Are States Like Illinois Rushing Crypto Laws To Avoid The Next FTX?

Amid the ongoing consideration of federal legislation to regulate the cryptocurrency markets, states seemingly are crafting local policies in an attempt to fill in the void. It appears states such as California, New Jersey, and now Illinois, may be rushing through legislation for the crypto markets as a response to fallout from FTX where in 2022 the third largest exchange failed and its CEO Sam Bankman-Fried was found guilty of fraud. A new bill in Illinois introduced two weeks ago called the Digital Assets Regulation Act (DARA) could be an example of this.

The DARA had already been introduced and considered in Illinois in 2023, where it ultimately did not pass by the time the session ended. There has been a similar trajectory of a bill in California, where the Digital Financial Assets Law that California Governor Gavin Newsom signed into law in 2023 was the same bill he vetoed in 2022. Since 2015, only New York has had a BitLicense regime where a specific license to operate with cryptocurrency is required in the state. Last year, New Jersey introduced legislation resembling the BitLicense that ultimately did not pass.

“The FTX scandal in 2022 is likely driving states to come up with their own crypto frameworks due to a lack of federal action. This is unfortunate, as a similar patchwork of state crypto licensing regimes that are all different may be created which is already a challenge with money transmitter licenses (MTL),” said Lee Brachter, Co-Chair of the United States Blockchain Coalition (USBC). The USBC is a national organization that focuses on multi-state issues impacting crypto and blockchain and recently merged with the Global Blockchain Business Council (GBBC).

Details on the DARA Bill In Illinois

The introduction of the DARA bill two weeks ago by State Senator Laura Ellman (D-IL) seems to highlight the concern that Brachter stated as to how states may feel obligated to take action in light of the void left by federal lawmakers and the pressures to create legislation based on the FTX failure. I spoke with a new organization called the Illinois Blockchain Association regarding DARA. According to their analysis so far, the new bill includes broad definitions that may impact more than just centralized exchanges, such as DeFi and base layer blockchain networks.

“While well-intentioned, DARA goes too far. It seeks to regulate not only those entities, but almost anyone working in blockchain in Illinois,” said Nelson Rosario, Executive Director, Illinois Blockchain Association. Rosario went on to state, “No one disagrees that certain types of companies – namely centralized businesses that take custody of customer funds should be subject to a comprehensive regulatory scheme. Many people are working on that precise thing in Washington today.”

Olta Andoni, General Counsel and Chief Compliance Officer of Enclave Markets, shared some of her specific concerns about DARA. Andoni stated, “I think it definitely has a broader outreach than the BitLicense because of the broad definition of the ‘digital asset business activity’.” According to Andoni, this definition, “…will be applicable to all structures just by operating and touching digital assets without even taking custody of them.” Andoni did point out she liked an exclusion of software developers from the definition of digital asset business activities, but believes there is room to a lot more misinterpretation on what the dissemination of the software will include.

“This bill, just as last year’s proposal, came out of nowhere. I do not think that the crypto attorneys in IL were even consulted for both versions…I am a big proponent of working on the definitions of the proposed draft to make it workable, but I do not think that the IL legislators will have much appetite for that,” said Andoni. Crypto policy may be facing a crisis at the state level if other states begin forging policy without having industry at the table. This may be as a result of a loss of confidence in the industry after the fallout from FTX. State Senator Laura Ellman (D-IL), the author of the DARA bill, did not respond to a request to comment.

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