Coinbase announced on Monday that it “must indefinitely suspend its business in Hawaii”. This is because the Hawaii Division of Financial Institutions (DFI) has imposed regulatory policies that would make Coinbase’s continued operations there impractical.
Also read: IRS Asks to Postpone Upcoming Hearing With Coinbase
Hawaii’s Money Transmitter License Requirements
According to Coinbase’s announcement, “the Hawaii DFI will require licensure of entities which offer certain virtual currency services to Hawaii residents”. Coinbase currently holds money transmitter licenses in 38 U.S. jurisdictions and submitted “a comprehensive application for licensure in Hawaii way back in 2014”, according to Juan Suarez, the head of Legal at Coinbase.
While Coinbase has no objection to the licensing policy decision, the company wrote:
We understand the Hawaii DFI has further determined that licensees who hold virtual currency on behalf of customers must maintain redundant fiat currency reserves in an amount equal to the aggregate face value of all digital currency funds held on behalf of customers.
This policy “would set Hawaii apart from nearly every other state in America and will make it impossible for Coinbase to operate there”, Suarez expressed, adding that 
For example, if Coinbase holds one bitcoin for a customer in Hawaii, this new policy will require the company to also hold the equivalent cash value of that bitcoin “as redundant collateral”, he described.
“This policy is obviously untenable. No digital currency business — and frankly, no commercially viable business anywhere — has the capital to supplement every customer’s bitcoin with redundant dollar collateral”, he further noted.
‘Permissible Investments’ Requirement
The ‘permissible investments‘ which Suarez referred to is a standard money transmitter licensing requirement for most U.S. states.
According to attorney Laurie Rosini of Perkins Coie: “Most states require digital currency companies to hold capital reserves in dollar-denominated ‘permissible investments,’ regardless of whether the company also holds digital currency value in the same form and
Some states, however, have waived the requirement and some have begun to propose rule changes to include digital currency businesses. Hawaii, on the other hand, has decided to impose this rule.
Washington State, for example, introduced House Bill 1045 in December proposing amendments to the Washington Uniform Money Services Act including adding a definition of “virtual currency”. The bill proposes that “in lieu of holding traditional ‘permissible investments’, digital currency companies must hold capital reserves in ‘like-kind virtual currencies of the same volume’ as that which is obligated to consumers”, Rosini explained.
Customers in Hawaii Need to Close Accounts
Coinbase now requires all Hawaii-resident customers to close their accounts within the 
While exiting the Hawaiian market for the time being, Coinbase still hopes to work with policymakers to either change the law or to encourage the DFI commissioner to revisit her existing policy discretion under Hawaii law, Suarez concluded.
What do you think of Coinbase exiting Hawaii and of Hawaii’s Money Transmitter Licensing requirements? Let us know in the comments section below.
Images courtesy of Shutterstock, Coinbase, and Wikipedia
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