Update March 6, 2019: Gov. Jared Polis signed SB19-023 into law. Read the final law here.
In one of the more dramatic endings during the last legislative session, a bill aimed at putting Colorado at the forefront of blockchain policy passed by a single vote. But, moments later, it failed after some lawmakers changed their minds.
The words blockchain and cryptocurrency often cause eyes to glaze and confusion to abound. And this new technology hasn’t been helped by fraud and cryptocurrency values that skyrocketed then plunged. But for proponents, such technology — aimed at building a more secure internet — is still worth figuring out. That’s why a revamped bill is expected to be introduced Friday by one of the same co-sponsors, Sen. Jack Tate, R-Centennial.
“We had a broad approach (in the bill) last year without any stakeholder input,” said Tate, who spent the past six months learning from local blockchain and finance companies, hearing from state regulators and working with politicians from both parties — a process done in the past for issues such as liquor and marijuana laws.
“What is different with having the programmatic approach is that it’s a narrow, nascent technology versus dealing with an established industry like alcohol. All the big players (from the alcohol industry) were there, and it was more like a showdown at Gucci Gulch,” Tate said. “Here, (blockchain) is a nascent technology dealing with a framework meant for other things. How do we update the regulatory framework now that we know there’s innovation out there? We don’t want to stifle innovation.”
The proposed Digital Token Act creates a guideline to determine whether digital tokens — like those modeled after the cryptocurrency bitcoin or cartoon cats such as CryptoKitties — are a securities investment, which require regulation. It’s a topic still being figured out on a national level by the U.S. Securities and Exchange Commission, although Wyoming ruled that some tokens are not securities last March.
But this time around, the creation of the Colorado bill was touched by many who opposed the last one, including regulators from the state’s banking and securities divisions. The law sets more limits so that not just any new digital token can forgo the security classification.
The process to decide whether Colorado even needed a blockchain law began shortly after the last bill failed. In June, Gov. John Hickenlooper created the Council for the Advance of Blockchain Technology, putting folks such as early bitcoin entrepreneur Erik Voorhees in the same room with Rep. Tracy Kraft-Tharp, D-Arvada, and Hannah Parsons, CEO of tech accelerator Exponential Impact in Colorado Springs.
“The legislation last year was introduced by people outside of Colorado. It created a frenzy, and that’s why this (council) process was so good,” said Parsons, whose accelerator graduated two blockchain startups last year. “People wanted to get ahead of Wyoming. But laws don’t translate between states. There are unintended consequences if we move too quickly.”
The council met regularly, prioritized problems, split into working groups, collaborated on documents publicly, used a Slack channel, and received input from citizens and state agencies, including the secretary of state’s office, Department of Revenue and Department of Higher Education.
“The process was incredibly helpful for us to sort through what needed legislation and what just needed to be clarified through guidance,” said Stephanie Copeland, the outgoing executive director of the Colorado Office of Economic Development and International Trade. “The way we got there was by sorting the work into the main problem statements the community believed were the biggest inhibitors. … This bill was one of the only ones that we felt necessary to move forward.”
All that work in the past six months may have resulted in just one potential bill. (A second one isn’t quite ready.) But council member Eric Kintner, an attorney specializing in digital currency at Snell & Wilmer in Denver, said the group achieved much more without new laws.
“I was really heartened by how much good faith everybody put into the process and how the regulators were willing to meet us and express their concerns but, at the same time, find solutions,” Kintner said. “A lot of times in my experience in private practice, you’re dealing with a government telling you, ‘No, you can’t do that.’ But this was ‘We want to support you.’”
Not everything passed muster. The creation of a sandbox where financial-tech startups could play and not worry about licenses, fees and rules was nixed. But a topic important to the blockchain-business community — how money gets transferred digitally — received feedback from the state’s banking division.
“The council commented that the banking community hasn’t put out guidance, so they did through the attorney general and the banking division. They said here’s how we view the Money Transmitter Act, and these are the companies that fall under the crypto. That was great,” Kintner said. “It’s formal guidance but not in the format of a formal rule or law. It allows flexibility. And if (it’s realized later that) the guidance goes too far, they can pull it. But this also signals to us that you fit in the market. You’re good to go.”
Read draft of the Colorado Digital Token Act (provided by Sen. Jack Tate)
The proposed Digital Token Act, co-sponsored by Democrat Sen. Stephen Fenberg, attempts to clarify uncertainty for crypto-economic companies in Colorado. The law would exempt tokens from securities law if the token is used primarily for “consumptive purposes,” or goods, content and services. If a token doesn’t qualify under the Colorado safe harbor, however, that doesn’t mean it’s a security. It would then be analyzed under typical securities law, or what is known as the Howey Test, which identifies investment contracts and adds disclosure and registration requirements.
“We need this because, right now, we have regulatory uncertainty in terms of blockchain technology. And where there’s uncertainty, there’s an ambivalence to making capital investments and business investments,” Tate said. “In addition, companies who’ve made the plunge had excessive legal costs trying to sort through the uncertainty. The overall goal is to make sure Colorado’s innovative spirit stays in place.”
All the effort by the council, however, doesn’t mean the bill is going to pass or stay intact.
At the last council meeting, the bill’s co-sponsor in the House, Tracy Kraft-Tharp, asked for a simple, one-sheet document to explain this to her fellow legislators. Reached this week, Kraft-Tharp said she’s not feeling fluent on the bill but does have a better understanding of blockchain.
“I’m just really grappling with what this is all about. I think that’s good that I am because it really keeps me in touch with people because people don’t understand it. That’s what happened last year,” said Kraft-Tharp, who educated herself by listening to blockchain podcasts such as “Unchained Crypto 101.”
She is juggling other bills on which she’s lead sponsor — including one on sales and use tax. By the time the proposed blockchain bill reaches the House, Kraft-Tharp said she’ll do her job: She’ll know the bill and make sure the proper experts are in place to testify.
“It’s like being in school and we have a test on March 13. I’m learning all along about what’s going to be on the test and by March 13. I’ll be an expert,” she said. “It’s not like ‘Oh, my God, the legislature, they can only read in second-grade language.’ Really funny. But I know how to get a bill through. I know a fact sheet needs to get put together. I don’t have to be a subject-matter expert because we’ll bring in the experts.”
That would include people such as Kintner, whom Kraft-Tharp thinks she’ll ask to testify.
“It’s been a very consensus-driven process to date, and I’m always open to new ideas to address issues we didn’t see right away,” Kintner said. “To be honest, we don’t know if many companies will use this or think it’s the greatest thing. … But this is an important step showing the state is open to new ideas and new technologies and, at the very least, there’s very good thought leadership to help other states who might be looking at amending their laws and guidance.”
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