Arizona to regulate cryptocurrency offerings, crowdfunding and blockchains

Bitcoin, the most visible example of cryptocurrencies, might soon be covered under Arizona securities rules.

PHOENIX — Whether through crowdfunding or the launch of a new cryptocurrency, fundraisers seeking investors will have new rules and regulations to work under in Arizona.

Rep. Jeff Weninger (R-Chandler) has introduced a slate of bills that collectively update the way in which state government looks at new e-commerce technologies like crowdfunding, Initial Coin Offerings (ICOs), cryptocurrency mining and blockchains.

If any of that sounds new and unfamiliar, that’s because it is — these represent some of the newest advances in how virtual data is processed and money is exchanged.

sCrowdfunding is online fundraising campaign set up for a specific purpose. This could be anything from designing videogame to raising money for car repairs, and there are sites dedicated to different kinds of crowdfunding. The two largest are GoFundMe and Kickstarter, with $5 billion and $1 billion respectively raised, according to crowdfunding.com.

GoFundMe is the largest crowdfunding platform, where anybody can start a campaign for just about anything — posting the link on social media and soliciting donations to raise money for whatever the cause may be. The GoFundMe website claims that the top categories are to pay for medical costs or memorials when somebody has passed away.

Kickstarter is a similar concept, but is project-based. Campaigns have a set funding goal with a deadline in mind, and are designed to bring to production art, music, videogames, movies, shows, tech items and other creative ventures. People who spend money on these projects are known as “backers” and pay in different tiers, where project creators can assign rewards to different tiers such as signed books, limited edition posters or a role in a short film as examples.

Initial Coin Offerings are similar in concept to an Initial Public Offering, a practice more familiar on Wall Street than the virtual world. ICOs are the financial impetus needed to get a cryptocurrency on the market. When an ICO opens up, investors are given the chance to buy a fraction of the total coins to be offered; these initial coins are called tokens, and are then redeemed for the actual coins if the ICO raises enough money to get the ball rolling on the creation of a new cryptocurrency. If it fails, the investors get their money back.

HB 2601 — which passed through the House Committee on Commerce with a 9-0 in favor vote — would reclassify crowdfunding and ICOs under state law regarding securities, with exemptions for certain intrastate offerings. While donation campaigns are covered under those exemptions (meaning crowdfunding is okay), ICOs, and the trade of cryptocurrency, are not. 

That means that if the bill becomes law, cryptocurrency traders will have to register with the Arizona Corporate Commission if they want to buy and sell without the government coming after them. The ACC is the state body that regulates securities, and investigates securities crimes ranging from international corporate fraud to single individuals operating out of their home office. Matt Neubert, the securities division director for the ACC, is in charge of the body that monitors the nearly 200,000 registered securities agents in the state.

“Cryptocurrencies may or may not be a security,” Neubert said.  “The ACC has not taken a position on that. Those (Initial Coin) offerings may very well be securities.”

Sweetbridge Inc. is an alliance of tech entrepreneurs that is working to build a lending system through the use of an in-house cryptocurrency token and coin system. While the bill provides an exemption for businesses that are using this technology for purposes outside of financial trading, Sweetbridge’s goal of decentralized lending might cross into a gray area. Sweetbridge advisor Caroline Lynch spoke in favor of the bill, pointing out the current stance of the SEC on ICOs — according to her, the SEC doesn’t view ICOs as securities.

However, Neubert disagrees — the state makes a firm distinction between crowdfunding as a means of getting donations, versus the giving of money for the promise of a future profit or share in the business.

“If the sellers are promised returns, then it’s a red flag that it may be an investment and should be questioned in great detail,” Neubert said.

The power behind cryptocurrencies — the technology that is poised to supposedly revolutionize entire industries — is the blockchain, and Weninger would like to see Arizona preemptively allow for businesses to make use of the technology beyond its current form as a financial tool. House Bill 2603 would do just that, and has cleared committee with a 9-0 vote in favor.

“This is permissive, it’s not a shall it’s a may,” Weninger said. “The goal is to allow in a couple years for corporations to submit their records on a blockchain.”

The blockchain offers a secure, tamper-proof method of recording information like ownership and has the potential for streamlining the process of submitting and verifying records at the state level. It was first developed as a decentralized ledger to record Bitcoin trades, in which the accounts (called wallets) of the purchaser and seller are listed along with the amount of Bitcoin traded. The users that are contributing processing power to the blockchain validate these transactions and are awarded a value in Bitcoin; this process is known as “mining.”

Weninger has a bill for that, too.

The process of mining is computationally intensive and to do it efficiently, uses a lot of power. While that may run up quite the power bill, there’s nothing illegal about it. Weninger’s bill would prevent cities and counties from changing that, instead reserving that decision for the state government. The vote on HB 2602 was 9-0, despite reservations from Rep. Mitzi Epstein (D-Chandler).

“It’s just saying once more, ‘let’s make the state the great decider of everything,’” Epstein said.

The “Due Pass” recommendations gracing each one of Weninger’s tech bills are only the first step in becoming law. It will take a vote on the House floor, a repetition of the process in the Senate, and the signature of Gov. Doug Ducey to finally make it a reality.

That reality is one that nobody could have predicted at the turn of the century, despite what’s happening at the core of every cryptocurrency transaction and blockchain record.

“It’s just solving equations,” Weninger said.

REVISION: Changes made to reflect the in-favor stance of Sweetbridge on HB 2601.

 

Erik Kolsrud is the Don Bolles Fellow covering the Legislature for Arizona Sonora News, a service provided by the school of journalism at the University of Arizona. Reach him at ekolsrud@email.arizona.edu.

29 comments Add yours

Leave a Reply

Your email address will not be published.