New Jersey lawmakers are hoping to lure cryptocurrency businesses away from neighboring New York City with more business-friendly regulations for digital asset transactions. According to its sponsors, the Digital Asset and Blockchain Technology Act would regulate cryptocurrency without stifling innovation.
"New Jersey is a hub of innovation and, with this bill, we can lead the nation in providing thoughtful regulation to the industry," said sponsor Assemblywoman Yvonne Lopez. The Digital Asset and Blockchain Technology Act was advanced by the Assembly's Science, Innovation, and Technology Committee and the State Senate's Commerce Committee in March.
States Increasingly Regulating Crypto in Absence of Federal Regulations
While regulators at the federal and state level are increasing their oversight over Bitcoin and other cryptocurrencies, there are still very few clear rules for businesses to follow, which many argue is hampering the industry's growth. At the same time, consumer advocates maintain that the volatile industry needs greater protections for investors.
States that have adopted regulations governing cryptocurrency have taken vastly different approaches. New York was one of the first states in the country to enact a regulatory framework for virtual currency like Bitcoin. Under regulations enacted in 2015, businesses must obtain a license, commonly referred to as a "BitLicense," prior to engaging in any virtual currency business activity.
While New York was applauded by many for bringing oversight to the growing crypto marketplace, its regulatory scheme is increasingly coming under fire for being too burdensome, particularly for startups and other small businesses. According to sponsors of New Jersey's Digital Asset and Blockchain Technology Act, New Jersey has the opportunity to attract crypto businesses to the State by crafting regulations that strike a better balance between fostering innovation and protecting investors. "Through the issuance of licensing for businesses that choose to use blockchain technology, the state will be able to develop a 21st century economy and grow a new and exciting business sector while protecting New Jerseyans from the potential harm," said Senate sponsor Andrew Zwicker.
Key Provisions of New Jersey's Digital Asset and Blockchain Technology Act
The Digital Asset and Blockchain Technology Act defines "digital asset" to mean a representation of economic, proprietary, or access rights that is stored in a machine-readable format, has a transaction history that is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process. "Digital assets" would not include securities, whether in digital form or otherwise, as defined under state and federal securities regulations.
Required License
Under the Digital Asset and Blockchain Technology Act, a person may not engage in a digital asset business activity, or hold itself out as being able to engage in a digital asset business activity, with or on behalf of a New Jersey resident unless the person is licensed by the Department of Banking and Insurance (Department), or has filed a pending license with the Department.
Under the proposed bill, the Department may license a person to carry on one or more of the following digital asset business activities:
- Receiving a digital asset for transmission or transmitting a digital asset, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of a digital asset;
- Storing, holding, or maintaining custody of a digital asset on behalf of others, exempting all custodians otherwise regulated as a bank, trust, broker-dealer, or credit union in any state or by the United States, or money transmitter licensed in New Jersey;
- Buying and selling digital assets as a customer business;
- Performing exchange services of digital assets as a customer business;
- Issuing a digital asset; or
- Borrowing or lending of, or facilitating the borrowing or lending of, customer digital assets.
The legislation provides that an application for a license must be submitted through the Nationwide Multistate Licensing System, and made in the form and medium to be prescribed by the Department in regulations. Applicants must provide certain information relevant to the applicant's proposed digital asset business activity, as well as information regarding key individuals responsible for establishing or directing policies and procedures of the licensee. The bill further provides that no license may be issued by the Department to an individual who has, within the five years preceding the submission of an application for a license, been convicted of embezzlement, forgery, fraud, or theft. The Department would be required to grant or deny any digital asset business license application or license reciprocity application within 120 days of its receipt.
The Digital Asset and Blockchain Technology Act further provides that the Department may audit any digital asset business licensee. Additionally, each licensee must maintain and enforce confidential, written compliance policies which are to be reviewed and approved by the licensee's board of directors or an equivalent governing body. The Department may suspend or revoke a digital asset business license upon certain findings provided in the bill.
Mandatory Disclosures
The Digital Asset and Blockchain Technology Act requires the terms and conditions of a digital asset business involving a consumer's account to be disclosed at the time the consumer contracts for a digital asset business service. The disclosure must be full and complete, contain no material misrepresentations, be in readily understandable language and may include, as appropriate and to the extent applicable, certain information concerning fees and charges, risks to the consumer, and any protections or securities that are in place.
The mandatory disclosures required under the bill must be displayed and individually agreed to by a consumer before any digital asset transaction at an electronic kiosk. Any fee to be charged is required to be displayed and individually agreed to by a consumer before any digital asset transaction or digital asset balance inquiry at an electronic kiosk.
What's Next?
Given that the regulatory framework for digital assets continues to evolve, we encourage businesses and investors to consult with an experienced business attorney before engaging in transactions involving virtual currencies. We will also continue to post legal updates on our website, so please check back regularly.
Originally Published 07 June 2022
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