The state of Hawaii was infamously hostile to cryptocurrencies. That might have been recently altered.
Crypto has gained legal status in Hawaii.
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Hawaii had long been known as being among the least welcoming states in the union to digital currencies, second only to New York, a state that possessed a Bitlicense that Hawaii was trying to embrace. However, the state administration disclosed that “digital currency enterprises will no longer require a Hawaii-issued money transmitter license to conduct business within the state” in a news release that was surreptitiously uploaded by the governor’s office last week.
“The companies will be able to continue transaction activity as an unregulated business,” the announcement continued. “However, such companies will be responsible for complying with any applicable federal licensing or registration requirements.”
Going forward, Hawaii’s regulatory posture has rapidly changed from stringent to “crypto friendly” for the unforeseeable future.
License or not to license?
The policy shift follows years of debate, research, and disastrous failures of attempted reforms in the state legislature. The Division of Financial Institutions (DFI) of the Hawaii Department of Commerce and Consumer Affairs has long argued that cryptocurrency, and specifically cryptocurrency exchanges, are subject to its jurisdiction. This jurisdiction is centered on designating cryptocurrency exchanges such as Coinbase and Binance as money transmitters, placing them in the same regulatory category as Western Union.
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In Hawaii, money transmitters must meet stringent reserve requirements. This meant that cryptocurrency exchanges had to maintain cash reserves equal to their digital holdings. While such a regulation would make catastrophic failures like FTX unlikely, it made doing business on the islands unfeasible.
Most large exchanges simply refused to serve consumers in Hawaii.
To break the deadlock, the DFI partnered with the Hawaii Technology Development Corporation (HTDC) to create a Digital Currency Innovation Lab (DCIL). The pilot initiative established a regulatory sandbox in which exchanges may temporarily service Hawaii consumers without fear of regulatory action in exchange for data on the transactions they eventually conducted in the state.
More than 30 digital currency startups applied, 16 were admitted to the program, and twelve were eventually selected for the pilot program’s launch in 2020. In the meantime, the state began designing a license expressly for cryptocurrency businesses.
Even within the regulatory sandbox, Hawaii managed to register a reasonable level of activity on participating exchanges, servicing as many as 146,000 users and trading as much as $284 million in one quarter.
Policymaker’s conundrum
Hawaii people and authorities were eager to embrace cryptocurrency’s seemingly rapid growth and economic possibilities. This was 2000, when Bitcoin’s price was approaching $10,000 but had not yet reached its $64,000 peak (or its eventual crash), and a number of proposals were proposed in the state assembly to remove or eliminate barriers to financial blockchains.
The DFI wrote the sole measure that passed both the state Senate and House chambers. However, testimony was split.
While most people felt that some regulation was necessary, opponents said the planned cryptocurrency license, modeled after New York’s Bitlicense, was overly burdensome. The law died before reaching the governor’s desk, as did bills that would have prolonged the DCIL pilot. In the aftermath, the state encouraged consumers of the pilot crypto exchanges to sell their holdings.
No consensus remains
The state ended up unilaterally extending the pilot before it terminated in 2020, adding two more years. The majority of the participating companies stayed in the program. However, the following parliamentary session, which saw multiple proposals submitted in the digital currency field, failed to create a clear framework for allowing but regulating cryptocurrency.
Despite the disastrous year cryptocurrency had in 2022, the pilot was extended for another two years, to June of this year. Last month, the most recent session of the Hawaii state legislature convened with no cryptocurrency measures on the agenda.
Now that DFI and HTDC have announced the end of the pilot, they confirm that the state of Hawaii will delegate responsibility for managing the cryptocurrency space to the federal government. “The DCIL’s judgment reflects a commitment to balancing innovation and regulatory accountability,” DFI commissioner Iris Ikeda said in a statement.
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