Aloha, Bitcoin: Hawaii Drops Crypto Licensing Pilot, Leaving Industry Unregulated

Crypto is legal in Hawaii.

The Aloha State has earned almost the worst reputation domestically for its lack of friendliness to digital currencies—second only to New York, while Hawaii, the state with the BitLicense, is trying to adapt and adopt it. But in a news release quietly posted by the governor's office last week, the state administration said that “digital currency companies do not need a Hawaii-issued money transmitter license to do business in the state.”

The announcement continued, “The companies can continue trading activity as an unregulated business.” “However, such companies are responsible for complying with any applicable federal licensing or registration requirements.”

In other words, Hawaii's regulatory position has suddenly changed from strong to “suspicious”.

To give permission or not to give permission

The policy change comes after years of debate, research and failed attempts to fix it 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 said that cryptocurrency – and specifically cryptocurrency exchanges – fall under its purview. This mandate relies on classifying cryptocurrency exchanges like Coinbase and Binance as money transmitters—putting them in the same regulatory bucket as companies like Western Union.

However, money transmitters are subject to strong reserve requirements in Hawaii. This means that crypto exchanges are required to have a cash reserve equal to their digital holdings. While such a policy led to catastrophic failures such as FTX, it also made it impossible to do business in the islands.

Most major exchanges refuse to serve customers in Hawaii.

To resolve the dispute, DFI has partnered with the Hawaii Technology Development Corporation (HTDC) to establish the Digital Currency Innovation Laboratory (DCIL). The pilot program created a regulatory sandbox in which Hawaii customers could be temporarily served without fear of regulatory action.

More than 30 digital currency companies applied, 16 of them entered the program, and twelve were finally on board to start the pilot program in 2020. In the meantime, the state began to prepare licenses for crypto companies.

Even within the confines of the regulatory sandbox, Hawai'i was able to record a fair amount of activity on the participating exchanges, serving up to 146,000 customers and serving up to $284 million in transactions during the quarter.

Hawaii has not been immune to crypto scammers.

Bills of war

Hawaii residents and policymakers have been eager to unlock Hawaii's seemingly exploding growth and economic potential. This is the year It was in 2000, when the price of Bitcoin had risen to $10,000 and had not yet hit the $64,000 peak (or subsequent crash), and various bills were proposed in the financial blockchains to loosen or remove the restrictions in the government legislature.

The only legislation to come out of both the state Senate and House was written by DFI. But the testimony was divided.

While many agreed that some regulation was needed, opponents said the proposed crypto license — modeled after New York's BitLicense — was too onerous. The bill died before reaching the governor's desk, as did bills extending the DCL pilot. After this, the state was encouraging crypto exchange customers in the pilot to sell their holdings.

It remains in limbo.

The state unilaterally extended the pilot before it expired in 2020, adding another two years. Most of the participating companies stayed in the program. But the next legislative session, which saw several bills in the digital currency space, again failed to provide a critical framework to regulate crypto.

Despite crypto's disastrous year in 2022, the pilot has been extended for two years, albeit in June this year. And last month, the last session of the Hawaii state legislature convened without any crypto bills.

Now that DFI and HTDC have jointly announced the end of the pilot, the state of Hawaii will leave it up to the federal government to manage the encryption space. “DCCL's conclusion is an important milestone that reflects its commitment to balance innovation and regulatory responsibility,” DFI Commissioner Iris Ikeda said in a statement. Ikeda was unable to respond to a request for comment from Decrypt at the time of writing.