State needs more time to regulate cryptocurrency merchants in Hawaii

Buying and selling often unstable cryptocurrencies through companies legally in Hawaii will be limited for another two years, after state lawmakers failed to pass legislation aimed at licensing and regulating industry operators.

Two state agencies recently announced that they will extend a 2-year-old digital currency transaction pilot program, which was scheduled to close June 30, for another two years.

Extending the Digital Currency Innovation Lab maintains a limit on how many cryptocurrency transmission companies can serve Hawaii consumers as part of an effort to monitor operations and gain insight on how to regulate the industry locally.

The move comes amid recent global cryptocurrency industry turmoil that has included a freeze on customer withdrawals by the depository and lending firm Celsius, a $60 billion wipeout of the “stable” TerraUSD digital currency, and a plunge in value for dominant virtual currency Bitcoin.

Over the past two years, 16 companies participated in Hawaii’s program, which is described as a “test bed for innovation in the digital currency space” and requires participants to report transaction data and customer complaints to state officials.

The Division of Financial Institutions, part of the state Department of Commerce and Consumer Affairs, operates the program with the Hawaii Technology Development Corp.

HTDC reported that about 134,000 Hawaii consumers transacted $896 million in cryptocurrencies under the program through the end of last year, and that 11 complaints were received.

Companies participating include exchanges, brokerage firms, payment platforms and ATM networks.

Until the program began, cryptocurrency merchants had effectively been blocked in Hawaii after DFI determined in 2016 that a state law governing money transfer businesses applies to virtual currency dealers.

This interpretation imposed licensing and asset reserve requirements that were too burdensome, and according to one industry supporter made Hawaii the only state where consumers couldn’t trade virtual currency legally.

Establishing the Digital Currency Innovation Lab allowed select companies to operate while giving state officials insight to craft regulations that would open up the marketplace and protect consumers from unfair practices.

However, draft legislation this year derived from the pilot program experience drew industry concerns and stalled in a legislative conference committee after the Senate and House of Representatives passed different versions of the measure, House Bill 2108.

Lawmakers instead passed Senate Bill 2695, which if enacted would form a 15-member task force to study industry issues and present ideas and recommendations for licensing and regulation to the Legislature shortly before the start of the 2024 legislative session.

Panel members would mainly be a mix of industry representatives and state regulators along with a scholar, two lawmakers, a banking industry official and a member of the general public appointed by the governor.

Sen. Bennette Misalucha, lead introducer of the task force bill, said in a statement that such a panel would provide a collaborative approach to producing appropriate regulatory framework so the industry can continue growing in Hawaii.

“We are convinced about the bright future of crypto commerce even as a possible economic diversification strategy for the state,” she said.

Misalucha (D, Pearl Harbor­-Pearl City-Aiea) also supports extending the pilot program.

“Many of our residents have shared concerns over the past month on the future of digital currencies and what would happen to all of their investments made, so this decision will allow us to continue the conversation on how to best regulate this growing industry and reduce consumer harm,” she said.

Rep. Aaron Ling Johanson, chair of the House Committee on Consumer Protection and Commerce, said in a statement that the program’s extension will further explore how to effectively balance consumer choice and financial innovation with consumer protection.

“This extension gives Hawaii the needed time to arrive at an ideal mutually agreeable solution,” said Johanson (D, Fort Shafter-Moanalua Gardens- Aliamanu).

Iris Ikeda, state commissioner of financial institutions, described the effort to extend the program as challenging but critical.

“We are relieved for the opportunity to extend the DCIL for participating companies and consumers,” she said in a statement. “A number of puzzle pieces had to fit together in order to make the (extension) happen, but I am glad we are able to pull it off.”

Len Higashi, HTDC’s acting executive director, said in a statement that the program had economic benefits and by continuing will provide opportunities to build on progress achieved over the past two years.

Initially, 12 companies were selected from 19 applicants to participate in the program. Later, four more were added and one withdrew.

The existing 15 participants are Apex Crypto, bitFlyer USA, BitStop, BlockFi Trading, CEX.IO, Cloud Nalu, Coinme, ErisX, Flexa Network, Gemini Trust Co., Novi Financial, Provenance Technologies Inc., River Financial, SoFi Digital Assets LLC and Uphold HQ Inc.

Robinhood was the firm that dropped out.

The state’s program does not insure against customer financial losses, and a disclosure is made that customers could lose all the money they invest.

Companies wanting to extend their participation in the program had until Friday to notify state officials. Those decisions were not publicly available Friday. Companies opting to cease participation have until the end of this year to wind down their business with Hawaii consumers.

The two state agencies operating the program als applications for new participants, though the timetable for that has not yet been determined.

For more information

>> Learn about Hawaii’s Digital Currency Innovation Lab and its programs focused on technology, innovation and manufacturing industries at htdc.org/programs