Hawaii has the highest barriers in the nation for companies that exchange cryptocurrency, and those restrictions could worsen if lawmakers don’t hurry and open the door for this potentially prosperous new realm of business.
Bitcoin, the world’s first “crypto” currency, was invented in 2009 by an unknown person or group of people using the name Satoshi Nakamoto, and has allowed people to store, buy and trade the digital currency through designated software.
Since then, thousands of other cryptocurrencies have sprung to life, such as Ethereum, Litecoin and Monero. Many of these cryptocurrency companies have increased in value substantially, with the entire cryptocurrency market valued at $2.2 trillion, That is slightly more than Google at $1.9 trillion, and a bit behind Microsoft at $2.5 trillion.
In Hawaii, cryptocurrency companies fall under Hawaii’s money- transmitter law, which since 2014 has required they hold cash assets equal to the amount of their virtual assets. For example, if a company holds $1 billion worth of cryptocurrencies, it would also need to have an additional $1 billion in cash as reserves.
No other state has this specific requirement for cryptocurrency companies — which is why most of these companies have either exited or avoided Hawaii.
The top two cryptocurrency exchanges — Coinbase and Binance — do not operate in Hawaii. Neither does Kucoin, Strike, eToro, Bittrex, Bitstamp, Robinhood Crypto nor PayPal’s “Cryptocurrency Hub.”
In March 2019, the governor authorized the creation of a temporary “sandbox” known as the “Digital Currency Innovation Lab,” which has allowed cryptocurrency companies to operate within the state without the need to meet the double reserve requirement of the money- transmitter law.
Only 15 cryptocurrency companies have been allowed to play in the sandbox, which so far has allowed 61,000 Hawaii customers to access virtual currency totalling more than $611 million in transactions.
Meanwhile, since the program began, Bitcoin’s value has increased by 370%, from $10,000 in 2019 to $47,000 by the end of 2021.
Looking ahead, the legal authority for the sandbox expires Dec. 30, 2022, which means lawmakers who wish to avoid shutting down this market entirely must pass some kind of enabling legislation during the 2022 legislative session.
The simplest way to allow cryptocurrency companies to operate in Hawaii would be to exempt them from the money-transmitter law.
Twenty states do not require a money-transmitter license for cryptocurrency transactions: Arizona, Arkansas, California, Colorado, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, North Dakota, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia and Wisconsin.
Another quick fix would be to add cryptocurrency as a “permissible investment” in the money- transmitter law, thereby nixing the double-reserve requirement. For example, Wyoming in 2014 exempted virtual currency from its double-reserve requirement and has since become the “most crypto-friendly jurisdiction in the United States,” according to MarketWatch.
A more complicated avenue would be to create a new licensing requirement for virtual-currency companies that also would bypass the double-reserve requirement. This could potentially create a needless administrative burden, but nonetheless allow for a more vibrant cryptocurrency market, so long as the regulations were not too stringent.
The Hawaii Division of Financial Institutions is actually introducing such a bill, aimed at lowering the hurdles for cryptocurrency companies in Hawaii. But lawmakers should be careful not to stack on too many requirements that would defeat the bill’s purpose.
The point is to ease Hawaii’s worst-in-the-nation restrictions on virtual currency and allow isles residents greater access to this emerging market. It would be one more way we could diversify our economy and help local families find new ways to generate wealth and thrive.
Joe Kent is executive vice president of the Grassroot Institute of Hawaii.
