Texas is seeing considerable momentum with respect to a proposed digital asset law that is being considered in the 2021 legislative session in the form of House Bill 4474 (the “Virtual Currency Bill”). As the second largest economy in the United States, and the ninth largest economy in the world by GDP, the legislation could have one of the biggest impacts on digital asset industry since the New York BitLicense was introduced. In short, the Texas Virtual Currency Bill provides a basic legal framework for companies dealing with virtual currencies.
On April 14, 2021, the Virtual Currency Bill was considered in a public hearing by the Texas House of Representatives Pensions, Investments & Financial Services Committee, and a revised version of the Virtual Currency Bill, in the form of a Committee Substitute Bill, was unanimously passed by the committee with bipartisan support on April 16.
As revised, the Virtual Currency Bill takes a thoughtful and narrow approach to amending the Texas version of the Uniform Commercial Code (UCC) by inserting a new definition of “virtual currency” under a new Chapter 12. The new Chapter 12 is considered to be an acceptable precursor to the Uniform Law Commission’s (ULC) proposed amendments to the UCC to address virtual currencies that are expected to be published in final approved form in 2022. The Virtual Currency Bill also makes slight adjustments to Chapter 9 in order to ensure that security interests against virtual currency can be properly perfected.
“Virtual currency” is defined in the revised Virtual Currency Bill as “a digital representation of value that: (A) is used as a medium of exchange, unit of account, or store of value; and (B) is not legal tender, whether or not denominated in legal tender”. In addition, certain merchant rewards and online gaming tokens are specifically excluded from the definition of “virtual currency.”
The Virtual Currency Bill also provides a clear and concise framework for establishing “control” over virtual currency, including how a purchaser can assume control. Notably, the Virtual Currency Bill clarifies that control can be established regardless of whether the power to control is shared with another person, a critical element in order for banks and other non-bank financial institutions to effectively provide custody services for virtual currencies.
The surgical approach taken by the Bill’s drafters, who took into account advice from certain notable legal scholars on how to amend the Texas version of the UCC, is a prudent step for a state like Texas. Additionally, the revised Committee Substitute Bill addresses certain risks that were recently noted by crypto-expert, and Avanti Bank CEO, Caitlin Long. Long correctly pointed out that the original version of the Virtual Currency Bill may not have adequately addressed how to perfect a lien in cryptocurrency. The changes made by the Committee provide much-needed flexibility for Texas when it decides to adopt additional virtual currency-specific legislation in the future, such as the amendments to the UCC, expected to be proposed by the ULC in 2022.
While it is critical that the ULC is taking its time to propose virtual currency amendments to the UCC, the Virtual Currency Bill demonstrates that Texas understands waiting is not an option in terms of taking the initial steps to recognize the legal status of virtual currency. The industry is in need of legal clarity now.
Additionally, the general state of the cryptocurrency industry, most notably current custody practices, makes Texas’ proposed law appropriate. With the rapidly evolving new digital asset class, it is essentially impossible to create a perfect legislative or regulatory framework at this time. The “light touch” approach taken by the Virtual Currency Bill provides the proper balance to allow the industry to continue maturing while leaving adequate room for additional regulatory changes in the future.
The Virtual Currency Bill is significant primarily because it provides more certainty for industry participants by establishing that Texas recognizes the legal status of virtual currencies. Even though the Bill still has to make its way through the House and the Senate to become law, some industry participants are already making plans to move to Texas due to the potentially welcoming regulatory environment.
The Virtual Currency Bill is steadily gaining widespread bipartisan support. The primary author, Representative Tan Parker, has been a major proponent of blockchain technology for some time already. Just one day after the public hearing, Representatives Stephenson, Capriglione, and Perez all signed on as joint authors of the Bill. Governor Abbott also voiced his direct support of the legislation, recently tweeting “[c]ount me in as a crypto law proposal supporter.” Abbott goes on to emphasize that Texas should lead in the crypto industry as it did with a gold depository.
Other states are continuing to press forward on establishing virtual currency regulations as well. Several virtual currency bills are being considered in Illinois, including one that amends the Blockchain Business Development Act to authorize the Department of Financial and Professional regulation to adopt rules around the custody of digital assets, digital securities, and virtual currency. Nebraska is on the verge of enacting several laws that closely mirror those enacted by Wyoming, a nod to the well-developed framework that Wyoming has created.
In total, 25 states, including Nevada, New Jersey, and Rhode Island, are considering some type of blockchain-related virtual currency and/or digital asset laws in their 2021 legislative sessions. It is clear that Texas is not interested in being left behind when it comes to the digital asset industry. If the Virtual Currency Bill becomes law, Texas may see a notable influx of investors and innovative businesses that are attracted to the legal certainty provided by the new law, in addition to the overall welcoming business environment in the state.