New Jersey is poised to adopt sweeping cryptocurrency and blockchain regulations with the passage of the Digital Asset and Blockchain Technology Act (the Act). If adopted, the Act would radically change the regulatory landscape for cryptocurrency-focused businesses providing services to New Jersey residents. Despite New Jersey having benefited from the exodus of cryptocurrency companies fleeing New York after the New York Department of Financial Services (NYDFS) implemented the first-of-its-kind BitLicense requirements in 2015, New Jersey appears fated to implement a similarly expansive cryptocurrency regulatory regime.
While the Act bears resemblance to the New York BitLicense framework, it includes a number of distinctions reflecting the evolution that the cryptocurrency industry has experienced since the latter’s introduction nearly eight years ago. In contrast to the BitLicense framework, the Act grants digital asset activity oversight and licensing responsibility to the New Jersey Bureau of Securities (the Bureau). While the Bureau has previously engaged in enforcement activity in the cryptocurrency and blockchain space (see BlockFi), the allocation of regulatory oversight to the Bureau marks a significant shift in the way state governments have traditionally regulated cryptocurrency- and blockchain-based firms. Historically, the New Jersey Department of Banking Insurance regulated these firms as money transmitters (as many other states currently do). By allocating regulatory oversight of cryptocurrency to the Bureau, the Act acknowledges the growing awkwardness of fitting ever-evolving cryptocurrency businesses within the antiquated money transmission regulatory framework originally adopted to govern check cashers and remittance providers.
The Act stipulates that the Bureau may license a person to carry on one or more of the following digital asset business activities:
- Receiving a digital asset for transmission or transmitting a digital asset, except where the transaction is undertaken for nonfinancial 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 as a money transmitter licensed in New Jersey
- Buying and selling digital assets as a customer business
- Performing exchange services of digital assets as a customer business
- Issuing a digital asset
- Borrowing or lending or facilitating the borrowing or lending of customer assets
Comparison to the New York BitLicense Framework
The Act is more comprehensive than the New York BitLicense framework. Among other things, the Act attempts to address the custody and control concerns emanating from recent cryptocurrency fraud and bankruptcy events. For example, the Act requires that if a licensee has custody of digital assets for one or more persons, they must maintain, in their custody, an amount of each type of digital asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital asset.1 In addition, the Act requires many disclosures, including disclosures of who has access to the private keys for the digital assets and a list of authorized agents for the company and where they can be found. The Act also expands the types of allowable activities and businesses subject to licensure. Of note, while New York prohibits BitLicense holders from borrowing or lending customer assets, the Act allows companies to engage in borrowing and lending activities. What remains unclear, however, is to what extent these activities may still pose broader securities regulatory issues in light of the Bureau’s and the SEC’s recent enforcement actions against a number of cryptocurrency platforms facilitating various lending activities in support of their “earn,” “rewards,” and “yield” programs (see BlockFi, Genesis and Gemini, Nexo).
Implementation and Licensing
The General Assembly unanimously passed and referred the Act to the Senate in October of 2022. The Act has moved quickly through both the Senate Commerce Committee and the Senate Budget and Appropriations Committee and could be up for a vote as early as this month. If passed, it will then be sent to Gov. Phil Murphy’s desk to be signed into law. The Act entrusts the Bureau with considerable authority to logistically organize, approve, or deny licenses in the state. Upon passage of the Act, the Bureau will issue a form document that all digital asset businesses that conduct business with the people of New Jersey will need to complete and submit along with a $1,000 nonrefundable fee. In addition, the Bureau will require new disclosure and compliance regimes within the confines of the law and as far as it decides are appropriate. The proposed penalties for failing to abide by the provisions of the license are as much as $10,000 for a first offense and $20,000 for a second offense, as well as $500 a day for conducting a digital asset business without a license. The Act follows the trend for more aggressive and robust enforcement abilities and compliance regimes for digital assets as governments look to protect consumers and punish bad actors in the space.
New Jersey boasts a large, growing industry of cryptocurrency- and blockchain-focused businesses, from custodians and trading platforms to market makers and industry service providers. The Act will create a sophisticated and robust licensing and regulatory regime that will impact both new and existing businesses operating in the space.
*Special thanks to extern Chris Coon for his contributions to this alert.
1 On Jan. 23, the NYDFS released new guidance for custody requirements regarding cryptocurrency and digital assets. In part, the guidance states that custodians of digital assets must maintain either (i) separate on-chain wallets and internal ledger accounts for each customer under that customer’s name or (ii) one or more omnibus on-chain wallets and internal ledger accounts that contain only virtual currency of customers held under the custodian’s name as agent or trustee for the benefit of those customers.