Illinois Breaks From New York With Blockchain Regulatory Approach

CoinDesk looks into Illinois' ambitious plan to guide the integration of blockchain technology within government operations.

AccessTimeIconDec 4, 2016 at 3:14 p.m. UTC
Updated Mar 6, 2023 at 3:30 p.m. UTC
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On 1st December, the state of Illinois took its first step in its ambitious multi-agency plan to guide the integration of blockchain technology into government operations.

The Illinois Department of Financial and Professional Regulation (IDFPR) announced that it has released for public comment its proposed Digital Currency Regulatory Guidance on decentralized "virtual currencies", which is intended to address inadequacies found in the IDFPR’s interpretation of the state’s Transmitters of Money Act.

The release happened at the same time the state’s Department of Innovation & Technology (DoIT) released its Blockchain and Distributed Ledger Request for Information.

The IDFPR and the DoIT – along with the state’s Department of Commerce and Economic Opportunity (DCEO) and Department of Insurance (DOI) and Cook County's Recorder of Deeds – form the Illinois Blockchain Initiative, a first-of-its-kind government collaboration announced on 30th November at the Blockchain Conference Chicago.

The initiative is to serve as a steering committee, designed to propose policy that will address not only the regulation of blockchain technologies in the state, but the simplified incorporation of the technology in government operation.

The DoIT's request reads:

"As with most emerging technologies, the State of Illinois recognizes that the full extent of future use cases will not be defined in the short term. That being said, the State believes it is important to horizon scan, explore, and ask questions. What are the strongest applications of the technology? What is the value proposition? How can we ensure proper safeguards are built in? Is the technology available now?"

The request for information’s response deadline is scheduled for 18th January, with presentations due to be made in Chicago from February to March, 2017.

But while the request presents a wide array of policy areas which the initiative could pursue, the IDFPR’s guidance document paints a need to consider a regulatory scheme to bring the state’s cryptocurrency market in compliance to money transmitter requirements. This is despite appearances that the state is less than optimistic about the potential of this market.

“As innovative payment technologies grow in popularity, it is vital that we provide a succinct regulatory framework that gives businesses operating in this space necessary clarity,” said Bryan Schneider, Secretary of the IDFPR, according to the department’s press release on the guidance document.

According to the statement:

"We plan to study digital currencies carefully as the technology develops, however, at this point in time digital currencies like Bitcoin, given their low transaction volume and relatively niche use, are best viewed as a speculative investment or possibly even a new type of asset class, not as money."

A different approach

The two documents combined give the impression that state-guided innovation in blockchain technology should steer away from FinTech.

Richard Morris is the deputy director of strategy and operational performance for the Illinois Department of Financial and Professional Regulation. "As a department, we have no current or future plans to regulate digital currency," he told CoinDesk.

Morris indicated that he believes the risk posed to consumers by the technology is low at this time, as are the number of cryptocurrency users.

"Digital currencies are still primarily used as a speculative investment as opposed to a true ‘currency’ or money. This is supported by the average amount per transaction, approximately $685 USD sent per bitcoin transaction in October 2016," he said.

In part bolstered by other states’ attempts to regulate cryptocurrencies, Illinois is currently pursuing a "light touch" in regards to modernizing its money transfer regulations.

Calling the IDFPR’s guidance document “an effort to provide businesses operating in this space the regulatory clarity around how we differentiate between the digital currency activities that are custodial and non-custodial and how that relates to sovereign currency,” the IDFPR’s position is to identify sovereign currency transactions – including the potential transfer of sovereign currency through the purchase and sale of cryptocurrency – and properly regard them as money transfer activities, in accordance to the Transmitters of Money Act.

An example given in the guidance document is bitcoin ATMs.

Should the ATM take cash or credit for the sale of bitcoins with the help of a third-party bitcoin exchange, the document argues that the ATM and its operator should be classified as a money transmitter, as defined in the Transmitters of Money Act.

However, if the ATM operator was to deal with the bitcoin customer directly without the help of a third party, no money transfer occurred, per the IDFPR’s interpretation.

According to Morris, the idea was to prevent confusion by creating a "one-size-fits-all" approach to diversely different virtual currency products.

Morris continued:

"We also understand given how inherently different digital currency’s properties are, other states haven’t taken the same light touch approach when it comes to regulating digital currency businesses, which creates uncertainty around who will be regulated, how they should be regulated."

Innovating distributed ledgers

Per the DoIT’s request for information, Illinois is requesting proposals regarding the creation of identity, attestation and ownership registries, which could include land registries and gun registrations; compliance and reporting ledgers, that could be used for voting systems and court records; and benefit and entitlement ledgers, including research grant tracking and social services payments.

“The best way to develop a technology is to put it into practice,” read the request for information. “The State of Illinois is interested in determining if blockchain and distributed ledger technologies could be leveraged to create more efficient, integrated and trusted state services.”

One potential use for non-Fintech blockchains come from Cook County, the county that houses the state’s largest city, Chicago.

On 9th November, voters decided to vote yes to a binding referendum that would merge the Office of the Cook County Recorder of Deeds with the Cook County Clerk’s office.

With the merging scheduled to happen no later than 2020, the office faces the difficult challenge of preparing for transfer the land deed library of the second-most populous county in the United States.

“Implementation of a blockchain-based system for processing transactions and conveying property would be a long-term goal, given that we are approaching the issue from a statewide focus (that it would make sense that all 102 counties in the state run ‘nodes’) and also understanding that a few large changes need to be made to Illinois' Conveyances Act to allow deeds to be ‘electronic data’ rather than paper documents, at least for the purposes of record-keeping,” John Mirkovic, deputy recorder for communications for the Cook County Recorder of Deeds, told CoinDesk.

He further explained:

“Making public records data-driven is a key step for blockchain record-keeping. Our office would like to see a system where all land records offices verify each other's transactions, while also providing full disaster recovery and backup.”

Making data available

One of the Cook County Recorder of Deeds’ short-term goals through the Internet Blockchain Initiative is to create a blockchain system that would aggregate all vacant and condemned property metadata into a “digital title” that would have a pointer from the existing online record.

The idea in doing this is to create a defense against scammers who are selling these properties to buyers seeking “fixer-uppers,” as current tax or home inspector data may not be available from a rudimentary deed check.

Successful implementation of this pilot program, which is currently in testing with, could open the door for additional state-run public data blockchains.

“Testing the effectiveness of data-driven records processing for land titles, which are complicated transactions, would also as a by-product show that the State could use such a system to transfer vehicle titles, which are simple transactions usually tied to an already-existing unique identifier,” added Mirkovic.

“This could completely replace the state's paper-based car titling system, allow regulated auto-dealers to generate their own vehicle titles the day they come off the truck, and sell them right away (rather than sending in applications and waiting for reply),” he continued.

“Further, the Department of Insurance and private insurers could be incorporated into the vehicle titling system, meaning that law enforcement could know a vehicle's insurance coverage status before they even walk up to talk to the driver," Mirkovic said.

As Bryan Schneider, secretary of the Illinois Department of Financial and Professional Regulation, said in his comments at the Blockchain Conference Chicago, while the state will endeavor to make Illinois a welcoming place for cryptocurrency companies, the focus of the Illinois Blockchain Initiative is towards embracing the potential of blockchain technology openly and using it as a means to improve efficiency and transparency while making security, confidentiality and regulation factors that can be addressed in real time.

“We know that talk is cheap and action is where it counts, so you have the commitment of myself and the leaders up here with me to actually make things workable for technology companies and their customers that want to do business here in Illinois,” said Schneider.

Image via Shutterstock


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