Cryptocurrency is legal in Hawaii.
The Aloha State has earned nearly the worst reputation in the nation for its unfriendliness toward digital currencies — second only to New York — and Hawaii is trying to adapt and adopt the state’s bitcoin license.
But in a press release quietly released by the governor’s office last week, the state revealed that “digital currency companies will no longer need a money transmitter license issued by Hawaii to do business in the state.”
“These firms will be able to continue their trading activities as unregulated businesses,” the announcement continued. “However, such firms will be responsible for complying with any applicable federal licensing or registration requirements.”
In other words, Hawaii's regulatory attitude suddenly shifted from strict to "relaxed."
Permission or non-permission
The policy change comes after years of debate, research and abrupt failures in attempts to fix the situation in the state legislature. The state’s financial regulator, the Division of Financial Institutions (DFI) under the Hawaii Department of Commerce and Consumer Affairs, has long maintained that cryptocurrencies, and specifically cryptocurrency exchanges, fall under its jurisdiction. The basis for that jurisdiction is to classify cryptocurrency exchanges like Coinbase and Binance as money transmitters, placing them under the same regulatory umbrella as companies like Western Union.
However, remittance agencies in Hawaii must adhere to strict reserve requirements. This means that cryptocurrency exchanges must have cash reserves equal to their digital holdings. While such a policy is unlikely to lead to a catastrophic failure like FTX, it makes it impossible to do business on these islands.
Most major exchanges simply refuse to serve customers in Hawaii.
To break the impasse, the DFI partnered with the Hawaii Technology Development Corporation (HTDC) to establish the Digital Currency Innovation Lab (DCIL). The pilot program created a regulatory sandbox where exchanges could temporarily serve Hawaii customers without fear of regulatory action in exchange for data on their business that eventually transacts in the state.
More than 30 digital currency companies applied, 16 were accepted into the program, and 12 of them eventually joined the launch of the pilot program in 2020. At the same time, the state began to develop licenses specifically for cryptocurrency companies.
Even within the confines of the regulatory sandbox, Hawaii has managed to register a significant amount of activity on participating exchanges, serving as many as 146,000 customers and generating $2.84 million in trading volume in one quarter.
Hawaii has not been immune to cryptocurrency scammers.
Battle of the bills
Hawaii residents and policymakers were eager to get Hawaii on board with cryptocurrency’s seemingly explosive growth and economic potential. It was 2000, when the price of Bitcoin climbed to $10,000 but had not yet reached its $64,000 peak (or its subsequent crash), and various bills were introduced in the state legislature to relax or remove restrictions on financial blockchains.
The only bill to pass both the state House and Senate was authored by DFI. But testimony was divided.
While most agree that some regulation is needed, opponents say the proposed cryptocurrency license, modeled after New York's BitLicense, is too onerous. The bill stalled before it reached the governor's desk, as did a bill to extend the DCIL pilot. The state has since encouraged customers of the cryptocurrency exchanges in the pilot to sell their holdings.
In trouble
The state ultimately unilaterally extended the pilot for another two years before it expired in 2020. Most participating companies stayed in the program. But the next legislative session — where several bills were introduced in the digital currency space — again failed to provide a decisive framework to allow but regulate cryptocurrencies.
Despite 2022 being a disastrous year for cryptocurrencies, the pilot program was extended for another two years, but in June of this year. Last month, the Hawaii State Legislature convened for its latest session without introducing any cryptocurrency bills.
Now, as the DFI and HTDC jointly announced the end of the pilot, they have confirmed that the state of Hawaii will hand over regulatory authority in the cryptocurrency space to the federal government. “DCIL’s conclusion marks a milestone and reflects a commitment to balancing innovation and regulatory responsibility,” DFI Commissioner Iris Ikeda said in a statement. As of the time of writing, Ikeda was unable to respond to Decrypt’s request for comment.