Colorado’s “epic fail” on crypto legislation marks growing split between Bitcoin and blockchain

The US state of Colorado has embraced blockchain, but has missed an opportunity to be seen as cryptocurrency-friendly…

A strange thing has just happened in the US state of Colorado. On one hand, blockchain has become part of the fabric of how the state works. On the other, a bill to classify Bitcoin and other digital currencies as separate from securities has failed.

Late last week, a bipartisan group of senators passed Senate bill 86, titled ‘Cyber Coding Cryptology For State Records’. Now, whenever major new IT projects are being drawn up, lawmakers must now consider using blockchain-based ledgers to secure state records against criminal theft or malicious tampering.

It is written into law that “the office, in conjunction with the state agency with which it is working, shall evaluate the potential use of blockchain and distributed ledger technologies as part of the project…[t]he study must produce recommendations of potential use cases where blockchain or distributed ledger technologies can be implemented inside of state technology solutions.” More than $5 million has been handed to departments to get this done.

It’s even part of the legislation that local schools and universities will promote and educate students on decentralised, distributed ledgers that use blockchain technology.

On 9 May, Colorado’s House Bill 1426, the ‘Virtual Currency Exemption Money Transmitters Act’ was narrowly defeated by 18 votes to 17 after previously getting approval. The Denver Post reported how frantic eleventh-hour arguments saw nervous senators switch sides to stop the bill in its tracks.

Bill sponsor Senator Tim Neville said this last-minute collapse was an “epic fail” for the state.

It would have marked out Colorado as crypto-friendly and opened the doors to new businesses, said Sen. Neville. But lawmakers happy to sing the praises of blockchain got jittery over frequent news stories on scammy ICOs and the fact that legally, cryptocurrencies are still too much of an unknown quantity.

The Post quotes Attorney General Cynthia Coffman saying: “The language…that would have carved out open blockchain tokens from the definition of a security under the Colorado Securities Act was overly broad and vague. The language would have created immunity from criminal liability for someone who commits securities fraud in that context.”

While the US Treasury is attempting to feel its way toward crypto regulation, there’s nothing solid in place. So now there is a steady drip-drip of states deciding for themselves how they should regulate cryptocurrencies without waiting for official word from Treasury Secretary Steven Mnuchin.


The US dollar is the second most popular trading pair for Bitcoin, with over a quarter of all transactions, according to CryptoCompare. Only the Yen has a higher trading volume. So whichever state regulates to attract and not punish crypto companies could create the crypto version of Silicon Valley – with all the associated businesses moving to shore up the local economy.

Wyoming was the first to crack pro-crypto legislation on 5 March 2018. Five linked bills passed under Wyoming Blockchain Legislation exempt currencies like Bitcoin and Ethereum from money transmitter laws, allowing individuals and businesses to trade crypto between themselves without being penalised for it.

The package of laws adds that virtual currencies are not subject to property taxes, and changes the state’s corporate code to allow companies to form what are known as ‘Series LLCs’. These company structures are often used by hedge funds and private equity funds to limit liability for parent companies, and are popular in the blockchain space. The intent is clearly to promote Wyoming as the “jurisdiction of choice for securities formation and to compete with Delaware and Nevada for corporate registration revenue”, writes Robert V Cornish Jr, partner at Wilson Elser.

More in line with the way the wind is blowing elsewhere is the state of Tennessee. Senators there ruled on 26 March that blockchain-based smart contracts were enforceable by law. Senate Bill 1662 states: “Smart contracts…that run on a distributed, decentralized, shared and replicated ledger…may exist in commerce. No contract relating to a transaction shall be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.”

At the same time, no legislation has been passed on how to treat cryptocurrencies in law.

Blockchain good, Bitcoin bad

Colorado’s split – between blockchain good, bitcoin bad – is emblematic of the way the law is starting to coalesce around blockchain-based technologies and the cryptocurrencies that inspired them.

These are in essence the first real shoots of the separation in law between blockchain tech for ledgers and smart contracts (seen as revolutionary, secure, stable, and safe) and blockchain-backed currencies (seen as volatile, dodgy and insecure).

“While the States have the power to create their own securities law, classifying all cryptocurrencies as securities would not be justifiable, in my opinion,” says Katrina Arden, an ICO advisor and attorney based in Los Angeles. She’s the founder of Blockchain Law Group, a crypto think tank with founder members in Australia and Russia.

“Blockchain technology and cryptocurrencies are two separate and distinguished matters,” she said.

“While blockchain by its nature can be classified as a digital record and, therefore, governed as such, cryptocurrencies can represent a myriad of things. Each coin or token provides specific rights to the holders and not all of them are attributable to securities.

Even the SEC agreed that each ICO has to be analyzed individually to determine whether the offered tokens constitute securities or not.

An alternative approach could be to classify cryptocurrencies into different classes of assets based on the distinguished characteristics and rights provided by them.” Agreeing is Julian Zegelman, Founding Partner of TMT Blockchain Fund. “The legal split between blockchain tech and cryptocurrencies in Colorado is not surprising,” he told CryptoNewsReview.

“Regulators are finally seeing the blockchain industry for what it is, a collection of distinct but interrelated segments as opposed to one whole. They are more accepting of blockchain as a software solution but remain suspicion of tokenization and cryptocurrencies, afraid that the uneducated consumer may lose their life savings in speculative crypto trading.”

The constant cycle of bad news about ICOs – suspicions of pump and dump schemes and the fact that one of the biggest players in crypto, Ripple Labs, is facing a class action lawsuit for allegedly defrauding investors – will all weigh heavily on the minds of regulators.

Julian adds: “They see the cryptocurrencies, ICOs, the raising of millions of dollars. Then they often see the fraud, scams and speculation associated with it on the front pages of newspapers. So it’s easier for regulators to think that this is all there is, so inevitably they are coming down hard on it.

It’s not surprising that regulators are slowly beginning to see the difference between blockchain technology as a software and tech tool – and cryptocurrencies which are often volatile and come short when comes down to compliant trading. This will change in the future as more serious companies tokenize their assets and as the most liquid cryptocurrencies begin to stabilise in their value and act very similar to traditional currencies.”

Bit Licences

Elsewhere, there are particular licences called ‘bit licences’ a local state requirement in New York and New York State which in reality have made it very difficult for crypto exchanges and other crypto finance models to work in the nation’s financial capital.

If you’ve ever wondered why the likes of Binance – listed in Hong Kong, with servers in South Korea or Bitthumb – South Korea again – don’t operate anywhere near Wall Street, this is likely the reason. “Certain jurisdictions outside of the US initially favoured all types of blockchain businesses,” said Julian.

“Singapore is a great example. However, when confronted with the vast amount of issues surrounding cryptocurrencies such as money laundering checks, significant amount of fraud and most importantly high volatility which makes it extremely risky for retail investors – even the Singaporean authorities took a step back. Singapore’s authorities focussed their efforts and government support on blockchain software businesses, technology protocols and platforms as opposed to the consumer-financing cryptocurrency businesses.

I think Colorado is very representative of that trend. But I think that trend will change in the next year or two as compliant regulated crypto exchanges come up.”

While Colorado crypto fans may have to wait for real revolutionary change, they cannot allow their politicians to wait too long.

Away from home South Korea and Singapore are booming, and closer to home Wyoming – and others – have aggressively set out their stall and are pushing forward, at speed.

Images: BigStock