State crypto commission offers policy recommendations

Report cites opportunities, threats of technology with ‘potential promise’

A state task force with the mission to assess state policy regarding cryptocurrencies acknowledges that digital assets “offer material opportunities to improve the efficiency and effectiveness of a broad range of human activities, including financial services” in New Hampshire. But it also warns that where there is opportunity there is also the risk of “greed, jealousy, arrogance, ignorance, incompetence, carelessness, naivete.”

The Governor’s Commission on Cryptocurrencies and Digital Assets report, released on Jan. 19, offers policy recommendations to both enhance the use of crypto in the Granite State while also protecting consumers, particularly in light of recent news — statewide and nationally — of fraud associated with these technology-based currencies.

“This is an important technology that offers real potential promise,” says Concord lawyer Bill Ardinger, the commission’s chair. “The legal system is too uncertain right now as far as innovation and development and sound regulation, so it should be clarified,” he adds, noting that the states, particularly New Hampshire, “should take the lead role as laboratories in building these legal rules of the road infrastructure.”

The task force group met seven times between April and September, hearing from crypto experts, among them New Hampshire residents Meltem Demirors, described as a veteran of digital assets investing, and Matt Higginson, considered a leader in distributed-ledger technologies and business development initiatives.

Among the report’s suggestions are:

• Establishment of a legal process for creation of so-called “Decentralized Autonomous Organizations.” These DAOs are popular among cryptocurrency enthusiasts and blockchain technologists to make decisions in a bottom-up management approach.

• Establishment and funding of a system in New Hampshire’s state court system to resolve disputes involving blockchain activities.

• Establishment and funding of a taskforce to investigate whether and how blockchain technologies can be used to improve current systems for filing and storing official government records.

• Establishment of a legislative standing committee to examine important issues arising under current New Hampshire securities laws and federal law developments.

• Establishment and funding of a Blockchain Quality Assurance Center at the University of New Hampshire’s Interoperability Laboratory.

“The Commission acknowledges that these technologies and applications are dynamic and innovating before our eyes, and that this report will only be an initial step in a long process of developing policies that will improve New Hampshire laws, enhance innovation and economic development, and protect rights and interest of New Hampshire citizens,” writes Ardinger in the report’s opening letter to Gov. Chris Sununu.

Educating the public

Cryptocurrency is a term applied broadly to digital currency, which is an alternative form of payment created using encryption algorithms. Bitcoins are an example. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across a network, or chain, of computer systems.

The report makes the point to define 16 terms associated with crypto, not using computer-speak but terms everyone can understand. That aspect was important to Ardinger, because those definitions were not contained in other reports from other states that are also looking into crypto technologies.

“It’s not in other reports,” says Ardinger.

“It is an attempt, and it probably is only a beginning, to use English language explanations of some key concepts that are involved in this arena. And I think it’ll only get better, but someone had to start it, and I think we did.”

Another key emphasis of the report was the need for educating the public — policymakers in particular — in order to craft policy that is both productive and protective.

“In order to propose and adopt effective legal rules, the policymakers must have a thorough understanding of the activity that is potentially subject to regulation,” the report says. “Because these new technologies are very specialized and complex, very few policymakers are likely to have the necessary knowledge to develop legal rules that properly balance conflicting goals of society.”

Angela Strozewski, executive vice president and chief operating officer of NH Mutual Bancorp, served on the task force as the representative of the NH Bankers Association.

Per the report, she emphasized early in the deliberations that the task force should encourage comprehensive education of crypto investors and consumers.

“A key to supporting crypto-asset literacy is to develop a culture that supports complete and understandable transparency and disclosure regarding the risks of investing in any crypto-asset,” the report says.

Ardinger noted that many aspects of the internet technology were initially difficult to understand, but people learned and adapted.

“Just think of the way that applications of the computer network technology that we call the internet has changed people’s lives, for the worse in some cases, but for the better in many cases. And I think people continue to work on it,” Ardinger told NH Business Review.

“I doubt this blockchain technology will be done in a year or two years. The most utopian, confident supporters of this technology have to admit that right now it’s clunky, just like the original internet was,” he said.

Ardinger, an attorney who has headed up the tax practice group at Rath, Young and Pignatelli in Concord for about 30 years, was instrumental in helping state policymakers craft the state’s trust regulations.

In February, Sununu named him to chair the 12-member crypto committee with instructions to develop “cryptocurrency and digital asset economies and appropriate regulatory regimes” for the state.

Ardinger makes note in his letter’s preamble of “criminal fraud resulting in the loss of billions of dollars of customer assets.” His reference is to Sam Bankman-Fried, former CEO of crypto exchange FTX, who faces federal fraud charges of misleading investors and using billions of dollars from his customers for his own ends.

A New Hampshire case — not noted specifically in the report — involves Ian Freeman of Keene, convicted in December of running an unlicensed bitcoin exchange business and laundering over $10 million in proceeds of romance scams and other internet frauds.

New state law

For his part, the governor thanked the task force for its work, saying, “This report is comprehensive and timely, providing specific recommendations that would establish New Hampshire as a leading jurisdiction for the development of sound and effective applications of blockchain technologies, including proposals to clarify current laws and to support law enforcement in its efforts to protect New Hampshire consumers and investors.”

A state law on the books now relative to crypto was the work of Rep. Keith Ammon, R-New Boston, a member of the crypto task force. Ammon, a libertarian associated with the Free State Project in New Hampshire, is current vice chair of the House Commerce and Consumer Affairs Committee.

His HB 103 from the 2022 legislative session exempts the developer, seller or facilitator of the exchange of an open blockchain token from some state securities laws. To be exempt, the developer, seller or a person who facilitates the exchange of an open blockchain token must file with the secretary of state.

The task force takes note of the political and ideological push and tug between centralized and decentralized control of technology-based assets.

“Many proponents of blockchain technologies and crypto-assets describe themselves as libertarian who have substantial reservations about the role of a central government or other centralized institutions in society,” the report states.

“The question for policymakers,” it continues, “is whether laws and regulations that clarify important uncertainties or provide basic ‘rules of the road’ for how larger-scaled crypto activities should be conducted are always ‘bad’ or may be ‘good’ because they encourage more effective innovation and development.”

Ardinger says he believes that in the same way that the internet is decentralized and largely unregulated by the government, digital assets have the same potential, as long as the “rules of the road” protect the user.

One example of its potential is banking.

He notes that a large segment of the population is what he called “unbanked,” in that they don’t have bank accounts.

“It’s not the fault of the banks by any stretch,” says Ardinger. “I’m just saying that technology that currently underlies our banking infrastructure across the world simply is not as accessible to all citizens as it could be. This technology, cryptographically secure databases, are maintained across a distributed network of computers in a very secure way. I’m not saying it’s there yet, but it offers opportunity for banks — traditional banks, traditional finance, but even possibly for some as-yet-created structure sometime over the horizon — to allow everyone to access money transfers, and that includes across borders.”

Categories: Banking and Finance