In September of this year, certain congressmen expressed their intention to preempt state regulation of virtual currency regulation. Rep. Darren Soto (D-Fla.) expressed a need for “partial federal preemption” of state laws and Rep. Warren Davidson (R-Ohio) plans to introduce a bill that may seek federal preemption of state licensing and oversight requirements of virtual currency exchanges.
We have seen state push-back on attempts by the federal government to regulate parts of the FinTech space, in addition to other areas of regulation. For example, in March 2018, a group of 32 attorneys general wrote a bipartisan letter to the U.S. House of Representatives expressing concern that a draft bill places consumer reporting agencies and financial institutions out of the reach of state enforcement (please see Reed Smith blog post here). Does the federal government have enough momentum to continue its advancement of regulating virtual currency and digital tokens?
State Action in Regulating Virtual Currency
Several states have established or begun to develop regulatory frameworks concerning cryptocurrency, virtual currency exchanges, and/or FinTech more broadly. New York State has been at the forefront of virtual currency regulation since 2014. In July 2014, New York became the first state to propose a comprehensive regulatory regime governing virtual currency business activities. On June 3, 2015, New York became the first state to implement a comprehensive virtual currency regulatory regime, known as “BitLicense.” Other states, such as California, New Jersey, North Dakota, Pennsylvania, and Utah have taken up efforts to regulate virtual currency and are at varying stages of development. Moreover, on September 15, 2015, the Conference of State Bank Supervisors (“CSBS”), a group devoted to supporting state regulators in advancing the system of state financial supervision, issued a model licensing regime as a guide to states in regulating virtual currency.
State Response to Federal Attempts to Regulate Virtual Currency
Recent actions taken by federal agencies have been met with opposition by state regulators. In December 2016, the OCC announced it would consider granting FinTech firms special purpose national bank charters. These charters would be aimed more broadly at the FinTech industry and not only at virtual currency firms. State regulators have opposed the framework, arguing that states are the best regulators of non-banking financial services companies and best ensure consumer protection.
The New York Department of Financial Services (“NYDFS”) issued a critical letter to the OCC opposing the proposed special purpose charter, arguing that the “imposition of an entirely new federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape will invite serious risk of regulatory confusion and uncertainty, stifle small business innovation, create institutions that are too big to fail, imperil crucially important state-based consumer protection laws and increase the risks presented by nonbank entities.”
On April 26, 2017, the CSBS brought suit against the OCC in federal district court, arguing that, in promulgating the special purpose FinTech charter, the OCC exceeded its statutory authority under the National Bank Act and violated the Administrative Procedure Act. On May 12, 2017, the NYDFS filed a suit of its own in federal district court against the OCC, raising similar issues and bringing similar causes of action as the CSBS suit. Both suits were dismissed given the OCC’s FinTech charter was in a proposed state. The OCC finalized the FinTech charter and began accepting applications in July. Shortly thereafter, the NYDFS once again filed suit and the CSBS is now deliberating a second law suit.
Other Federal Advancements
In late September, a group of congressmen sent a letter to SEC Chairman Jay Clayton requesting clarity regarding regulation of cryptocurrencies and digital tokens noting “[i]t is important that all policy makers work toward developing clearer guidelines between those digital tokens that are securities, and those that are not, through better articulation of SEC policy, and, ultimately, through formal guidance or legislation.” Legislators are not the only branches of the federal government getting involved. On September 26, 2018, a federal district court decided that My Big Coin, the virtual currency at issue, meets the definition of a commodity and thus falls within the jurisdiction of the CFTC to pursue fraud charges.
Toward a Uniform Approach
We continue to see federal efforts and advancements in virtual currency and digital token regulation despite state pushback. The push by the federal government has its merits. Creating a uniform and predictable set of legal and regulatory standards across state lines may provide an ideal environment for innovation and consumer protection. The states, on the other hand, are not likely to go easily along with these efforts.