By Keli‘i Akina
The good news is that Hawaii residents will be able to keep trading in cryptocurrency.
The bad news is that Hawaii’s policymakers haven’t given up the dream of regulating it into oblivion.
For years, Hawaii residents who wanted to buy or sell cryptocurrency were stymied by the state’s Money Transmitters Act, which demands that digital currency companies hold cash assets equal to their digital assets. For example, under this “double reserve” rule, a company with $1 billion in bitcoin and etherium must also have $1 billion in cash reserves.
This double-reserve requirement makes Hawaii one of the most unfriendly states for cryptocurrency, and in 2017 — the same year that the value of bitcoin climbed from $1,000 to $19,783 — exchanges such as Coinbase, Binance and Bitstamp simply stopped doing business here.
Ironically, during that same year, both the Hawaii Senate and House approved an exemption for cryptocurrency from the Money Transmitters Act, but that exemption was removed in conference committee and never passed. As a result, Hawaii residents were forced to watch rather than participate in the worldwide digital currency boom for the next couple of years.
Finally, in 2019, Gov. David Ige authorized the “Digital Currency Innovation Lab,” a temporary regulatory “sandbox” that allowed certain companies to do business in Hawaii without being subject to the double-reserve requirement.
Since the lab’s inception, 134,000 Hawaii customers have been able to complete more than $800 million in transactions involving cryptocurrency.
With the lab set to end this year, Hawaii policymakers during the latest legislative session faced a dilemma: If cryptocurrency is going to survive in Hawaii, it needs to be exempted from the double-reserve requirement. That small change in the law is all that is required.
But rather than passing a simple bill exempting digital currency from the double-reserve requirement, as contemplated in 2017, the Legislature instead considered a massive 90-page bill that set out an exhaustive program of regulation, licensure and oversight for cryptocurrency.
As the Grassroot Institute of Hawaii pointed out in extensive testimony on the licensing bill, the proposal was fraught with problems ranging from being too bank-centric to issues with privacy and data security.
Eventually, the licensing bill collapsed under its own weight, leaving policymakers scrambling for a solution that would not result in an abrupt end to cryptocurrency in Hawaii.
They ended up approving a resolution asking the state to administratively extend the Digital Currency Innovation Lab project for two years, and a bill to create a task force that will study the issue.
The big question since has been: “What will happen to the sandbox?”
Well, now we know, and cryptocurrency enthusiasts can breathe a sigh of relief: The state Division of Financial Affairs and Hawai‘i Technology and Development Corp. nine days ago extended the sandbox until June 30, 2024, so — for now — cryptocurrency in Hawaii lives.
We must realize, however, that this means there will be even more pressure on the Legislature to come up with a permanent answer. If our lawmakers continue to embrace heavy regulation and licensing schemes, this might be a short respite before cryptocurrency is killed off permanently in Hawaii.
Under the byzantine licensing scheme considered earlier this year, Hawaii would have gone from the worst state in the nation for cryptocurrency to … the worst state in the nation for cryptocurrency, though perhaps slightly better than before.
If only lawmakers would realize that the answer is right in front of them. The sandbox is light-touch regulation in action. All that it does is remove the double-reserve requirement for cryptocurrency.
If the sandbox works — and judging from the pleas for an extension, it clearly does — then why not learn from its example?
There is no need to create a burdensome regulatory scheme when we have proof that a simple, common sense approach is better and more effective.
The clock has been reset for cryptocurrency in Hawaii. Hopefully, policymakers will spend that time wisely and learn the value of light regulation. That way, we could make Hawaii one of the best states for cryptocurrency, rather than one of the worst.
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Keli‘i Akina is president and CEO of the Grassroot Institute of Hawaii.