Illinois is currently debating a piece of legislation that has the potential to be tremendously positive for the blockchain and cryptocurrency industry in the state. Against this backdrop, legislators have introduced the Digital Assets Control and Protection Act (DACPA), a measure intended to regulate digital assets. There’s growing worry that its sweeping reach and tough standards may hinder innovation and push companies away from Illinois. The move has already drawn fierce backlash and comparisons to New York’s infamous BitLicense. Many have panned BitLicense for its draconian approach to regulation.

The DeliciousNFT.com team has been deeply engaged in the evolution of DACPA. In this piece, we’ll look at its possible effects by comparing it to New York’s BitLicense debacle, and we’ll discuss other regulatory frameworks that might allow innovation to flourish without risking consumer harm. Our goal here is to explain what’s at stake for the Illinois blockchain community. Plus, we’re looking to highlight the greater Web3 ecosystem.

To address industry fears that DACPA would have unintended adverse effects on the industry, the Illinois Blockchain Association convened with other industry stakeholders to work on amendments. They claim that the legislation is consumer protection. It may unavoidably penalize the very successful industry it seeks to clamp down upon. The association prefers a balanced approach. It fosters innovation but brings much-needed balance by addressing key issues of fairness in consumer protection and market integrity.

The DACPA: A Closer Look

The proposed DACPA legislation would create broad regulations of nearly all digital asset activities taking place in Illinois. The Illinois Department of Financial and Professional Regulation (IDFPR) will be the primary regulatory arm monitoring industry activities. They will push forward burdensome regulations and implement an oppressive licensing regime. In particular, you hone in on centralized exchanges and companies that control crypto on behalf of Illinois residents. On top of that, you bring together a mix of startups, students and technologists testing out blockchain solutions to real-world challenges.

The biggest worry among many industry insiders is the scope of the bill’s regulatory jurisdiction. Other experts have noted that the Illinois implementation of the license gives regulators even wider authority over the new profession. In stark contrast, New York’s BitLicense has only approved a little over 30 licenses since starting in 2015. This continuing situation leads to serious questions about the IDFPR’s competence. How are they supposed to do all that and regulate one of the world’s most technologically complex and fast-moving sectors within a few months with their already stretched resources and only a handful of new staff?

The DACPA creates serious costly burdens for compliance. This would result in an incredibly confusing licensing regime that will hinder any Illinois-based startup’s ability to comply with clear and concise licensing terms. This could result in an unintentional two-tiered system. It would be large, well-capitalized companies who could afford the compliance burden, all while squeezing out emerging startups that wouldn’t be able to weather the impacts. Additionally, the Illinois Blockchain Association expressed concern that regulatory overreach would have a chilling effect on the adoption of blockchain technology. They underscore this technology’s promise to fuel enterprise innovation across Illinois.

Echoes of New York's BitLicense

The proposed Illinois legislation shares similarities with New York's BitLicense, indicating a comparable regulatory approach to overseeing digital asset businesses. Additionally, both frameworks require licenses to engage in business activity involving digital assets, with ongoing annual renewal obligations. They feature guardrails for avoiding risk and disclosures for corporations that do business with crypto. Further, Illinois' proposal requires covered digital asset exchanges to provide 24/7 customer service, similar to the customer support expectations under New York's BitLicense.

Those similarities are cause for alarm, as New York’s BitLicense has been widely lambasted for being too restrictive. The BitLicense framework has often been pointed to as the reason for pushing crypto businesses from New York and killing innovation. The Illinois version of the license provides for much wider regulatory authority than in New York’s much-maligned BitLicense. Since its introduction in 2015, New York’s BitLicense has only granted a little over 30 licenses.

One notable difference is that both states require assets certified as digital assets. Illinois does permit certification by the New York Department of Financial Services (NYDFS) for assets certified prior to January 1, 2023. This would make things easier for at least some of the companies. It highlights their dependence on another state’s regulatory structure. The Illinois Blockchain Association argues that the state should learn from the experiences of other jurisdictions and adopt a more balanced approach.

Alternative Regulatory Approaches

Illinois is in a unique position to lead and find more innovative regulatory approaches to fostering innovation while protecting consumers. Other states have pursued alternative paths, providing examples that Illinois could look to as models.

These other approaches better prioritize cooperation and coordination between regulators and the industry, promoting a more nuanced and adaptive regulatory framework. By encouraging innovation and attracting blockchain companies to the area, Illinois has the opportunity to become a leader in the emerging Web3 space.

  • Sandbox Regulations: Wyoming's Special Purpose Depository Institutions Act (WY Stat § 13-12-101) and Sandbox participants (WY Stat § 40-29-103) provide a waiver of specified requirements imposed by statute or rule, allowing for innovation while maintaining oversight.
  • Task Forces and Study Groups: Establishing task forces and study groups, such as Utah's Blockchain and Digital Innovation Task Force (HB 335) and New York's Cryptocurrency and Blockchain Study Task Force (AB 9275), can help policymakers understand blockchain technology and develop effective regulations.
  • Clear Regulatory Frameworks: The updated Regulatory Framework for Investment Advisers (RFIA) introduced in July 2023 aims to codify a clear regulatory framework for cryptoassets, providing clarity on which assets are securities or commodities.
  • Licensing and Registration: Requiring blockchain companies to register and obtain licenses, such as in Vermont (HB 515), can help ensure consumer protection while allowing for innovation.
  • Compliance Periods: Offering compliance periods, such as the two-year period for intermediaries and digital assets, can provide a transition period for companies to adapt to new regulations.

The fate of blockchain technology in Illinois now rests with Gov. If the DACPA is adopted in its current form, it will inhibit innovation. This would further incentivize companies to move out of state. If policymakers are willing to consider alternative regulatory approaches, Illinois could create a thriving blockchain ecosystem that benefits both consumers and businesses.

The Future of Blockchain in Illinois

The Illinois Blockchain Association and other industry stakeholders are advocating for a more measured approach. Through their work, they hope to encourage the continued experimentation of innovation, while addressing key consumer protection concerns. The association believes that Illinois can be a leader in the global adoption of blockchain. To do so, the state needs to embrace a regulatory environment that fosters development and creativity. Food for thought. As always, the deliciousNFT.com team will be tracking the situation closely and updating you on these exciting new developments.

Balancing not undercut consumer confidence while fostering innovation is the key. Illinois has a great opportunity to hear from other states their successes and failures. Better collaboration and cooperation will produce a regulatory framework that is efficient but fosters innovation and growth. Those decisions will play a major role in defining the future of blockchain technology within Illinois’s borders. Looking to tomorrow we’re looking forward to these improvements, so stay tuned!

The key is to find a middle ground that protects consumers without stifling innovation. Illinois has the opportunity to learn from the experiences of other states and create a regulatory framework that is both effective and conducive to growth. The decisions made in the coming months will have a profound impact on the future of blockchain technology in Illinois.