Bitcoin has been gradually shedding its reputation as a fringe investment, as its value zig-zags into the stratosphere, and it becomes accepted by businesses such as Expedia and Microsoft. But while financiers have been paying more and more attention to “cryptocurrencies,” so have state governments.
On July 23, Washington became the latest state to regulate the digital currency market, ostensibly to protect consumers. The bill establishing the regulations, passed by the state legislature in April, has prompted both scorn and praise within the cryptocurrency community, and has led some Bitcoin-related businesses to shut down their Washington operations rather than comply.
The bill’s primary targets are digital exchanges, which allow customers to trade and deposit their Bitcoin, Ethereum, and other currencies. Every exchange with Washington customers must now operate under the state’s money transmitter laws, which have traditionally applied to businesses like Western Union. That includes an obligation to be licensed by the state’s Department of Financial Institutions, and to maintain virtual currency reserves equal to the funds they retain on behalf of customers.
In addition, exchanges must agree to third-party security audits of their systems, and post surety bonds of between $10,000 and $550,000, which work as security deposits in the event customers deserve compensation from an exchange.
“We had these old regulations for money transmitters in the state, and they were clearly meant for older business models,” said Charles Clark, who helped craft the new laws at the Department of Financial Institutions. “The virtual currency industry had issue with that. This gives them some clarification and guidance.”
Shortly after the regulations were signed into law, exchanges such as Bitfinex, Bitstamp, Kraken, and Poloniex pulled out of the state, and informed Washington customers they needed to take their business elsewhere. In a statement, Kraken said that “while revenue continues to grow, operating costs have become prohibitive, primarily due to the high cost of continuing to meet the regulatory compliance requirements imposed by the state. Unfortunately it has become impractical for us to operate in Washington and we must discontinue service for all residents.”
Others have taken to Reddit to respond to the regulations, accusing Washington of having a “cryptohating legislature” and being “a very sorry state for any forward-thinking, technology enthusiast individual to reside in.”
Clark said he’s followed the online conversation and the news of exchange closures. He downplayed the fallout, noting that Washington issued a regulatory guidance paper on virtual currencies in 2014, and that new regulations are similar to those found in states like New York or North Carolina.
“This legislation shouldn’t have come as a surprise at all,” said Clark.
Washington’s new policies were formed through discussions with a range of cryptocurrency industry groups, licensees, trade associations, the Chamber of Digital Commerce, and companies involved in the space, Clark said.
One of the companies participating in these discussions was Coinme, which operates Bitcoin ATMs in Washington, provides wallet services and facilitates the exchange of virtual currencies in 18 states and internationally. Coinme CEO Neil Bergquist praised Washington state’s approach, calling Washington “a leader among the 50 states” on regulating virtual currencies, and “early on the draw” in providing guidance to companies. He predicted the exchanges leaving the state wouldn’t make too many waves.
“As long as there are still some (exchanges) standing at the end of it, I think it will have a somewhat minimal impact on consumers,” said Bergquist, who pointed out that the largest exchange, Coinbase, is still operating in Washington.
The cryptocurrency industry has been a boon to the state economy, Bergquist said, creating high-paying jobs and a number of new millionaires in recent years. But even as it gains in popularity, it’s still confusing and arcane to many government officials. Lawmakers must recognize the gaps in their knowledge, he said, or risk squashing innovation.
“There are some states whose approach is unfortunate, and some are doing a better job because they actually do the work to understand it,” Bergquist said. “It’s important that regulators, entrepreneurs, and customers are all part of that dialogue.”
Where some governments have addressed the burgeoning cryptocurrency industry with regulations, others have taken a different approach. This past June, for example, Montana awarded a $416,000 grant to a Bitcoin mining firm, and Nevada passed a law specifically prohibiting Bitcoin transactions from being taxed.