In July 2017, the Uniform Law Commission (“ULC”), a non-profit which was established in 1892 to provide states with drafts of uniform state laws in areas in which uniformity would be appropriate, created a uniform model law called the Uniform Regulation of Virtual-Currency Businesses Act (the “Act”) to provide a consistent framework across states for regulation of entities providing products or services that constitute “virtual currency business activity.”
ULC proposed uniform laws have no effect until adopted by each state’s legislative body, but, throughout its history, the ULC has successfully drafted many uniform laws that have been adopted by the states (sometimes with slight variation among states). One of the most well-known of those is the Uniform Commercial Code (“UCC”) governing commercial transactions such as contracts, leases, sales of goods, and borrowing money. The UCC has facilitated interstate business transactions and virtual currency businesses require the same type of facilitation of interstate business so the Act has been drafted to cover businesses engaged in virtual currency activities regardless of whether or not the virtual currencies involved are issued on a centralized or decentralized basis.
As drafted, the Act defines “virtual currency business activity” as (1) exchanging, transferring, or storing virtual currency; (2) engaging in virtual currency administration; (3) holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another; and (4) exchanging digital representations of value within online games or game platforms for virtual currency or legal tender. Further, key provisions of the Act include a three tiered structure which provides for: (1) exempt companies such as banks, licensed money service entities, and those companies conducting business in the state below $5,000 annually; (2) companies that must register with the state and that conduct between $5,000 and $35,000 in business within the state annually; and (3) fully licensed status for companies doing greater than $35,000 in business within the state annually or having already operated for two years as registrants.
Currently, the Act has only been introduced in Hawaii, Nebraska, and Connecticut and no states have adopted it yet, meaning that there is no state in which the Act is currently in effect. As use of Blockchain technology grows and more businesses are created that engage in virtual currency activity, the Act (or another variation) is likely to be introduced (and adopted) in most if not all states out of necessity as the benefit of having a common regulatory structure across states would generate more predictability and ease in the business practices of blockchain based companies and facilitate economic development.
However, just as it took over a decade for the UCC to reach widespread adoption in the states, it will likely take a number of years for the Act to be fully adopted. The good news is that in February of this year, the American Bar Association approved the Act as appropriate for state adoption which gives further weight to the Act and increases it likelihood of state adoption. Thus, with continued growth of virtual currency businesses, we will likely see widespread adoption of the Act or a variation of it within the next decade or so.