The Aloha State has suddenly relented in its years-long effort to regulate cryptocurrencies.

Remember crypto?

The digital assets space — from Bitcoin at the top to thousands of short-lived, pump-and-dump meme coins at the bottom — has fallen well out of favor since the 2022 collapse of FTX and subsequent crash.

Even so, Hawaii law, and how it was interpreted by local financial regulators, never fully opened the door to it. And back in 2017, when Bitcoin skyrocketed in value to $20,000 from $1,000, many Hawaii residents felt they were missing out on a major opportunity.

It all stemmed from the classification of cryptocurrency exchanges — companies like Coinbase, Kraken and the infamous FTX — as “money exchangers” like Western Union. Under that umbrella, these firms had to retain cash reserves equivalent to what was being managed on behalf of customers. This made sense for a company that moved “real” money but was impossible for a platform that might hold billions in Bitcoin, Ethereum, Solana and other digital coins.

This prompted most exchanges to drop their Hawaii customers and block Hawaii residents from signing up. Coinbase did so publicly, slagging Hawaii policymakers in the process.

Of course, crypto is ostensibly decentralized and bows to no government. So technically proficient investors could still get their hands on crypto. But your typical local resident couldn’t, making it effectively illegal.

The state did push hard to create a pathway for exchanges to operate here, though, albeit still under strict controls.

In 2020 the state Division of Financial Industries joined forces with the Hawaii Technology Development Corp. to launch the Digital Currency Innovation Lab. This set up a regulatory sandbox to let a vetted set of exchanges serve Hawaii customers, in exchange for visibility into their Hawaii operations to evaluate how everything worked. The DCIL found substantial interest among Hawaii residents, despite the hoops they had to jump through and the temporary nature of the pilot. In one quarter, 27,000 new customer accounts were opened in Hawaii, and participating exchanges reported $324 million in transactions across more than 60 different cryptocurrencies.

Meanwhile, a number of legislators took a stab at drafting bills that would change Hawaii’s crypto stance. Some aimed to remove all regulation. Others, including the official administration bill, proposed a special license for digital currency.

None of the bills made it to the governor’s desk. And while the DFI used the pending expiration of the DCIL pilot as a reason to pass a new law, the program was simply extended another two years when the bills failed. And then for another two years.

During that time, of course, crypto crashed, and only in late 2023 showed signs of recovery. Bitcoin has wobbled its way from $20,000 about a year ago to $40,000 now. The crash certainly gave ammunition to those who would see crypto banned entirely.

Instead, Gov. Josh Green’s office quietly announced Jan. 25 that the DCIL was shutting down and — more important — that crypto would simply be left unregulated at the state level.

The answer to “how to regulate crypto,” after so much study and debate, turned out to be “not at all.”

Yes, buyer beware, do your own research and certainly steer clear if you have doubts. But provided you stay within federal laws and financial market rules, Hawaii residents are now free to buy, sell or HODL crypto.

It’s unclear how successful the DCIL ultimately was, and why the call was made to drop the whole thing. The DFI very kindly declined to comment.

But it’s worth noting that the announcement came the week after the U.S. Securities and Exchange Commission approved the sale of bitcoin spot ETF — a conventional investment vehicle that allows people to ride along with the world’s largest cryptocurrency without owning it directly.

If big banks are playing in the space, it’s probably legitimate enough to give it a pass.

While local fans and would-be investors cheered, though, we still have to wait for the major exchanges to get back on board and remove the blocks they put in place to keep Hawaii residents out.

The governor’s announcement was so low-key, nobody noticed for nearly a week. It might take longer for word to get to Coinbase.

Ryan Kawailani Ozawa publishes Hawaii Bulletin, an email newsletter covering local tech and innovation. Read and subscribe at HawaiiBulletin.com.