Regulators: Federal Preemption of State Blockchain Laws Unlikely

A member of the Federal Deposit Insurance Corporation (FDIC) and three state-level regulators discussed blockchain technology at a panel today centered on the future of US FinTech policy.

Held at the Blockchain & Distributed Ledger Technology Conference in New York City, the panel provided a window into the complicated series of exchanges – ranging from state-level interactions with citizens to potential top-level federal regulation – that are influencing this discussion.

FDIC associate counsel Adriana Rojas said that while her agency wants to take a leadership position, its interaction with state controllers and private institutions is still in early stages.

Rojas told the audience:

Apart from providing the FDIC's view on the industry, the day's panel was rare in that the audience was also given a chance to hear what three specific state representatives had to share on the matter.

The sharp discrepancies in how states are treating bitcoin and blockchain firms was perhaps best on display during a talk by Joseph Borg, director of the Alabama Securities Commission, an independent agency that works with government regulators.

Borg said his state is currently receiving applications from industry businesses that "run the gamut" from refined business models, to amateur or even legally dubious proposals.

Though one or two inquiries have come from entrepreneurs using an alternative digital currency, "only bitcoin" companies have submitted actual applications, he said.

Borg continued:

Borg has been with the Alabama commission for 21 years and says that partnerships have been crucial to his organization's work to understand the still-developing industry.

In addition to attending a training session about blockchain taught by the FDIC, he says the commission has "agreements" with FinCEN, the US Treasury and the Consumer Financial Protection Bureau (CFPB).

Elsewhere, the panel showcased the sometimes surprising ways the subject of blockchain is coming to the attention of state regulators.

D Michael Quinn, of Ohio's Division of Securities, said he had received an informational request from the owner of a candle shop who was running a mining operation from his back-office.

The entrepreneur contacted the agency in a bid to sell both mining hardware and shares in mining profits.

Quinn said he unaware of a single application being sent to his agency from the "blockchain or the ledger industry," and that most of the contacts he makes are from individuals who want to let people invest in digital currency without actually owning it.

In one poignant moment of the panel, Quinn said he was unaware any groups that represent the blockchain industry. Panel moderator, Marco Santori, of Pillsbury Winthrop Shaw Pittman LLP, interjected to say that organizations such as the Coin Center could be counted as such industry voices.

Perhaps most notably, however, Quinn said the state hasn’t made any decision on the proper course of regulation, but that that might change as he and his peers “get more educated.”

But as far as following New York’s precedent by establishing a state-specific regulatory regime, he added:

Jim Burns, securities bureau chief at the Idaho Department of Finance, described his state’s interest in blockchain technology as still in early stages.

For example, he said he has mostly met educators and "enthusiasts" looking to use the technology not for a financial application, but as a way to streamline business operations.

"We do get very few inquires about the business solutions side. But many people agree that is an area that won’t be regulated," he said.

Burns further indicated he does not believe that non-financial applications of blockchain technology will be regulated.

However, he offered a contrarian view of this proposal, noting that licenses can help existing businesses and startups "keep competition out" by increasing the barrier to entry.

"The f-word," as Santori described "federal pre-emption," or the option that the federal government might write laws that supercede state controls, wasn’t an option anyone on the panel viewed as likely.

While Borg said there was a "good argument" for simplifying the application process, he said it was unlikely any state would agree to federal controls that impacted their revenue or their ability to serve its citizens.

"The bottom line is you still have to deal with the folks on the ground," he said. "They are not going to call the federal government when something goes wrong."

Rojas, who said she wasn’t speaking on behalf of the FDIC, explained that the organization would like to "maintain a good relationship" with the states and invited the members of the panel and others to tell federal regulators "how best to regulate them".

As part of the FDIC’s research, Rojas said it has engaged in conversations with the Conference of State Bank Supervisors (CSBS). The FDIC is also currently reviewing a white-paper published by the US Office of Comptroller of the Currency (OCC) in March, which called for a balanced approach to regulation.

"We’re reviewing it very closely," Rojas said. "We’re looking at it and very much in favor of working with the OCC."

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