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Guest post by Colin Gallagher, Advisory Board Member at Lifeboat Foundation (https://lifeboat.com/ex/bios.colin.gallagher)/Chair of Education Committee, Bitcoin Foundation/Visionary for ABIS (http://abis.io )

California’s third try at passing a bad bill

Once again, the California legislature is attempting to pass “Bitlicense,” an effort by the state to require you to obtain an expensive permit, audits, and background check, merely to express yourself and choose how you wish to transact with others. The Electronic Frontier Foundation, a nonprofit that defends the rights of people in California and beyond, recently sent a letter to the legislature opposing AB 1123 (California’s latest “Bitlicense” attempt).

AB 1123, authored by Dababneh, is California’s third try at passing bad legislation on the subject of usage of what now are over 700 distributed, decentralized virtual systems, which have applications that cannot be simply described as “money,” since they are actually decentralized ledgers and a form of public expression.

As with AB 1326 (the previous “Bitlicense” bill that failed to pass in California – twice) AB 1123 fails to focus on security of exchanges. Some of the best minds in bitcoin, including Andreas Antonopoulos and others, have already designed some security standards that can could be made applicable to exchanges. However, AB 1123 doesn’t attempt to set a minimum security standard for exchanges. (As I’ve asserted before, people should not rely upon exchanges, and should not store funds in them for long periods, in part due to persistent security issues.) Instead, in a fatal flaw, AB 1123 tries to regulate the behavior of all individuals who might ever use any of the over 700 distributed, decentralized virtual systems – bitcoin or any other.

Are you a merchant who would use bitcoin for anything other than receiving it in exchange for your product? Make donations? Sending it to your friend’s startup without permission of the state? In each case, you’d be a criminal under AB 1123!

Feel like applying for a permit to make donations to someone in this state? Get ready: Depending on the whim of a commissioner, you would have to fork out 500 dollars — initially. Don’t forget your nonrefundable “application fee” — $3,500. Renewals? They’ve got that covered. $2,500 annually. Branch office fees? $125 to each branch office involved. Oh, and $75 dollars per hour would be billed to you for the benefit of the state examiners who would scrutinize your application to express yourself, innovate, and choose the medium of exchange that you personally prefer. If AB 1123 passes, companies will absolutely flee California at rates previously unseen. (Although this article deals specifically with crypto related issues, it’s worth a mention that California’s enactment of SB 1 (increase in gas tax and registration) and its proposal to enact SB 640 (tax on all services) will also force more people out of the state.)

AB 1123 would, if passed and signed into law, necessitate surveillance and monitoring that would conflict with laws of CA, such as CalECPA (SB-178), which was designed specifically to limit surveillance in California and require warrants. The implementation of AB 1123 would involve state regulators attempting to identify whoever uses decentralized, distributed systems and then sending them warrants, creating a chilling effect for anyone considering doing anything online. It would transform California’s digital landscape into a system reminiscent of East Germany and California’s regulators into the Stasi.

If you live in California, contact your state legislators and urge them to oppose AB 1123, the third attempt by the legislature to license innovation and free expression. Contact the Governor and ask him to veto AB 1123 if it arrives at his desk (you can do this from anywhere in the world, regardless of whether or not you live in California). Remind them that AB 1123 is merely a renumbered version of AB 1326, which the people of the state have successfully defeated twice before.

Sending California’s bitlicense to defeat when it first emerged was a victory worth celebrating — and we must do it again. California should not be allowed to fall prey to the same blunders that have cast New York (and some other states) in a financial stone age, and we deserve the freedom to be innovators (without state sanction) both in the making of new decentralized systems as well as in our daily actions and explorations of new systems.

What happened with the New York bitlicense?

AB 1123 is similar to the approach that New York took when it adopted a bitlicense. Many companies ceased to operate in New York as a result of it.

A partial list of companies that immediately left NY were: BitQuick, Eobot, Genesis Mining, GoCoin, Kraken, LocalBitcoins, Paxful, and Poloniex. Kraken, an exchange headquartered in San Francisco, CA, said the license “comes at a price that exceeds the market opportunity of servicing New York residents. Therefore, we have no option but to withdraw our service from the state.” The price of bitlicense in New York was, in many instances, well beyond the $5,000 license fee, often requiring as much as $50,000 in compliance costs. These companies, which stopped serving NY customers, are likely to make an exodus from CA if AB 1123 is adopted.

The New York bitlicense has been challenged in court by Theo Chino. The Bitcoin Foundation and various persons who support innovation, freedom of expression, and decentralized or distributed systems are supporting Theo Chino’s case against New York’s bitlicense. The case will be heard next at the New York Supreme Court on June 8, 2017, and it is likely other legal challenges will be launched against the New York bitlicense, in addition to the increasing availability of technological (software-based) means of circumvention.

The North Carolina bitlicense

In North Carolina, due to the enactment of bill H289 on June 30, 2016, the sale or issuance of any payment instruments or stored value primarily for personal, family, or household purposes, or even receiving of money or monetary value primarily for personal, family, or household purposes (including bitcoin or any cryptocurrency) is considered a crime unless you have a permit from the state or you fall under one of very limited exemptions. As such, H289 in North Carolina was very similar to California’s proposed bitlicense (originally proposed as AB 1326), but the difference was that California’s bill failed twice due to overwhelming opposition from both residents of the state and EFF, whereas H289 (North Carolina’s bill) slipped through the cracks and got passed by the Governor despite that the content of the bill makes it just horrible (not to mention unenforceable).

North Carolina residents, under H289, are unable to put up a website and advertise that they are accepting bitcoin as payment for goods or services, without running the risk of having someone from the State demand they get a license for money transmission (the cost of which in North Carolina is $1,500 just to get started for the application, and there are numerous other requirements). Altogether, H289 is a horrible bill, yet it managed to get enacted. It arguably should be contested (and overturned) in court, much as New York’s bitlicense is being subjected to court challenge.

Recently, the State of California got handed a defeat as (another) of its anti-1st Amendment laws were struck down in the case of Doe Publius and Derek Hoskins v. California Legislative Counsel Diane Boyer-Vine. In the decision in that case, it was stated that “the Court finds that Plaintiffs are likely to succeed on their claims that § 6254.21(c) violates the First Amendment as applied to them, and also violates the dormant Commerce Clause as applied to Hoskins. The Court further finds that the remaining preliminary injunction factors weigh in Plaintiffs’ favor. The Court therefore preliminarily restrains and enjoins Defendant from applying or enforcing § 6254.21(c) against Plaintiffs.” And in the Hassell v. Bird case at the California Supreme Court, the Electronic Frontier Foundation filed an amicus brief asking the court to overturn the lower court’s dangerous holding. In their brief, the Electronic Frontier Foundation emphasized that website owners have a 1st Amendment right to defend content on their platform. Although these cases are specific to California, the same issues (1st Amendment and Commerce Clause, for example) will no doubt be applicable in any future challenges to North Carolina’s H289.

To be sure, there are bills in other states which propose similarly awful ideas, but the above examples are provided as just a few examples of bills which either need to be challenged in court (in the case of the New York’s and North Carolina’s bitlicense) or simply defeated so that they cannot ever take hold in the first place (in the case of California). Some states, however, have seen the light and are moving in the right direction: New Hampshire’s legislature has just passed a repeal of its anti-bitcoin legislation, and Hawaii, one of the worst states to do business in for people interested in bitcoin, is now considering legislation (with its Senate Bill 949) to change that, just as New Hampshire did.

The legislatures of Washington, Georgia, Connecticut, New Mexico, North Carolina, and New York — the highly bitcoin-hostile and anti-innovation states – should take note of these recent efforts in New Hampshire and Hawaii, and these legislatures (and the people of those states) should work to repeal laws that attempt to force licensing requirements upon people who choose to innovate and engage in free expression by using bitcoin or any of the many newer systems now emerging.