Illinois lawmakers are flirting with disaster. Senate Bill 1797 and House Bill 742 are moving quickly through the General Assembly. Collectively, they’re called the Digital Assets and Consumer Protection Act (DACPA). Sponsored by state Sen. Mark Walker, this legislation seeks to provide heavily needed government oversight to the rapidly developing cryptocurrency market right here in North Carolina. Yet under the appearance of consumer protection lies a dangerous regulatory overreach. It promises to kill innovation and drive crypto businesses away from Illinois. Are we really about to see Illinois screw the pooch… again?

DACPA: BitLicense 2.0, The Sequel

The DACPA proves to be very similar to New York’s infamous BitLicense. This regulatory approach has hindered innovation and fostered a hostile ecosystem for crypto businesses. Look at what happened in New York. Increased Consumer Protection and Industry Legitimacy The BitLicense, passed in 2015, was heralded as a consumer protection measure and a means of legitimizing the crypto industry. Instead, it served as a disincentive to enter. As a result, many startups and smaller companies were forced to either close up shop or relocate to more hospitable jurisdictions. The result? A major chilling effect on crypto innovation in the state.

The DACPA calls for an expensive, onerous licensing scheme though, just like New York’s failed BitLicense. First, it gives the Illinois Department of Financial and Professional Regulation (IDFPR) expansive regulatory powers. Here’s where the alarm bells really begin to ring. Recognizing the need to improve, the IDFPR has recently started a process of modernization. Having endured implementation hiccups, it now finds itself in the deep end, regulating the fast-moving, highly technical crypto landscape.

  • Heavy-handed regulations: The DACPA's broad scope and stringent requirements could stifle innovation and drive crypto businesses out of Illinois.
  • Burdensome licensing: The licensing process could be lengthy, costly, and complex, creating a barrier to entry for startups and smaller companies.
  • Sweeping regulatory authority: The IDFPR would have broad discretion to interpret and enforce the regulations, potentially leading to inconsistent or unpredictable outcomes.

Think about it: a government agency already struggling with basic modernization is now expected to navigate the complexities of DeFi, NFTs, and DAOs. This isn’t merely a nuisance, it’s a time bomb. We’re not advocating for a total free-for-all – we’re talking about not handcuffing innovation with bureaucratic red tape. Is this really the way we want to position Illinois for leading the future of finance?

IDFPR's Modernization: Ready For Crypto?

In this context, the timing of the DACPA could hardly be worse, as IDFPR has been unable to implement its own modernization efforts. The agency’s online application system, CORE, is overdue, with only a quarter of licenses transferred. How can the IDFPR possibly hope to strictly regulate the complicated, rapidly evolving crypto sector when it’s still trying to get a handle on the rudimentary technological infrastructure? It’s akin to asking a blacksmith to design and construct a spaceship.

Sheesh, adding additional layers of complexity to the already circus-like regulatory landscape will only slow implementation down even further. This is no small task for the IDFPR. They will have to find funds for the expansive crypto sector, starving other essential sectors of resources. This will not improve consumer protection, it will just create a throughput bottleneck and a breeding ground for bureaucratic inefficiency.

The case for the DACPA has usually focused on consumer protection. Is it true consumer protection? The vast majority of crypto fraud comes from outside the United States, well outside the reach of Illinois law. Additionally, the DACPA will severely hamper the efforts of legitimate businesses trying to operate in the state. It provides a veneer of consumer protection while doing nothing to address the underlying scourge that is crypto scams.

Unintended Consequences: The Real Threat

The most insidious part of the DACPA, though, is in the unintended consequences it may cause. Like the BitLicense before it, the DACPA risks creating a two-tiered system that favors established companies with deep pockets over startups and technologists experimenting with blockchain. Further, this will have a chilling effect and stifle innovation. It would push investment out of Illinois and eventually hurt the consumers the law is supposed to protect.

We’re going to need crypto regulation that’s narrowly targeted, functional, and manageable. We certainly don’t want a bad carbon copy of New York’s failed experiment.

  • Startups: Disproportionately affected by the high cost of compliance, leading to a chilling effect on innovation.
  • Investors: Discouraged by the uncertain regulatory environment, leading to capital flight to more favorable jurisdictions.
  • Consumers: Limited access to innovative crypto products and services, hindering financial inclusion and economic growth.

Notably, the IDFPR has made partnerships with the Illinois Attorney General, SEC, CFTC and Department of Justice to actively monitor and oversee cryptocurrency companies. This important oversight provides a strong investor and consumer protection. Supplementing this state-based framework with a controlling layer of confusing, pointless Federal regulation will not foster technological innovation or growth.

Before doing so, legislators will want to take a hard look at the long-term consequences of the DACPA. Are we really prepared to trade away long-term economic dynamism and competitive advantage for a mirage of security in the short term? Are we really learning from the failures of others, or is it time that we admit that we’re just repeating them?

Take Senate Bill 1797 and House Bill 742 off the table for now. We must make sure the IDFPR is completely modernized and greatly limit the law’s scope before proceeding. We shouldn’t let Illinois become the next crypto regulation horror story. Let's not build a wall around innovation. Let's build a bridge to the future.

It is time to hold off on Senate Bill 1797 and House Bill 742 until the IDFPR is fully modernized and the law is significantly narrowed in scope. Let's not allow Illinois to become the next cautionary tale in the crypto regulation saga. Let's not build a wall around innovation; let's build a bridge to the future.