Vermont: First-of-its kind legislation would regulate and tax blockchain, cryptocurrency, and financial technology
Last week, we addressed states’ ongoing interest in legalizing marijuana despite steps that Attorney General Jeff Sessions has taken to prosecute it at the federal level. Vermont is set to be the next state to legalize recreational weed, but the first to do so via legislation, making it a bit of a trailblazer. The tiny jurisdiction is showing its stripes in a different context this week, by considering legislation that would tax blockchain, cryptocurrency, and financial technology.
In July 2014, the Pew Charitable Trusts blogged about the phenomenon of digital currency, such as Bitcoin, Ethereum, and Litecoin, and the emergence of states’ interests in regulating and taxing digital currency. Digital currency, also known as virtual currency or cryptocurrency allows people to conduct business, or “transfer value,” over the internet without the need for a third party intermediary, like PayPal, or credit card companies, and also without any third party fees. All of these currencies rely on cryptography to function.
Cryptography is ideal for this purpose because it allows one to store and transmit data “in a particular form so that only those for whom it is intended for can read and process it,” according to blockgeeks.com. The site explains that digital currency uses blockchain technology, which allows digital information to be distributed but not copied; “[t]he blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Said differently, blockchain is the record that contains a sequence of transactions made up of data blocks.
Historically, little regulatory action
Pew’s July 2014 blog acknowledged that at that time, no state had passed legislation to regulate the use of digital currency in any way, but that they were starting to think about it. For instance, New York had recently proposed regulations in an effort address consumer protection, money laundering and cybersecurity. In California, Gov. Jerry Brown had signed legislation allowing the use of cryptocurrency, reversing the state’s pre-existing prohibitions, and the Texas Department of Banking said that it would not treat Bitcoin and other digital currencies as money.
Additionally, California, Massachusetts, and Texas, among others, had alerted consumers that virtual currencies were “not subject to ‘traditional regulation or monetary policy,’ including insurance, bonding and other security measures, and that values can fluctuate dramatically.”
At the time that Pew’s blog article was posted, the price of a Bitcoin hovered around $600 each.
Fast forward to last fall, when a Business Insider piece reported that on October 13, 2017, the price of a Bitcoin had reached “a whopping $5,856.10.” Business Insider recognized that digital currency had become a topic of “continual debate,” nationally and internationally, which featured a range of regulatory responses, “from excitement to suspicion to indifference.” According to “coindesk,” Bitcoin reached an all time high of $19,783 on December 17, 2017.
The Business Insider piece also affirmed that the United States government had not yet regulated digital currency, leaving the states free to do so. Hence, in 2017, at least eight of them “worked on bills accepting or promoting the use of Bitcoin and blockchain technology.” This included “important developments” for regulating blockchain in an evidentiary context in these places:
- Arizona: Recognition of smart contracts
- Vermont: Blockchain as evidence
- Chicago: Real estate records
- Delaware: Pending initiative authorizing registration of shares of Delaware companies in blockchain form
On Jan. 3, 2018, a Vermont lawmaker, Sen. ALison Clarkson, introduced S. 269, which would regulate blockchain, cryptocurrency, and financial technology. Its ultimate purpose is to “promote regulatory efficiency; enable business organizational and governance structures that may expand opportunities in financial technology; and promote education and adoption of financial technology in the public and private sectors.”
S. 269 would legalize the formation of so-called “digital currency limited liability companies,” and require them to maintain a physical presence within Vermont, and/or “conduct some or all of [their] activities” in the state. Such companies would also be required to remit a transaction tax equivalent to $0.01 per transaction for:
(1) Each unit of currency mined or otherwise created.
(2) Each sale or other transfer of one or more units of currency.
These companies would otherwise be exempt from the taxes mandated in the state’s tax code, but not exempt from other judicial, statutory, or regulatory provisions of Vermont law.
The global policy director and general counsel for the Chamber of Digital Commerce, a Washington-based trade group, told Bloomberg that she did not like the idea: that “taxing cryptocurrency transactions sends a bad message to this emerging industry…’We wouldn’t want to see these transactions be taxed. We wouldn’t want them to be treated differently than any other transactions. I think you see some states taking a restrictive approach, while others are looking to help foster the industry in their states.’” Bloomberg nevertheless noted that S. 269, a “first of kind” bill, allows the Green Mountain state to “hold on to its reputation as an innovator in blockchain legislation.”
Bitcoin.com characterized the Vermont as being “very friendly towards Bitcoin and digital currencies.” The site pointed to last May’s addition of Bitcoin as a ‘permissible investment,’ Vermont’s inclusion of the definition of virtual currency transmissions in its statutory scheme, and the above-mentioned law that made the records that are created on a public blockchain admissible as evidence in court.
Other states are moving to legislate for blockchain technology in different contexts. A Jan. 15, 2018 article in Enterprise Times pointed to five different bills, in Nebraska, Florida and Tennessee, which would make smart contracts legally binding. The article defines smart contracts as “piece[s] of code created within a blockchain.” Smart contracts are created within a blockchain, and “designed to be executed as soon as the conditions that they contain are met.” The value in a smart contract is that “there is no room for fraudulent changes.”Helpfully, Bitcoin.com offers a comprehensive overview of how digital currency operates that contains answers to recurring questions and myths about digital currency. According to the site, the price as of this writing is in the $11,000 neighborhood.