Illinois officials push state crypto license to mimic New York’s bit license

Illinois is trying to follow in New York’s crypto footsteps with a new regulatory regime, according to David DeCarlo, Illinois’ first regulatory innovation officer, who is among the prominent proponents of the plan now being pushed through the state legislature.

A coordinated pair of bills has been introduced in both chambers of the Illinois General Assembly that would establish a crypto license for the state as well as consumer protections that would include disclosures and safeguarding of customer assets. The Illinois Department of Financial and Professional Regulation (IDFPR), where DeCarlo works, has helped craft the new measures that could put Illinois in league with New York and eventually California in setting up comprehensive crypto regulations at the state level.

“It happens too often where there’s some fraud or collapse that hurts consumers directly in their wallets,” DeCarlo said in a CoinDesk interview. The state needs “safeguards in place soon so we can get ahead of them,” he said, plus a way to give the latest economic innovations a firm foothold in Illinois.

The Illinois legislation would require crypto firms to seek licensing similar to New York’s BitLicense, and it would also establish trust companies that could handle custody of digital assets. Crypto exchanges and other virtual asset companies will have to provide investment information, protect customer funds, have defensive measures against hacks and guard against the use of money launderers.

The effort may not be welcome news for cryptocurrency companies that have been overseeing BitLicense oversight, which the CEO of New York-based bitcoin rewards app Lolli claimed has made New York “one of the most crypto-hostile states in the nation. Only a few dozen such licenses have been issued, and they are notoriously hard to come by. Even New York City Mayor Eric Adams has slapped them.

“We definitely took some ideas about what worked in New York,” DeCarlo said, adding that IDFPR has also been in contact with California to make sure everyone is working toward a complementary framework “that would work across New York , Illinois and California.”

However, California’s last legislative effort last year for its own BitLicense was vetoed by the governor.

A potential benefit of the Illinois version is that companies already licensed in a state with similar rules — so far, New York — would be allowed to do business in the state while they await their local license, DeCarlo said. Companies already operating in Illinois will also have some time to comply.

“Current holders of an Illinois money transmitter license will also have a transition period to comply with the requirements of this statute,” a spokesman for the state’s financial regulator said in a statement.

The consumer side of the Illinois legislation, patterned after the creation of the Consumer Financial Protection Bureau (CFPB) in the 2010 Dodd-Frank Act, gives state regulators the power to enforce crypto rules and also pursue misdeeds committed by unlicensed firms.

“It’s not just a trial balloon being floated,” DeCarlo said, and lawmakers there seem to recognize an urgent need to do something. “I think there is momentum to be able to rally behind something that will protect the citizens of Illinois.”

Two Democratic former chairs of their House Financial Institutions Committees, Sen. Laura Ellman and Rep. Mark Walker, introduced the corresponding bills. Walker said in a statement that the measures “not only work to hold bad actors accountable, but allow good actors to enter the market and prove to customers that they are operating within the bounds of the law.”

“The devil is going to be in the details as to how they establish the licensing regime,” said Nelson Rosario, founder of boutique law firm Rosario Tech Law who also teaches crypto-legal issues at Chicago-Kent College of Law. Basing the system on New York could lead people to wonder whether a license granted to just a handful of companies is stifling innovation, he suggested.

“Something like this can only be inevitable,” Rosario said, as the US tide turns against crypto regulation in the wake of industry disasters over the past year.

In the absence of US federal regulations for crypto, which still appear to be at least months away, states have moved more quickly to fill the vacuum. Many of them — still including Illinois for now — oversee digital asset firms with money transfer regulations.

For Illinois to take the next step, the legislative campaign must get the bills through committees in both chambers by the end of the session in May. The Assembly is dominated by Democrats, and any approved bills will go to the desk of Governor JB Pritzker, also a Democrat.