Uniform Law Commission Approves Uniform Regulation of Virtual Currency Act

What is the Uniform Law Commission?
The mission of the Uniform Law Commission (ULC) is to provide states with “well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.” In 2015, the ULC established a drafting committee to develop a framework for regulating virtual currencies. The drafting committee, composed of certain ULC commissioners, was joined by a number of advisors and observers from industry, government and private practice, who provided valuable insights on the workings of the technology underlying virtual currency and the applicability of current regulations to the business of virtual currency. In a number of drafting sessions, the group developed a draft model act regulating those businesses that engage in the exchange, transfer and storage of virtual currency, with the goal of creating a prudential, narrowly-focused regulation.

Why is Model Regulation Needed?
The ULC saw a clear need for a uniform act to prevent conflicting regulation among the states and to promote regulation that will not prevent innovation in the rapidly developing virtual currency field. No overarching federal scheme currently exists and several states, including New York, California, North Carolina, Vermont and Texas, have undertaken efforts to consider possible regulatory frameworks, with varying levels of success. In the absence of a well-constructed model act, New York’s BitLicense, the subject of criticism for the perceived burdens it places on emerging businesses, is the most visible, albeit controversial, precedent available. The very nature of virtual currency means that the business of dealing in virtual currency will transcend state borders and implicate laws of multiple states. Uniformity of legislation is critical to the growth of this industry and technology.

Who Will the Model Act Regulate and How?
The work of the drafting committee quickly moved from the idea of regulating virtual currency itself to regulating functional activities involving virtual currency. The activities for which user protection is most needed and most appropriate are those in which a business stores, transfers or exchanges virtual currency on behalf of the owner of that virtual currency. Logically, the Model Act does not apply where other law and regulation is deemed adequate to provide protections, such as the Electronic Funds Transfer Act, Commodity Exchange Act or state blue sky laws. Banks are exempt, as are companies that merely provide software, computing power or other services that enable a virtual currency business. Persons transacting in virtual currency for their own use, or for academic purposes, or below a de minimis amount annually are likewise exempt. This leaves the focus of the Model Act on protecting consumers by, among other things:

• Requiring the business to maintain enough virtual currency to satisfy the entitlements of its users,
• Ensuring that the property interests of customers are pro rata in the event of a shortfall; and
• Providing that the virtual currency of customers is not the property of the virtual currency business or reachable by its creditors.

The Model Act requires covered virtual currency businesses to register with the designated state authority, provide evidence of adequate capital and report on a regular basis. To promote innovation, businesses are afforded an “on-ramp” of graduated levels of regulation as they grow. The Model Act further provides for reciprocity among states adopting it, to avoid the burden of redundant compliance. These business-friendly features meant that the Model Act received strong support from many in the industry.

What’s Next?
The Model Act will now be made available to the states for adoption. Each state’s legislature may consider the Model Act for adoption as-is or with non-uniform changes. Introductions of the Model Act for debate may be made in some states as early as later this year.