The bipartisan bill would provide a federal safe harbor for non-custodial blockchain service providers from state money transmission and digital asset licensing laws.
On March 23, 2023, US House of Representatives Majority Whip Tom Emmer (R) and Representative Darren Soto (D) introduced the Blockchain Regulatory Certainty Act (the Bill).
The short Bill is singular in purpose: it would clarify that blockchain service providers that do not custody or control user funds (such as developers, crypto miners, validators, and wallet software providers) are not money transmitters for the purposes of state money transmission and licensing laws or under US anti-money laundering laws. Non-custodians would also not be considered financial institutions under the Bank Secrecy Act, 31 U.S.C. §§ 5311 et seq., as amended, or “any other State or Federal legal designation requiring licensing or registration as a condition to acting as a blockchain developer or provider of a blockchain service.”
Without being subject to these laws, non-custodial crypto service providers could avoid the often onerous operational and compliance requirements that classification as a money transmitter or money service business entails, either at the state or federal level. Such requirements include those under Financial Action Task Force (FATF) guidance and the Financial Crimes Enforcement Network (FinCEN).
Market participants have argued that due to regulatory imprecision, non-custodial crypto service providers have been unfairly treated like custodial exchanges, despite the wide gap in the risks they present.
The Bill is a bipartisan effort that was originally introduced in 2018, and twice again in the interim years. The sponsors, who also serve as co-chairs of the Congressional Blockchain Caucus, hope that if legislation provides the safe harbor to market participants that do not custody assets, innovators would not be compelled to relocate beyond US borders in search of more favorable jurisdictions. Members of the blockchain and digital asset industry have therefore applauded the Bill for its effort to introduce a dose of much-needed clarity and consistency at the federal level.
One area of controversy is to what extent the Bill would preempt state crypto licensing regimes such as New York State’s BitLicense or the Illinois digital asset business licensing proposal (for more information, see this Latham blog post). Given the broad definition of blockchain service providers and developers that the Bill encompasses, it would seem to curb much of the purview of the BitLicense for market participants that do not custody digital assets. Latham & Watkins will continue to monitor developments regarding the Bill.