intrusive, 30 page application is also extremely difficult to obtain. Since its introduction, only three such licenses have been awarded.
Some degree of regulation is indeed necessary in order to prevent disasters like Mt. Gox and to protect investors and consumers. However, tech experts agree that a great deal of the New York legislation goes too far. For example, state law requires the identity of every party involved in a transaction be recorded. Also, this law requires businesses that hold a BitLicense to refuse to complete any transaction with an individual whose identity is unclear. In this way, businesses would be forced to spend extra time monitoring transactions and could be forced to reject payments from legitimate customers, which is a clear violation of an individual’s privacy. BitLicense regulations apply to New York residents when they are out of state or even abroad, which is a clear violation of the interstate commerce clause.
Lawmakers in other states, realizing the potential of these emerging technologies, are moving forward with legislation to foster their use and adoption. Nevada, Illinois, and Delaware should all serve as templates for the future encouragement of blockchain technology nationwide.
The Nevada state legislature, through Senate Bill 398, ensured that Bitcoin transactions will not be subject to taxation within the state. Rather than forcing innovative startups out, Nevada has provided these companies with incentive to set up shop in the state. Blocking taxation on blockchain transactions not only helps companies and consumers save money, but it drastically reduces all other burdens associated with extra taxes.
Illinois has also shown great promise and faith in the development of blockchain and has launched the Illinois Blockchain Initiative to promote its development and use. This pilot program uses blockchain to transfer property titles, which, because of the built-in security of a distributed ledger system from manipulation, protects land titles and reduces fraud possibilities. Additionally, the state has plans to employ blockchain to hold medical records and maintain health provider registries.
Delaware also plans to make blockchain a priority. The state has launched the Delaware Blockchain Initiative and vows to create a state government office that will act and promote the technology, change the corporate law to permit blockchain-based shares, and to avoid any new regulatory burdens on businesses employing blockchain. Currently the state has a bill in progress that would allow stock registries and other business records to be held in a blockchain, which would lead to efficiency in validating trades.
The beauty of cryptocurrency is its convenience. Bitcoin has the potential to be a global currency, and blockchain has the ability to create a safe and efficient way to carry out these transactions. In order to increase the legitimacy of blockchain technologies, lawmakers must continue to recognize the legality of smart contracts and minimize its regulation. Implementing blockchain-friendly legislation, decreasing licensing requirements, and eliminating taxation of blockchain use are all ways to promote healthy and continuous economic growth into the future.