Bill > A1975

Introduced Session

This bill, the "Virtual Currency and Blockchain Regulation Act," establishes a regulatory framework for virtual currency businesses to operate in New Jersey, creates provisions governing the use of blockchain with certain business entities, and creates certain incentives for virtual currency businesses to locate in the State. Provisions on open blockchain tokens This bill provides that certain open blockchain tokens are intangible personal property rather than securities. An open blockchain token is to be considered intangible personal property under the bill if it meets the following characteristics: (1) the predominant purpose of the token is consumptive; (2) the developer or seller did not market the token to the initial buyer as a financial investment; and (3) at least one of the following subparagraphs is satisfied: (a) the developer or seller reasonably believed that it sold the token to the initial buyer for a consumptive purpose; (b) the token has a consumptive purpose that is available at or near the time of sale and can be used at or near the time of sale for a consumptive purpose; (c) the initial buyer of the token is prohibited by the developer or seller of the token from reselling the token until the token is available to be used for a consumptive purpose; or (d) the developer or seller takes other reasonable precautions to prevent an initial buyer from purchasing the token as a financial investment. The bill requires that, before making an open blockchain token available for sale, the developer or seller of a token, or the registered agent of the developer or seller, is to electronically file a notice of intent with the Department of Banking and Insurance and pay a filing fee of $1,000. The notice of intent is to contain the name of the person acting as a developer or seller, the contact information of the person, or the registered agent of the person and comprehensive details, to be determined by the Commissioner of Banking and Insurance, on the open blockchain token made available for sale. A form is to be made available by the department for this purpose, and is to include a secure electronic form conspicuously posted on the department's Internet website. A developer, seller and the registered agent of these persons, if applicable, is to have a continuing duty to update the contact information provided on a notice of intent as long as the open blockchain token associated with the notice is actively being sold. The bill makes a willful failure by a developer, seller or facilitator to comply with the duties imposed by the bill an unlawful practice under the Consumer Fraud Act. An unlawful practice under the Consumer Fraud Act is punishable by a monetary penalty of not more than $10,000 for a first offense and not more than $20,000 for any subsequent offense. In addition, violations can result in cease and desist orders issued by the Attorney General, the assessment of punitive damages and the awarding of treble damages and costs to the injured party. Provisions on digital assets as property This bill establishes digital assets as property and allows banks to provide custodial services for digital assets. A digital asset is a representation of an economic, proprietary, or access right that is stored in a computer readable format, and includes digital consumer assets, digital securities, and virtual currency. Under the bill, all digital assets will be classified as property, with digital consumer assets classified as a general intangible property, digital securities classified as a security, and virtual currency classified as money. A digital asset will also be treated as a financial asset under the bill, if a written agreement is entered with the owner of the digital asset classifying the asset as such. If the digital asset is treated as a financial asset, then the digital asset will remain as intangible personal property. Under the bill, a secured party or an agent, custodian, fiduciary or trustee of the party with a security interest in a digital asset will be able to perfect their security interest through control. A secured party holding a security interest in a digital asset through control will have priority over a secured party that has a security interest in the asset but does not have control. Perfection by control will create a possessory security interest in a digital asset and will not require physical possession. Additionally, the bill will allow a bank to provide custodial services of digital assets upon providing 60 days written notice to the Commissioner of the Department of Banking and Insurance. A bank that elects serve as a qualified custodian must follow federal Securities and Exchange Commission rules regarding custodial services and must ensure the following: (1) the implementation of all accounting, account statement, internal control, notice and other standards specified by applicable State or federal laws and regulations for custodial services; (2) maintenance of information technology best practices relating to digital assets held in custody; (3) full compliance with applicable federal anti-money laundering, customer identification and beneficial ownership requirements; and (4) other actions necessary to carry out the aforementioned requirements, which may include exercising fiduciary powers similar to those permitted to national banks and ensuring compliance with federal law governing digital assets classified as commodities. Apart from the requirements above, a bank providing custodial services will also be required to enter into an agreement with an independent public accountant to conduct an examination that conforms to federal regulations concerning custodial services, at the cost of the bank, pursuant to certain rules and requirements. The bill also provides that digital assets held in custody are not depository liabilities or assets of the bank. A bank, or its subsidiary, that holds digital assets in custody will be able to register as an investment adviser, investment company or broker dealer as necessary. Banks holding digital assets in custody must maintain control over a digital asset, with the customer electing, pursuant to a written agreement with the bank, one of the following relationships for each digital asset held in custody: (1) custody under a bailment as a nonfungible or fungible asset. Assets held under this bill will be strictly segregated from other assets; or (2) custody under a bailment that allows the bank, based on the customer's instructions, to undertake transactions with the digital asset. A bank that holds a digital asset in custody under a bailment that allows the bank to undertake transactions with the digital asset will not be liable for any loss suffered with respect to any transactions made, except for liability consistent with fiduciary and trust powers as a custodian. The bill provides that a bank and a customer must agree in writing with regard to the source code that the bank will use for each digital asset, and the treatment of each asset. Any ambiguity within the agreement will be resolved in favor of the customer. A bank will be required to provide clear, written notice to each customer, and require written acknowledgement, of the following: (1) prior to the implementation of any updates, material source code updates relating to digital assets held in custody, except in emergencies which may include security vulnerabilities; (2) the heightened risk of loss from transactions with the digital asset, if the bank is given the instruction from the customer to undertake transactions with the digital asset; (3) that some risk of loss as a pro rata creditor exists as the result of custody as a fungible asset; (4) that custody may not result in the digital assets of the customer being strictly segregated from other customer assets if the bank is allowed to undertake transactions with the asset; and (5) that the bank is not liable for any losses suffered if the bank does transact with the asset, with exception for liability consistent with fiduciary and trust powers as a custodian. A bank and a customer must agree in writing to a time period within which the bank must return a digital asset held in custody. If a customer elects to allow the bank to make transactions with the asset, then the bank and the customer may also agree in writing to the form in which the digital asset will be returned. The bill provides that all ancillary or subsidiary proceeds relating to digital assets held in custody will accrue to the benefit of the customer, except as specified by a written agreement with the customer. The bank may elect not to collect certain ancillary or subsidiary proceeds, as long as the election is disclosed in writing. A customer who elects to custody under a bailment that treats a digital asset as either fungible or nonfungible may withdraw the digital asset in a form that permits the collection of ancillary or subsidiary proceeds. Finally, the bill provides that a bank will be prohibited from authorizing rehypothecation of digital assets. The bank will not engage in any activity to use or exercise discretionary authority relating to a digital asset unless it has the customer's instructions to do so. A bank will also be prohibited from taking any action which would likely impair the solvency or the safety and soundness of the bank, as determined by the commissioner after considering the nature of custodial services customary in the banking industry. Provisions on decentralized autonomous organizations This bill allows the formation of decentralized autonomous organizations (DAO) under the State's limited liability company law. A DAO is an organization controlled by its members with no central authority. Instead, the organization is governed by a set of smart contracts built on distributed ledger technology or blockchain. The smart contracts automate many of the decision-making processes typically reserved for upper-tier management in a traditional company. The bill permits DAOs to incorporate as limited liability companies, and affords DAOs similar protections as are afforded to limited liability companies under current law. The bill provides a DAO is a limited liability company whose articles of organization contain a statement that the company is a decentralized autonomous organization. The bill requires DAOs to maintain a presence in the State through a registered agent and to include in its name a designation such as "DAO", "DAO LLC" or "LAO". The bill permits limited liability companies in the State currently to convert to DAOs by amending their articles of organization. Under the bill, a DAO may be member managed or algorithmically managed, as set forth in its articles of organization. If algorithmically managed, the underlying smart contract must be able to be updated, modified or otherwise upgraded. The bill provides that the articles of organization or the smart contracts of the DAO will govern aspects or the organization such as relations among the members, rights and duties of each member, voting rights, transferability, distributions and amendments. In addition, unless provided for in the articles of organization or operating agreement, no member has any fiduciary duty to the DAO or any member other than the implied contractual covenant of good faith and fair dealing. Provisions on blockchain filing system This bill gives the Division of Revenue and Enterprise Services in the New Jersey Department of the Treasury the authority to develop filing system using blockchain through which all required filings may be submitted. The division is to try to use blockchain technology and include an application programming interface as components of the filing system, as well as robust security measures and other components determined by the division to be best practices or which are likely to increase the effective and efficient administration of the laws of this State. The division may create a blockchain or contract for the use of a privately created blockchain. The division may consult with all interested parties, including businesses, registered agents, attorneys, law enforcement and other interested persons, before developing the filing system and if possible, partner with technology innovators and private companies to develop necessary components of the system. The division may also promulgate rules and regulations to effectuate the provisions of the bill. Exemption for virtual currency from money transmitter law This bill also exempts virtual currency from current law governing money transmitters. "Virtual currency" is added to the law to mean any type of digital representation that: (1) is used as a medium of exchange, unit of account or store of value; and (2) is not recognized as legal tender by the United States government. Authorization for business entity to issue stock as certificate token This bill authorizes a business entity, such as a corporation or limited liability company, to issue stock certificates in the form of electronic certificate tokens. "Certificate token" is defined as an electronic representation of a share of stock which contains certain information required under existing law for stock certificates and which is entered into a blockchain or other secure, auditable database. Business incentives for virtual currency businesses The bill also provides certain incentives for virtual currency businesses to locate in New Jersey. The bill exempts receipts from retail sales of energy and utility service to a virtual currency servicer or registrant for use or consumption directly and primarily in the creation of virtual currency, including mining, from the tax imposed under New Jersey's "Sales and Use Tax Act." The bill provides that a virtual currency servicer or registrant may file an application for a sales and use tax exemption with the Director of the Division of Taxation in the Department of the Treasury. The "Grow New Jersey Assistance Act," N.J.S.A.34:1B-242, provides certain business and insurance premiums tax credits for job creation and retention in New Jersey. For the purposes of the "Grow New Jersey Assistance Act," the bill designates virtual currency servicers and registrants registered pursuant to this bill's provisions to be in a "targeted industry" and a "technology startup company." Therefore, in order for a virtual currency servicer to be eligible for that program, the minimum number of new or retained full-time jobs would be a minimum of 10 new or 25 retained full-time jobs, which is less than is required for certain other types of business. Virtual currency servicers and registrants would also be eligible for, in addition to the base amount of the tax credit, an additional $5,000 for each new or retained full-time job each year. Allowance for virtual currency in payment of State taxes Current law, N.J.S.A.54:48-4.3, allows the Director of the Division of Taxation to establish an electronic funds transfer system for payments of State taxes. The bill amends the definition of "electronic funds transfer" to include any transfer of virtual currency. This change would allow the director to accept virtual currency in the payment of State taxes.

Committee Categories

Yvonne Lopez (D)*,  Raj Mukherji (D)*, 

Received in the Senate, Referred to Senate Commerce Committee (on 11/03/2022)

Official Document