Blockchain Regulatory Certainty Act Will Protect Non-Custodial Crypto Services | Latham & Watkins LLP
The bipartisan bill would provide a federal safe harbor for noncustodial blockchain service providers from state money transfer and digital asset licensing laws.
On March 23, 2023, United States House of Representatives Majority Whip Tom Emmer (R) and Representative Darren Soto (D) introduced the Blockchain Regulatory Certainty Act (the bill).
The brief bill has its own purpose: it would clarify that blockchain service providers who do not hold or control user funds (such as developers, cryptominers, validators and wallet software providers) are not money transmitters for state money transfer and licensing laws or under US anti-money laundering laws . Non-custodians also will not be considered financial institutions under the Bank Secrecy Act, 31 USC §§ 5311 et seq., as amended, or “any other state or federal legal designation requiring licensing or registration as a condition of acting as a blockchain developer or provider of a blockchain service.”
Without being subject to these laws, non-custodial crypto service providers can 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 inaccurate regulation, non-custodial crypto service providers have been unfairly treated as custodial exchanges, despite the large gap in risk they pose.
The bill is a bipartisan effort that was originally introduced in 2018, and twice again in the intervening years. The sponsors, who also serve as co-chairs of the Congressional Blockchain Caucus, hope that if legislation grants the safe harbor to non-custodial market participants, innovators will not be forced to move beyond US borders in search of more favorable jurisdictions. Members of the blockchain and digital asset industries have therefore applauded the bill for its efforts to introduce a dose of much-needed clarity and consistency at the federal level.
One area of controversy is the extent to which the bill would preempt state cryptolicensing regimes such as New York State’s BitLicense or the Illinois digital asset 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 appears to limit much of the BitLicense scope to market participants who do not hold digital assets. Latham & Watkins will continue to monitor developments regarding the bill.
