South Dakota Cryptocurrency Updated Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
|South Dakota||HB 1196
Signed by governor 3/7/19, Chapter 207
|Provides a definition of blockchain technology for certain purposes.|
South Dakota – HB 1091
HB 1091 is proposed state legislation that explicitly addresses the legal treatment of cryptocurrency in the state of South Dakota. Overall, the House Bill provides cryptocurrency a legal definition, classifies digital assets as property, addresses digital asset custodial services, and details the duties of banks that provide cryptocurrency services within the state. House Bill 1091 was introduced by the 2021 South Dakota Legislature. Although this bill died in Chamber, reviewing its provisions is still worthwhile because a similar bill will likely be reintroduced in the future.
Under Section 1, a “digital asset” represents an economic, proprietary, or access right stored in a computer-readable format. In other words, digital assets are monetary values that are electronically stored on computers. The bill states that digital assets include: (1) digital consumer assets, (2) digital securities, and (3) virtual currencies. Under the bill, “digital consumer assets” are used primarily for consumptive, personal, or household purposes. The statutory definition of digital consumer assets include open blockchain tokens because these tokens are classified as intangible personal property.
In contrast, a “digital security” is a transferable share of an investment in a profit-sharing agreement or assets that share similar characteristics to other “instrument[s] commonly known as a securitie[s].” Instruments commonly known as securities include notes, stocks, bonds, and some cryptocurrencies, such as ICO tokens. In particular, ICOs are known as “the cryptocurrency industry’s equivalent to an initial public offering (IPO).” Just as companies issue stocks to raise capital, companies issue ICOs to fund commercial activities. Specifically, ICOs are a prominent fundraising method for startups that intend on providing products and services in the cryptocurrency and blockchain market.
Finally, section 1 defines “virtual currency” as a digital asset that is: (1) used as a medium of exchange, a unit of account, or store of value; and (2) is not recognized as legal tender by the United States government. To reiterate, a token’s individual characteristics determine whether a cryptocurrency is classified as a: (1) digital consumer asset; (2) digital security; or (3) virtual currency. Accordingly, cryptocurrencies must be analyzed on a case-by-case basis to determine how an individual token is categorized.
Section 2 of the Act classifies digital assets as intangible personal property and states that all three categories of digital assets are regulated as financial instruments. In other words, digital assets are categorized as a financial instrument regardless of whether it constitutes a digital consumer asset, a digital security, or a virtual currency. Specifically, section 2 emphasizes that virtual currency is regulated as intangible personal property that functions as money. However, “money” is ambiguous under the proposed statute because the Act does not provide the term with a statutory definition. Therefore, consulting a dictionary for a common definition of money is constructive. Categorically, Merriam-Webster dictionary defines money as “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” Since cryptocurrency functions as a medium of exchange, Section 1’s statutory definition of virtual currency is consistent with the common usage definition of money.
Furthermore, section 3 declares that financial banks are legally authorized to provide cryptocurrency services in the state of South Dakota and that banks may register as investment advisors for cryptocurrency investors. Additionally, the Act states that digital assets held in the custody of banks are not liabilities or assets of the bank and shall accrue to the customer’s benefit. In interpreting the statute, some may argue that banks are legally required to provide cryptocurrency services to South Dakota residents. However, that argument is inconsistent with the language of section 3 because the provision uses permissive words, such as “can” and “may.” The proposed statute does not use mandatory language and does not say that banks shall provide cryptocurrency services. Therefore, banks are presumed to be authorized but not legally required to provide cryptocurrency services within the state of South Dakota.
The duties of banks providing custodial services in respect to digital assets are detailed in Section 6. Under the proposed legislation, banks are required to: (1) implement all accounting, account statement, internal control, notice, and other standards specified by applicable state or federal law and rules for custodial services; (2) maintain information technology best practices relating to digital assets held in custody as specified by the commission; (3) comply with applicable federal anti-money laundering, customer identification, and beneficial ownership requirements; (4) act as fiduciaries; (5) employ an independent public accountant to conduct an examination at the cost of the bank; (6) maintain control over digital assets while in the bank’s custody; (7) agree in writing with each customer regarding the source code version the bank will use for each digital asset; (8) provide written notice to each customer that cryptocurrency that the bank is not liable for any losses suffered except for liability relative to a fiduciary power; and (9) agree with customers how digital assets will be returned by the bank.
Finally, section 7 of HB 1091 prohibits banks from engaging in the three following activities: (1) authorizing or permitting rehypothecation of digital assets; (2) engaging in any activity that uses or exercises discretionary authority relating to digital assets unless the customer so instructs; and (3) taking any action that may impair the solvency or the safety and soundness of the bank. Presumably, these prohibitions are intended to protect both the banks’ interests and the interests of the bank’s customers.
In conclusion, HB 1091 provides a potential legal framework for cryptocurrency regulations within the state of South Dakota. However, it should be noted that the bill still needs to be approved by the Senate before the above regulations become effective. Since the bill died in Chamber, the bill likely will not receive Senate approval this year. Nevertheless, a similar bill will probably be reintroduced in the future and will probably be similar to HB 1091.
South Dakota – Memorandum by the South Dakota Division of Banking
On May 25, 2019, the South Dakota government released a memorandum entitled “Virtual Currency Transmission in South Dakota.” The memorandum’s author is the Director of the South Dakota Division of Banking (SDDB), Bret Afdahl. The memo was addressed to all money transmitters operating within the state of South Dakota. According to Afdahl, money transmitters facilitating cryptocurrency transactions within the state are legally required to follow the state laws of South Dakota. In other words, cryptocurrency firms are not exempt from the general banking laws of South Dakota.
As the memo emphasizes, virtual currency is classified as “monetary value” under the state banking laws of South Dakota. Thus, according to the SDDB, any South Dakota firm that receives cryptocurrency for transmission within or outside the United States must comply with the state banking laws of South Dakota. Accordingly, cryptocurrency firms that function as money transmitters must receive authorization from the government of South Dakota to legally operate within the state. Specifically, SDCL 51A-17-4 states that firms are prohibited from engaging in the business of money transmission without first obtaining a license and undergoing a criminal background investigation. In plain English, cryptocurrency firms must pass a criminal background check to receive the necessary authorization to provide money transmission services in South Dakota. Presumably, virtually all firms that cannot pass the required criminal background check will not be licensed to act as money transmitters by state authorities.
Under South Dakota law, money transmission is defined as “the business of the sale or issuance of payment instruments or stored value or of receiving money or monetary value for transmission to a location within or outside the United States by any means, including wire, facsimile, or electronic transfer.” Presumably, cryptocurrency firms are engaged in the statutory definition of money transmission because they often exchange money, such as U.S. dollars, for monetary value, such as cryptocurrency, through electronic transfers. Likewise, cryptocurrency transactions are often conducted within the United States and internationally. Since cryptocurrencies are classified as “monetary value” in South Dakota, money transmitters that facilitate cryptocurrency exchanges must be licensed by the state. In other words, cryptocurrency firms that are not authorized to operate by the government of South Dakota are illegally providing money transmission services and can be legally sanctioned.
Finally, the memo states that money transmitters providing virtual currency services in South Dakota are legally required to do the following to maintain their licenses: (1) update the money transmitter Nationwide Multi-State Licensing Service and Registry (NMLS) profile and list virtual currency transmission as a business activity, and (2) complete the virtual currency sections of the Money Service Business Call Report each quarter. Therefore, the legal obligations of cryptocurrency firms do not end after they receive authorization. Instead, these firms must continue to satisfy the above legal obligations to continue legally operating within South Dakota or face the possibility of losing their license to provide money transmission services within the state.
In conclusion, money transmitters that offer cryptocurrency services to citizens of South Dakota must follow the above requirements and obtain a license from the appropriate governmental authorities to legally provide money transmission services under South Dakota law.
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