Illinois is trying to follow in New York’s crypto footsteps with a new oversight regime, said David DeCarlo, Illinois’ first regulatory innovation officer, who is among the prominent advocates for the plan now being shepherded 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 the 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 state-level crypto regulations.
“It's happening too often where there's some scam or collapse that's hurting consumers directly in their pocketbooks,” DeCarlo said in a CoinDesk interview. The state needs "safeguards in place soon so we can get in front of those," he said, plus a way to give the latest financial innovations some stable footing in Illinois.
The Illinois legislation would require crypto firms to seek licensing akin to New York’s BitLicense, and it would also establish trust companies that could handle custody of digital assets. Crypto exchanges and other virtual assets businesses would have to provide investment disclosures, protect customer assets, have defensive measures against hacks and shield themselves against use by money launderers.
The effort may not be welcome news for cryptocurrency businesses that have had run-ins with BitLicense oversight, which the CEO of New York-based bitcoin rewards app Lolli argued has made New York “one of the most crypto-hostile states in the nation.” Only a couple of dozen such licenses have been issued, and they’re famously difficult to obtain. Even New York City Mayor Eric Adams has bashed them.
“We definitely took some ideas of what was working in New York,” DeCarlo said, and he added that the IDFPR has also been in touch with California to make sure everybody is working toward a complementary framework “that would work across New York, Illinois and California.”
However, California’s most recent legislative effort last year for its own BitLicense was vetoed by the governor.
One potential boon for 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 awaiting their local license, DeCarlo said. Firms that are already operating in Illinois would also get some time to comply.
“Current holders of an Illinois money transmitter license will also have a transition period to come into compliance with the requirements of that statute,” a spokesman for the state’s financial regulator said in a statement.
The consumer side of the Illinois legislation, patterned after the establishment of the Consumer Financial Protection Bureau (CFPB) in the 2010 Dodd-Frank Act, gives the state regulators the power to enforce the crypto rules and also to pursue misdeeds committed by unlicensed firms.
“It’s not just a trial balloon that's being floated,” DeCarlo said, and lawmakers there seem to recognize an urgent need to do something. “I think there's momentum to be able to coalesce behind something that will protect the residents of Illinois.”
Two Democratic former chairs of their chambers’ financial institution committees, Sen. Laura Ellman and Rep. Mark Walker, introduced the matching bills. Walker said in a statement that the measures “not only work to hold bad actors accountable, but allow good actors to enter the marketplace and prove to customers they are operating within the bounds of the law.”
“The devil is going to be in the details with respect 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 the Chicago-Kent College of Law. Basing the system on New York could make people wonder whether a license granted to only a handful of firms is stifling innovation, he suggested.
“Something like this may just be inevitable,” Rosario said, because the U.S. tide is turning toward crypto regulation in the wake of industry disasters over the past year.
In the absence of U.S. federal regulations for crypto, which still seem to be at least months away, the states have moved more quickly to fill the vacuum. Many of them – still including Illinois for now – are overseeing digital assets firms with money-transmitter regulations.
For Illinois to take the next step, the legislative campaign must get the bills through committees in both chambers by the session’s May conclusion. The assembly is dominated by Democrats, and any approved bills would head to the desk of Gov. J.B. Pritzker, also a Democrat.
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