New Jersey Senate considers crypto license bill

On November 5, 2020, the New Jersey Senate introduced bill S3132, known as the Digital Asset and Blockchain Technology Act, pending a referral to the New Jersey State Senate Commerce Committee. A2891, an identical bill, was previously introduced in the Assembly and is currently reported and referred to the Assembly Appropriations Committee.

The Bill seeks to regulate digital asset business activity through a mandatory licensing framework under the oversight of the New Jersey Department of Banking and Insurance, similar to the BitLicense regulatory framework in New York State. Pursuant to the Bill, a person may not engage in a digital asset business activity with or on behalf of a New Jersey resident unless the person is licensed by the Department, has filed a pending license with the Department, or is licensed to conduct digital asset business activity by a state with which New Jersey has a reciprocity agreement.

The term “digital asset business activity” is broadly defined under the Bill and means one or more of the following activities:

• receiving a digital asset for transmission or transmitting a digital asset, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of a digital asset
• storing, holding, or maintaining custody of a digital asset on behalf of others, exempting all custodians otherwise regulated as a bank, trust, broker-dealer, or financial institution in any state or by the United States
• buying and selling digital assets as a customer business
• performing exchange services of digital assets as a customer business
• administering or issuing a digital asset or
• borrowing or lending, or facilitating the borrowing or lending of, of customer digital assets.

The Bill defines "digital asset" to mean “a representation of economic, proprietary, or access rights that is stored in a machine-readable format, has a transaction history that is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process, and includes digital consumer assets, digital securities, and virtual currency.”

For a person licensed by another state (such as neighboring New York State, for example) to engage in digital asset business activity, the Bill provides such person the right to engage in such activities with a resident of New Jersey to the same extent as a New Jersey licensee if:

• the Department determines that the state in which the person is licensed has in force laws regulating digital asset business activity that are substantially similar to, or more protective of users and
• the person submits certain information and certifications to the Department.

“Digital consumer asset” is separately defined under the Bill and includes a digital asset that is used or bought primarily for consumptive, personal, or household purposes. The Bill seeks to protect and strengthen consumer rights with respect to digital consumer assets. The terms and conditions of a digital asset business involving a consumer's account must be disclosed at the time the consumer contracts for a digital asset business service. The disclosure must be full and complete, contain no material misrepresentations, be in readily understandable language and may include, as appropriate and to the extent applicable, certain information concerning fees and charges, risks to the consumer, and any protections or securities that are in place.

Licenses issued pursuant to the Bill are not transferrable or assignable. Licenses granted under the Bill are subject to annual renewal and licensees are required to submit a renewal report that contains an update of all information required at initial licensing and a description of any material changes and material litigation, including federal or state investigations.

If a person violates the provisions requiring licensure, such person is liable for a penalty of $500 per day, from the first day the Department issues a notice of failure to apply for a license until a license application is filed with the Department.

The Bill is one of the important steps for New Jersey to implement a regulatory framework for businesses dealing with digital assets. As the Bill lays out a reciprocity arrangement with other states, it remains to be seen whether, and to what extent, a New York State BitLicense holder, for example, may actually be permitted to engage in digital asset business activity in New Jersey without a separate license granted by the Department.