New Jersey is positioned to adopt seminal legislation that is sure to alter the regulatory dynamic for cryptocurrency-focused businesses that operate within the state. The Digital Asset and Blockchain Technology Act (Act) is the first of its kind within the state and comes in the wake of a momentous year for cryptocurrencies and the blockchain technologies that enable them, as federal and state officials move to regulate the volatile cryptocurrency market.
In effect, the Act would allow decentralized autonomous organizations to form in the state, allow companies to issue electronic stock certificates, and would create tax incentives for virtual currency businesses to move to New Jersey. However, it would also require developers to file online with the Department of Banking and Insurance before making an open blockchain token available for sale and pay a $1,000 filing fee.
In 2015, New York was one of the first states in the country to enact a regulatory framework for virtual currency like Bitcoin. This legislation requires businesses to obtain a license, commonly referred to as a “BitLicense,” prior to engaging in any virtual currency business activity. Since then, this regulatory scheme has been met with extensive criticism, under the belief that it is too burdensome, primarily for startups and other small businesses. Despite these effects, New Jersey now appears situated to pass legislation of similar nature. However, sponsors of the Act allege that such regulation will strike a better balance of encouraging innovation while simultaneously protecting investors – something New York’s regulatory framework is historically criticized for.
Key Provisions of New Jersey’s Digital Asset and Blockchain Technology Act
According to the Act, ““digital asset” means a representation of economic, proprietary, or access rights that is stored in a machine-readable format, has a transaction history that is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process, and includes digital consumer assets and virtual currency.” Such “digital assets” do not include securities, whether in digital form or otherwise, as defined under state and federal securities regulations.
Under the proposed Act, a person may not engage in digital asset business activity or represent itself as being authorized to engage in a digital asset business activity, with or on behalf of a New Jersey resident unless the person is licensed by the Department of Banking and Insurance or has filed a pending license with the Department.
The Department may license a person to carry on one or more of the following digital asset activities:
Receiving a digital asset for transmission or transmitting a digital asset, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of a digital asset;
Storing, holding, or maintaining custody of a digital asset on behalf of others, exempting all custodians otherwise regulated as a bank, trust, broker-dealer, or credit union in any state or by the United States or money transmitter licensed in this State;
Buying and selling digital assets as a customer business;
Performing exchange services of digital assets as a customer business;
Issuing a digital asset; or
Borrowing or lending of, or facilitating the borrowing or lending of, customer digital assets
In order to apply for a license, an application shall be submitted through the Nationwide Multistate Licensing System, made in the form and medium to be prescribed by the Department in regulation. An applicant must provide all information that is relevant to the applicant’s proposed digital asset business activity, as well as information regarding key agents responsible for operating the digital business activities of the licensee.
The Act further provides that a criminal record check will be conducted on behalf of each applicant, for which the applicant is financially responsible. To this end, the Act also provides that no license may be issued by the Department to an individual who has, within the five years preceding the submission of an application for a license, been convicted of embezzlement, forgery, fraud, or theft. The Department would be required to grant or deny any digital asset business license application or license reciprocity application within 120 days of its receipt.
Terms and Conditions Disclosures
The Act requires that the terms and conditions of a digital asset business involving a consumer’s account must be disclosed as part of establishing a relationship with a customer and prior to entering an initial transaction with the customer at the time the consumer contracts for a digital asset business service. A disclosure shall be full and complete, contain no material misrepresentations be in readily understandable language and may include, as appropriate and to the extent applicable, information regarding fees and charges, consumer risks, liabilities associated with the transactions, and any protections that are utilized to prevent loss.
These terms and conditions must be displayed and individually agreed to by the consumer before any digital asset transaction occurs at an electronic kiosk. If the consumer is to incur a fee for the digital asset transaction while using the electronic kiosk, the fee shall be displayed and individually agreed to by the consumer before the transaction takes place. These regulations also apply to a digital asset balance inquiry.
Will the Bill Pass?
The Digital Assets and Technology Act is currently very well positioned to pass both the Assembly and the Senate, and thereafter, to become the governing law in New Jersey. As of now, the Act has passed three Assembly Committees, in which it received unanimous support from both Democrats and Republicans on the committees. This unanimity is particularly rare at this stage, indicating the likelihood that the Act will pass.
In terms of time, unless amended again, this legislation indicates that final passage may be in the spring 2023. This prediction remains speculative as it is difficult to tell whether the Assembly will amend the Act once more from now. Assembly amendments tend to prolong the process by an additional one to two months. If that is the case, and the Act returns to the Senate, it remains quite likely to pass.
In November of 2020, it was the Senate who originally proposed the Act. The Senate consists of 40 total votes: 25 Democrats and 15 Republicans. The Act is sponsored by the Democrats, thus increasing the probability that it passes through the Senate. Passage requires a majority vote, indicating a 50% or higher favorable vote would be adequate. Further, the Senate proposed amendments the most recent time the Act was received, which, when compared to other bills recently passed, indicates the Act is inclined to pass so long as the amendments are upheld by the Assembly. The Assembly consists of 80 votes, requiring a simple majority to pass. As previously indicated, the Act has successfully passed through three Assembly committees with ease.
Given the all-encompassing nature of the Act and the penalties for noncompliance, it is advisable to prepare for this to become law this year. Since there is certain to be an influx of applications once the method for applying is made available, and since penalties are not enforceable if an application is in its pending stages, it is sensible to prepare application materials now.