Senate Bill 202 was signed into law at the end of June— requiring cryptocurrency organizations to get a state license and follow money transmission laws if they charge a fee for processing a crypto transaction.
“Basically what we’re doing is setting up the guardrails that that those transactions are going to run between,” said Sen. Chris Gebhard (R-48), the sponsor of the bill. “They create protections for both sides of that transaction.”
As lawmakers tackle cryptocurrency regulations, the industry can be split into two parts. There is the creation and maintenance of cryptocurrencies themselves. Then, there are organizations that help consumers access those currencies. For example, Coinbase is a marketplace that lets people buy and sell crypto; but Coinbase itself does not have a cryptocurrency it created.
“All of those sort of intermediaries… maybe they're fine, upstanding institutions. Maybe they're really shady,” said Bryan Routledge, an associate professor of finance at Carnegie Mellon University.
SB202 focuses on the access companies— setting up some accountability for transactions. This ensures marketplace organizations are correctly sending a customers money to the corresponding currency, and vice versa.
"Since they could be trustworthy or not, that's a place for regulation to step in and say, here are the rules. If you want to partake in this transaction,” Routledge said.
In a press release, Pennsylvania’s Department of Banking and Securities says that requiring the licenses will close a gap in consumer protections.
Just a few weeks after Pennsylvania’s inclusion of cryptocurrency into Money Transmission laws, the GENIUS act was signed into law at the federal level on July 18.
The GENIUS act sets up regulatory framework for “stablecoins”, which are cryptocurrencies that link their value to the U.S. dollar. Pennsylvania’s SB202 applies to all virtual currencies, providing a different type of enforcement from the federal government at this time.
Financial institutions have always had to juggle laws from the federal and state level.
“We regulate people who move money around. Here's a new way to move money around. They should be included,” Routledge said.
Regulating how cryptocurrency works can be easily bipartisan. However, questions abound on if cryptocurrency should be accepted or legitimized as money by society.
"It gets at a bit of… what we mean by 'what is money?’,” said Routledge.
The finance professor says money often fills three roles in society. It’s a way to store value (I have $14 in my spending account), a way to exchange value (I will give you $5 if you give me ice cream), and a way to measure value (How dare you, this ice cream is worth $7).
While cryptocurrencies have established a way to store value (people can open crypto wallets) and ways to exchange value (such as the markets where people buy and trade cryptocurrencies)— they are still not often used as a measurement of value (is ice cream worth 3 Bitcoins? .012 Bitcoins?). This makes them difficult to use in everyday life.
Part of the hesitancy around using cryptocurrencies in the mundane purchases of life is that people don’t trust that currencies have value.
The innovation of cryptocurrency is not that all of it takes place digitally. Many Americans can go months without using cash. And a $20 bill, at the end of the day, is just paper. It has value because the United States Federal Reserve says it has value.
That link to authority is what cyptocurrencies lack; on purpose in many cases. Bitcoin was launched in the wake of the financial crisis of 2008.
“It’s big innovation was record keeping without sort of a trusted record keeper,” Routledge said. “A monetary system that didn't have a bank or a central government controlling it."
Bitcoin launched with an algorithm and a limited amount of coins. To trade Bitcoin, people create crypto wallets. If someone traded Bitcoin to another account, the transaction would get encased in cryptography (basically a really complicated puzzle, but with computer code).
“Miners”, which could be any stranger with the right technology and computer skills, would solve the cryptography around a transaction— which let the transaction get officially recorded. Instead of a miner earning a transaction fee for their service, a new coin is created and given to the miner.
“This kind of decentralized record keeping… is like, it’s just a big spreadsheet,” Routledge said.
Bitcoin’s algorithm has a max amount of coins that can be created, which adds scarcity/value to the virtual currency. This technology is called blockchain, and is used in many cryptocurrencies that have launched since then.
The regulatory questions that face lawmakers in the future will revolve around who will hold the authority to stabilize money’s value.
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