The path toward decentralization is paved with good intentions. Scratch that – it's paved with well-intended lawmakers who seek to uniformly regulate the ever-evolving blockchain and cryptocurrency industry but, in doing so, may unintentionally stifle its growth and introduce layers of centralization.
A Tuesday, March 12, hearing in the Nevada Senate's Committee on Judiciary exemplifies this sentiment. State Senator James Ohrenschall (D) presented SB195, a bill to enact the Uniform Regulation of Virtual-Currency Businesses Act and the Uniform Supplemental Commercial Law.
This two-pronged proposal represents the Uniform Law Commission's (ULC) attempt to consistently regulate "virtual-currency business activity" across the United States. Such activity, according to the ULC, ranges from the exchange, transfer, and storage of virtual currencies to holding electronic precious metals. Under SB195, businesses engaging in these activities would need to register with Nevada's Department of Business and Industry, which would ensure that the state's registrants adhered to the act's requirements.
Also introduced in the legislatures of California, Oklahoma, and Hawaii, the proposal was ultimately drafted to protect consumers. The ULC believes the act would "afford protections for custodial customers" of virtual currencies while also providing a flexible licensing scheme for registrants. Indeed, the commission wants to make these "protections similar to those of customers of regulated banks, broker-dealers, and traditional money transmitters."
Multiple stakeholders in Nevada, however, do not see SB195 this way. Elisa Cafferata, executive director of the Nevada Technology Association, testified in opposition to the bill. During her testimony, she asserted that SB195 was premature, adding that it was too early to adopt a uniform virtual currency law. She also noted that the requirements set forth in the bill would hinder the progress of the state's blockchain companies.
Matt Digesti, vice president of government affairs and strategic initiatives at Blockchains LLC, testified in opposition as well. (Disclosure: ETHNews is a division of Blockchains Management Inc., which is the parent company of Blockchains LLC.) Besides echoing Cafferata's sentiment that the bill was premature, Digesti said the lack of Nevada stakeholder involvement during the bill's drafting was problematic; no blockchain- or cryptocurrency-related startups were asked to provide input regarding SB195. Further, he was concerned with the bill's potential reach, noting that the proposed act's policies might extend to any digital token.
Other opponents at Tuesday's hearing included Figure Technologies, Hosho, and Filament, three blockchain companies operating in Nevada. Wendy Stolyarov, director of government affairs at Filament, submitted written testimony in opposition to the bill.
A few groups testified in neutral to SB195. A representative from the Nevada Credit Union, for example, said the financial institution was concerned with whether it would fall under SB195's registration exemptions. As such, the credit union is working with Senator Ohrenschall to ensure the bill's language works in its favor.
Looking beyond the reservations of Nevada stakeholders, though, the ULC's proposed act has caused a stir among the broader US crypto community. Andrea Tinianow, chief innovation officer for US management consulting firm Global Kompass Strategies, said the act's application of securities laws under Article 8 of the Uniform Commercial Code (UCC) to virtual currency business activities seemed strange. She continued:"This classification of virtual currency within the existing securities intermediary framework also is curious because most forms of virtual currency likely are not securities. Why should they be treated like securities then?"
Tinianow added that Article 8 of the UCC "sets forth a regime of indirect ownership," which, when applied to virtual currencies, could mean that only those "owned via securities intermediaries in omnibus accounts [would] likely [be] eligible to participate in the UCC statutory framework." This eligibility limitation, she believes, ignores cryptocurrency's nature of direct ownership.
In fact, the Wyoming Legislature's Blockchain Task Force declined the ULC's request that the state enact the uniform virtual currency act over the legislature's own bill, SF125. The task force's response letter to the ULC cited an "indirect ownership regime" as one of the reasons why it believed the proposed act to be "inappropriate." SF125 was instead signed into state law by Governor Mark Gordon a couple of weeks ago.
Despite the controversy over SB195 this past Tuesday, the Nevada Senate's Committee on Revenue and Economic Development heard a blockchain-friendly bill, SB164, later the same day. Sponsored by Senator Ben Kieckhefer (R), the bill seeks to clarify that virtual currencies are intangible personal property and are thus exempt from Nevada property taxation. Like Kieckhefer's two other blockchain-related bills, SB162 and SB163, which were introduced earlier in Nevada's legislative session, SB164 is meant more as enabling legislation to encourage the growth of blockchain companies in the state.