The outcome of the US presidential election this month, coupled with the prospect of a crypto-friendly president and Congress, have unleashed a torrent of enthusiasm that has been building throughout the crypto sector this year. While there is still a long and winding road to clear, thoughtful, and comprehensive crypto regulation in the United States, there are good reasons to expect more regulatory clarity and more selective enforcement at the federal level.
However, while crypto regulatory reform at the federal level has been the focus of most of the crypto sector’s attention, most financial services activity in the United States is also regulated at the state level. As a result, US state laws and regulators will continue to have an important role to play in many digital asset products and markets in the United States, including the use of cryptocurrencies, tokenization and use of traditional financial assets (such as stablecoins and other “real-world” crypto-assets (RWAs)), as well as the broader use of distributed ledger and blockchain technology to support financial transactions. Even if new federal laws are passed to create clearer regulatory frameworks—and crypto antagonists are removed from key federal agency positions—state-level legal and regulatory hurdles to bringing digital asset products and services to the market will remain.
In this Legal Update, we discuss the role that state law and regulators will continue to play in digital asset products and markets.
STATE REGULATORS WILL CONTINUE TO HAVE JURISDICTION
In recent years, calls for crypto regulatory clarity have been aimed primarily at the federal regulators that oversee securities, commodities, and banking activity. The results of the US elections make it more likely that updates to federal crypto laws and new leadership at federal regulatory agencies may finally deliver sought-after clarity, as well as a less-skeptical view of crypto activities overall. Even if that occurs, many crypto ventures and businesses developing digital asset products and services must still navigate the state rules that apply to all financial services businesses (such as money transmitters) and crypto-specific rules like the New York BitLicense and the California’s Digital Financial Asset Law (DFAL).1
For example, financial services companies such as banks, insurance companies, and payments providers that seek to bring digital asset products and services to the market will need to satisfy these state regulators. And when a business engages in digital asset or crypto activity that falls under existing definitions of financial services activities, it will also be regulated under the laws that apply to that activity. For example, many companies that require a BitLicense in New York also have either a money-services license or a trust license. Those licenses carry a number of obligations that should be considered the baseline requirements for businesses dealing in digital asset products and services in New York; the core requirements for dealing in digital asset products and services are derived from general financial services laws.
Beyond this baseline, in New York, the BitLicense is also required by the New York State Department of Financial Services (NYDFS) for businesses conducting virtual currency activities in New York. However, “virtual currency activities” is broadly defined, and is intended to be applied to an extensive array of activities in New York. The BitLicense adds heightened general and crypto-specific requirements, and existing supervision or registration with a federal authority generally will not exempt a company from the requirement to obtain a BitLicense if it is conducting virtual currency activities.
State regulators, such as those in New York and California, oversee some of the most significant financial markets and financial institutions in the world, and they will continue to have a strong interest in regulating crypto. Despite what happens at the federal level, the interests and outlooks of those regulators may not always align. For example, blue-state regulators may react to Republican control of the White House and Congress by stepping up their own rulemaking and oversight in areas where they have jurisdiction.
STATE LAW ISSUES REMAIN UNRESOLVED
Important state law issues that affect the digital asset sector—such as laws related to property ownership and legal liabilities—will not be addressed by changes to federal laws.
For example, “not your keys, not your crypto” continues to be an accurate-yet-unsatisfying description of property laws as they generally apply to digital asset ownership in the United States. The term is often used to highlight risks associated with centralized custody of digital assets, and the lack of recourse “owners” of those assets may have if access or control of the assets are lost if the custodian of the assets is hacked or become insolvent. This legal uncertainty will not be affected by any changes to the federal regulatory framework.
In addition, the legal status of decentralized autonomous organizations (DAOs) in the United States remains unclear, and the subject of litigation. Despite DAO-specific laws being passed in states such as Wyoming and Delaware, most DAOs have declined to create formal legal entities under these laws, and seek the formal legal protections that these laws may provide. While many DAOs choose instead to form legal entities “wrappers” offshore, many do not, choosing to operate without any generally-recognized legal entity structure. As a result, DAOs members—or token holders who participated in governance—can potentially be exposed to broad liability for the DAO’s actions. For example, courts have found DAOs to be general partnerships under state law, with each member in the DAO deemed to be a general partner of the DAO and therefore fully liable for its actions.
However, the work to modernize state law to address some of this uncertainty has begun apart from, and unrelated to, federal regulatory regimes. For example, the 2022 amendments to the Uniform Commercial Code added Article 12 address both blockchain and distributed ledger technologies more broadly. The Article 12 amendments are designed to provide consistent legal treatment for digital assets and blockchain records by, for instance, establishing definitions and rules around “control” of electronic records (i.e., cryptographic keys) and “transfer” of interests. So far, Article 12 has been enacted by 25 states, with bill introductions in five further state legislatures (as of November 2024).2
KEY TAKEAWAYS
The evolution of state laws on digital assets—both cryptocurrencies and tokenization, as well as other uses of blockchain technology—will continue on a parallel—but unrelated—track from federal regulatory updates in this area. As a result, the interaction between state law and any new federal laws and regulations should remain a focus of companies building products and services in this space.
1 The DFAL is currently scheduled to become effective on July 1, 2026.
2 The New York City Bar published a Committee Report in support of New York State adopting the Article 12 amendments, reissued in July 2024.
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