Casey Wagner

A bill in Illinois to revamp the state’s crypto licensing requirements advanced Wednesday evening, putting crypto companies on notice.&nbsp;



The Fintech-Digital Asset Bill requires exchanges and crypto businesses to obtain a license from the Illinois Department of Financial and Professional Regulation. The bill also outlines new risk protection and disclosure requirements for companies engaging with crypto.&nbsp;



The licensing requirements apply to businesses that facilitate crypto trading, crypto custodians, and any business “engaging in digital asset administration,” the <a href="https://ilga.gov/legislation/103/HB/PDF/10300HB3479lv.pdf" target="_blank" rel="noreferrer noopener">bill text</a> read. Licensed entities can also not store or facilitate trading of stablecoins unless the stablecoin is issued by an FDIC insured institution or another registered issuer and the issuer has fully-backed reserves at all times. 



Under the proposed law, exchanges are also required to submit documentation before listing assets to disclose any risks of the asset being considered a security and any conflicts of interest with the exchange and token. Additionally, exchanges must conduct a “comprehensive risk assessment designed to ensure consumers are adequately protected.”&nbsp;



“We do see a very active crypto and digital asset industry,” David DeCarlo, Illinois’ first regulatory innovation officer, said during an appearance on CNBC. “We are talking with New York…to try to put forth a regime that would complement what is happening in other states. We are not trying to reinvent the wheel, we want to be able to work with other regulators and then raise the bar nationally.”&nbsp;



The motivation behind the legislation is consumer protection, DeCarlo added, especially given the recent collapse of several crypto firms.&nbsp;



The major concern for crypto companies with operations in Illinois is that if the bill is passed, they will only have a matter of weeks to submit application materials for approval before the law is enforced, according to Web3 community group <a href="https://twitter.com/alliancedao/status/1633593323163205633?s=20" target="_blank" rel="noreferrer noopener">Alliance said</a>. 



If businesses are approved for a digital asset license in Illinois, the bill allows the state to access books and records and pass along relevant information to appropriate enforcement agencies.&nbsp;



The licensing requirements are reminiscent of New York’s BitLicense law passed in 2015. Any exchanges, issuers or custodians wishing to operate within the state are required to apply for the license.&nbsp;



As of Feb. 10, New York has issued virtual currency licenses to a total of 24 companies, including Paxos, Genesis and Coinbase. The New York Department of Financial Services, which oversees BitLicense issuance, did not respond to Blockworks’ request for comment about the timeline for approval or how many applications the regulator has received.&nbsp;



New Jersey, once a safe haven for crypto firms fleeing New York, is <a href="https://blockworks.co/news/new-jersey-crypto-bill-impacts">also proposing a licensing requirement</a> that takes the BitLicense one step further when it comes to crypto custody. A licensee offering digital assets custody must maintain “an amount of each type of digital assets sufficient to satisfy the aggregate entitlements of the persons to the type of digital asset,” the <a href="https://legiscan.com/NJ/text/A2371/id/2655313" target="_blank" rel="noreferrer noopener">proposed bill states</a>.



Illinois’ bill moved forward in the state House, Wednesday, after being introduced in mid-February. It is now on the calendar for a second reading and short debate.



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Is Illinois the Next New York? Inside the New IL Crypto Bill.

<div id="highlights-block_622f858b9d31f" class="highlights">
 <ul>
 <li>Illinois state representative sponsors another bill aimed at bringing regulatory clarity to the space</li>
 <li>Illinois will not be taking after other states looking to establish bitcoin as legal tender</li>
 </ul>
 
</div>



A bill that would allow the Illinois Department of Revenue (IDR) to accept crypto payments as easily as it accepts credit card transactions has moved forward to the state Senate.&nbsp;



<a href="https://ilga.gov/legislation/fulltext.asp?DocName=&amp;SessionId=110&amp;GA=102&amp;DocTypeId=HB&amp;DocNum=5287&amp;GAID=16&amp;LegID=139797&amp;SpecSess=&amp;Session=" target="_blank" rel="noreferrer noopener">House bill 5287</a>, sponsored by Illinois state Representative Margaret Croke, would allow the IDR to create rules and regulations around accepting cryptocurrencies as a payment method. The IDR has expressed interest in being able to process digital asset payments similar to how it accepts credit cards, Croke said, sparking the inspiration behind the bill.



“When the state of Illinois accepts a credit card payment for the purposes of collecting revenue, for taxes or other payments, we have a third party processor,” Croke, a Democrat representing Illinois’ 12th District, said. “Similarly, we would have a situation where someone, if they chose to pay via cryptocurrency, would go through a crypto processor and then the state of Illinois would receive US dollars.”&nbsp;



The IDR will have final say over which types of payments it allows to be made in cryptocurrency, Croke said, but it could potentially apply to businesses looking to pay taxes in digital assets.



The bill passed the House and moved to the Illinois Senate in late February. Croke said there should not be “any issues” in moving the bill forward in the next month or so.&nbsp;



<h3 class="wp-block-heading">Legal tender question&nbsp;</h3>



While the measure may sound similar to efforts in <a href="https://cms.blockworks.co/arizona-considers-making-bitcoin-legal-tender/" target="_blank" rel="noreferrer noopener">Arizona</a> and <a href="https://cms.blockworks.co/to-make-bitcoin-legal-tender-in-ca-bitcoiners-may-have-to-rewrite-constitution/" target="_blank" rel="noreferrer noopener">California</a> to establish bitcoin as legal tender, Croke made it clear that Illinois is only interested in operating within the current rules. According to the Constitution, defining “legal tender” falls under the power of Congress, she acknowledged. 



“What I don&#8217;t want to happen is that as a state we move so quickly that we end up having to roll back or get usurped by the federal government,” Croke said.



<blockquote class="wp-block-quote">“I don&#8217;t want to get to a point where someone has been operating a business for a year in Illinois, and all of a sudden, the federal government comes in and says, ‘you&#8217;ve got to change everything you&#8217;ve been doing.’” </blockquote>



Regardless of the legislative branch’s power, action from the federal government has been slow, Croke said. The recent <a href="https://cms.blockworks.co/bidens-crypto-executive-order-may-be-watershed-moment-despite-lack-of-specifics/" target="_blank" rel="noreferrer noopener">executive order</a> from the Biden administration shows that digital asset regulation is being thought about on a federal level, but clear guidelines are necessary, she added. 



“I always joke when we don&#8217;t know what to do in the legislature, we create a task force or a report,” Croke said. “That being said, I&#8217;m glad that there is this level of motivation…to really dive into the topic and give clear direction on what the Biden animation administration wants to around cryptocurrency.”&nbsp;



Another <a href="https://cms.blockworks.co/this-state-representative-is-out-to-make-illinois-the-next-crypto-hub/" target="_blank" rel="noreferrer noopener">crypto-focused bill</a>l that Croke sponsored is slated for a revamp following new guidance from the Office of the Comptroller of the Currency in a somewhat rare case of federal policy moving more quickly than state legislation.



House bill number <a href="https://www.ilga.gov/legislation/BillStatus.asp?DocNum=3968&amp;GAID=16&amp;DocTypeID=HB&amp;SessionID=110&amp;GA=102" target="_blank" rel="noreferrer noopener">3968</a>, a digital assets-focused proposal that would allow financial technology companies in the state to hold cryptocurrencies, passed the Souse in April 2021 and made it to the state Senate before the OCC ruling came out.



“The bill applied to existing banking institutions chartered with the State of Illinois, and now they don&#8217;t need to be included in this legislation because they&#8217;ve received the guidance that they needed on the federal level,” Croke said. “Now it just applies to new special purpose trust companies.”



HB 3968 is technically still in the Senate, but before it is introduced to the House, Croke hopes to file a new bill in the Senate. The Illinois state House, Croke said, tends to be more progressive than the Senate when it comes to cryptocurrency.



“Not necessarily two words you always hear together in the political sphere: progressives and cryptocurrency,” she said. “Cryptocurrency is still a very novel idea for a lot of people.”



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Illinois Moves Closer To Accepting Crypto for Taxes, but Not Considering Legal Tender Status

<div id="highlights-block_6155f90ef4dc0" class="highlights">
 <ul>
 <li>Chicago is already a financial hub, now Rep. Margaret Croke wants to add crypto to the list</li>
 <li>House Bill number 3968 passed the Illinois House in April and is set for a Senate vote as soon as mid-October</li>
 </ul>
 
</div>



As federal agencies struggle to agree on digital asset jurisdiction, state legislators are leading the way on cryptocurrency regulation, and Illinois state Representative Margaret Croke (D-12th district) is the latest example.&nbsp;



“We are so much more nimble at the state legislature and get along with our colleagues so much more than on a federal level,” Croke said. “It&#8217;s funny because on the federal level for some reason we&#8217;ve gotten to this weird sentiment of ‘Republicans are pro-crypto’ and ‘Democrats are anti-crypto.’”&nbsp;



Croke, a democrat, is the chief sponsor of a House Bill number <a href="https://www.ilga.gov/legislation/BillStatus.asp?DocNum=3968&amp;GAID=16&amp;DocTypeID=HB&amp;SessionID=110&amp;GA=102" target="_blank" rel="noreferrer noopener">3968</a>, a digital assets-focused proposal that would allow financial technology companies in the state to hold cryptocurrencies. The bill passed unanimously through the Illinois House in April and will be up for vote in the Senate as soon as mid-October.&nbsp;



The proposed policy is similar to state laws in Wyoming, which pioneered the acceptance of cryptocurrency banks in 2020.&nbsp;



“The bill creates a special purpose trust company, so essentially it creates a charter system similar to Wyoming,” Croke said. “Except, you are better off, in my opinion, partnering with an existing financial institution in Illinois, which I think adds great benefits because we get FDIC insurance and can be a little bit more stable and safe with the crypto assets you&#8217;re a custodian of.”&nbsp;



The special purpose trusts will generally have to follow the same regulatory framework as existing corporate fiduciaries, but the bill will also include new policies associated with digital assets. These include rules that will oversee capital and liquidity requirements and collateralization of fiduciary assets.&nbsp;



Croke first became interested in digital assets and regulation after reading a <a href="https://www.idfpr.com/Forms/2020%2001%2012%20Blockchain%20Report.pdf" target="_blank" rel="noreferrer noopener">study</a> from the Illinois Department of Professional Regulation that discussed crypto’s implications and policy suggestions.&nbsp;



<blockquote class="wp-block-quote">“I started thinking that it would be a good thing for legislators, especially maybe one that was on the younger side,” Croke said, referring to herself, “to have a good understanding of crypto because I think that we are going to go down the path of regulation.”&nbsp;</blockquote>



Croke previously served as the deputy chief of staff at the Illinois Department of Commerce and Economic Opportunity. She has been an Illinois representative since January 2021 and has sought to change the state’s perception.&nbsp;



“I love everything that promotes Illinois as a state that you want to come to and grow your business,” she said. “Because sometimes, when thinking of Illinois, or Chicago, the first things that people tell me that they know are Al Capone, and we&#8217;re experiencing some gun violence and the Windy City and things like that, but you don&#8217;t always hear that we&#8217;re an economic powerhouse.”&nbsp;



The bill, Croke said, has been well received, even from her peers that have not done significant research into digital assets. A bill suggesting greater regulation around digital assets while also opening the door for greater business opportunities is a hit on both sides of the aisle, she said. What has been the most surprising though has been the support from financial institutions.&nbsp;



“The banking industry in Illinois is very excited about this bill, and usually that doesn&#8217;t happen,” she said. “They don’t typically like change, but this is different because they can now partner with crypto companies or they can start doing this on their own if they want.”  



As for those who are looking to become their own crypto company without interference from a bank, there is room for these players, too, Croke said. But they should expect to follow the same rules as existing financial institutions.&nbsp;



“I think that&#8217;s a fair thing to ask.”