The recent issuance of guidance regarding digital currency activities in Hawaii marks a significant milestone for Fintech companies and startups operating in or considering expansion into the Aloha State. Effective July 1, 2024, a money transmitter license is not required to conduct digital currency/asset activity in Hawaii. If a company conducts activity involving both digital currency/assets and U.S. dollars, a money transmitter license is required for the U.S. dollars money transmission activity as defined in Chapter 4849D, Hawaii Revised Statutes. The new guidance will supplant the Digital Currency Innovation Lab (DCIL), also referred to as the "sandbox" concluded on June 30, 2024. Digital currency companies will no longer require a Hawaii-issued money transmitter license to conduct business within the state. The companies will be able to continue transaction activity as an unregulated business. This development is part of Hawaii's ongoing efforts to position itself as a hub for technological innovation and financial inclusivity, while also ensuring consumer protection and regulatory compliance. In this article, we will delve into the specifics of the new guidance, its implications for digital currency services, and the opportunities it presents for Fintech innovation.
Understanding the New Guidance
Hawaii's approach to digital currency regulation has been cautious yet forward-thinking. The state's regulatory bodies have recognized the potential of blockchain and digital currencies to transform the financial landscape. The latest guidance outlines the types of digital currency activities and services that companies can legally conduct within the state. This clarity is a welcome development for Fintech firms, as it removes a layer of uncertainty that has previously hindered the growth of digital currency initiatives in Hawaii.
Permissible Digital Currency Activities
Companies that provide digital currency services to the public may provide the following services without a money transmitter license:
1. Trading of digital currency or assets
NOTE: exchanges/platforms that provide U.S. dollars denominated
stored value accounts that are used exclusively for facilitating
the purchase or sale of digital currency on the platform do not
require a money transmitter license. This activity includes
importing U.S. dollars into the platform from the customer's
external bank account and returning U.S. dollars to the
customer's external bank account. Any other use of the U.S.
dollars stored value accounts (such as enabling U.S. dollars
payments between platform participants or parties external to the
platform), may require a money transmitter license for that
activity.
2. Providing hosted digital currency wallets or
digital currency custodial services.
3. Any digital currency activities that represent
investments (such as lending, staking, etc.). However, such
activities may be subject to other licensing or registration
requirements.
4. Issuing or redeeming stablecoins.
5. Issuing or redeeming proprietary tokens.
6. Facilitating the use of proprietary tokens
within a proprietary platform.
7. Processing/facilitating digital currency
payments within the blockchain environment.
8. Payment processing involving digital
currency.
9. Transferring digital assets from one person to
another.
Companies that conduct activity in U.S. dollars or other f iat currencies that meet the definition of money transmission (§489D-4, HRS Definitions) will likely require a money transmitter license for that f iat-denominated activity if an exclusion (§489D-5, HRS) does not apply. The money transmitter licensing requirements will apply only to the activity that does not involve digital currency. For example, the permissible investment requirement will apply to the amount of U.S. dollars outstanding money transmission obligations, but not to obligations denominated in digital currency. However, the evaluation of a company's financial soundness will consider the company's entire financial situation. The Hawaii Division of Financial Institutions (DFI) provides guidance to the industry on the Department of Commerce and Consumer Affairs website. For specific questions regarding money transmitter licensing, please contact DFI at dfi@dcca.hawaii.gov.
Regulatory Compliance and Consumer Protection
While the new guidance offers a broad range of opportunities for Fintech innovation, it also emphasizes the importance of regulatory compliance and consumer protection. Companies engaging in digital currency activities must adhere to anti-money laundering (AML) and know your customer (KYC) requirements, among other regulatory obligations. Additionally, they are expected to implement robust security measures to protect consumers' digital assets and personal information.
Opportunities for Fintech Innovation
The clarification of permissible digital currency activities in Hawaii opens up numerous opportunities for Fintech companies to innovate and grow. By providing a clear regulatory framework, Hawaii is encouraging Fintech firms to explore new business models, develop cutting-edge technologies, and offer novel financial services that can benefit consumers and businesses alike. This is particularly significant in a state that is keen to enhance financial inclusivity and access to digital financial services for its residents.
Conclusion
Hawaii's new digital currency guidance is a landmark development for the Fintech industry. It not only clarifies the legal landscape for digital currency activities but also signals the state's commitment to supporting innovation and financial inclusivity. For Fintech companies, this is an invitation to leverage the potential of digital currencies to create transformative financial solutions. As Hawaii continues to refine its regulatory approach, the Fintech community has a unique opportunity to contribute to the state's vision of a more inclusive and innovative financial future.
Consulting with legal and compliance experts is advisable to determine whether your company meets the definition of money transmission based on the new Hawaii digital currency guidance. Ankura has many experts who can help guide you navigate the new digital currency guidelines in Hawaii and assist with any license applications needed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.