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What do states want? Most states want innovators, talent, and treasure to migrate to their state. Attracting the right innovator might provide the state hundreds, thousands, or tens of thousands of jobs.

The way to do that is to have the most friendly environment. This can include things like low taxes, great educational resources, low cost of living, safe streets, etc.

How about for crypto? How do you attract crypto innovators and become the best state for starting crypto companies by embracing this new technology?

This list is for US State legislation. Different legislation would apply for US Federal legislation. Why? Because of the nature of US Federal Regulation which might act across state lines. One of the first principles of crypto is that it is trans-jurisdictional.

Here's a list, and I'll break down each one in the sections below.

  • Designate cryptocurrencies as property.
  • State banking options for crypto.
  • Accept cryptocurrency for state taxes and/or services.
  • Create a de minimus exemption for taxes on purchases or trades.
  • Create Enabling Legislation to encourage innovation.
  • Create an innovators sandbox.

Designate cryptocurrencies as property

The reason to this for the state is that property law is long established for the states. States like Wyoming, that are far ahead in this area, have taken additional steps to ensure that the legal claims on crypto are clear.

State banking options for crypto.

Federally chartered banks have been notoriously difficult for crypto innovators. This appears to be a remnant of a program called Operation Chokepoint, which makes it risky for banks to deal with businesses in certain industries. The nature of the Bank Secrecy Act seems to prevent banks from providing documentation about the reason accounts are rejected, or closed which prevents this from being fixed.

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State chartered banks or Credit Unions have the opportunity to be a solution, and state legislation enabling these institutions to support crypto would encourage crypto innovators. Enabling state chartered banks and credit unions to custody cryptocurrencies and crypto-assets is an excellent first step.

Accept cryptocurrency for state taxes and/or services.

This has already been done by some states. While not a lot of taxes will be paid by cryptocurrency while it is acting as a great store-of-value, the signal sent by allowing state taxes to be paid in cryptocurrency is a clear demonstration that the state understands the technology, acknowledges its value, and wishes to embrace the technology and resulting companies, and innovation flowing from it. Some states, like Ohio, California, Florida, and Colorado are taking, or have already taken this step.

Create an exemption for taxes on purchases or trades.

One of the challenges with crypto is the way it is taxed. While a like-kind exchange is allowed when swapping one hotel chain for another hotel chain, the Section 1031 like-kind exemption was eliminated through the Tax Cuts and Jobs Act for non real estate after January 1, 2018.

States can simply allow tax exempt purchases and trading crypto-to-crypto to demonstrate support of this new technology. Because of the nature of Federal vs. State taxes, this might need to be limited to purchases in-state, but that could open up new opportunities for online and in-person businesses within a state, and encourage commerce to remain in the crypto-friendly state.

This could be limited with a de minimus exemption of $1000 if there are concerns about house or car purchases. Or, simply allow the innovator's talent and treasure to flow to the state where state will benefit economically from their other activities.

Create Enabling Legislation to encourage innovation.

I've written a whole other article about Enabling Legislation, but the summary is that legislation should open up areas for innovation by using the words "may", or "can" instead of guard rail legislation using the words "shall", or "must". It explicitly allows for something that might otherwise fall into a grey area or require attorneys to analyze. These areas are common in crypto because the nature of blockchain technology acting like a shared electronic ledger opens up so many possibilities of things that can now be done that haven't been done before. When this overlaps with rules that were intended and appropriate for an earlier time - like the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940 - the extra clarity provided by Enabling Legislation is a welcome sight for innovators.

Create an innovators sandbox.

If some area of crypto seems too risky to allow fully unfettered innovation, create a sandbox. A sandbox will allow innovation up to a dollar amount, or with additional reporting, which can allow a proof-of-concept, or even be sufficient for a successful business model.

Conclusion

I'm sure there are other beneficial state legislation ideas, but states that follow these will clearly demonstrate to the innovators that they are welcome in the state, and that the state understands and welcomes this new technology.