Coinbase Exits as Hawaii Requires Bitcoin Companies to Hold Fiat Reserves

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 Coinbase Exits as Hawaii Requires Money Transmitter License“cash reserves (or similar, liquid assets referred to as ‘permissible investments’)” need to be maintained by Coinbase and other digital currency businesses.

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 volume as it is received”. She added that this has resulted in “added burdens on digital currency companies without enhancing consumer protections”.

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 Coinbase Exits as Hawaii Requires Money Transmitter Licensenext thirty days, Suarez wrote, adding that “We will implement controls to prevent Hawaii residents from establishing Coinbase accounts for the indefinite future”. In addition, he advised customers wanting to hold onto their bitcoin to send them to another wallet service. However, “we cannot recommend any service which meets Coinbase’s security standards and which is licensed to operate in Hawaii”, he claims.

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.

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  • Mateus Miguel

    Coinbase is very similar to a Bank, the difference is that they deal with digital currency, they can have access to any account and do what they want, coinbase is not a decentralized company.

    I agree with those type of rules, this will only protect peoples money.
    Companies like this, must guaranty that the currency they hold is protected, by having a similar amount of cash in case something goes wrong.

    • cseverance

      Even US Banks do not hold a dollar for dollar equivalent amount of anything especially gold so why force other currency exchanges to hold such high standards?

    • Jason | 高

      Along that line of thinking you could argue that banks should hold equal BTC value for every dollar. That way if the fed “quantitatively eases” it away we can get reimbursed. And like @cseverance:disqus mentioned, fractional reserves..

  • Frankie Galloway

    One of the most obtuse regulations I ever heard of. That would be like mandating your local convenience store to hold enough cash to refund every item sold in the store. Once you have purchased a product, it is yours. How long you hang out in the parking lot with it, (i.e leave it on the exchange), is the customer’s responsibility. The store is under no obligation to pay for your purchase if they and/or you are robbed. Coinbase does hold insurance over funds held on the exchange. As do I, hold insurance on my vehicle. Must I have to hold cash and assets commensurate in value to cover damages/injuries in a collision with other drivers in Hawaii also?
    Clearly regulators in Hawaii cant tell the difference between an asset and a hole in their head. I praise Coinbase for their move.
    Sorry, Hawaii, innovation will sail past your little isolated island. An island of foolish regulators perhaps? Seems like it’s the type of place that could benefit most from Bitcoin’s remittance advantages, among other things. I guess I must cancel my expensive vacation to Hawaii since I won’t have the option to transact with the leading US. Bitcoin exchange, from there.

  • Jörg Molt

    There is a significant sign so Hawaii will also turn over to paper wallet deals. CoinBase is no bank and it is still a market place which works great. They should change to BitSquare or use VPN`s to use CoinBase service further on.

    Many people in the world understand that VPN`s are necessary this times and becoming free of such ridiculous rules and treatments. After a while the Government will see and learn. There are other places who have learned faster.

    Still wait…

  • elsordo

    It seem Hawaii is just protecting their citizens from the uncertain or unknown. No one can foretell the future and so the policy makers implement the said regulation. Then again Coinbase has their right to accept conduction or reject as under a free market system. The policy makers may be having second thought plus a numbers of vexed Hawaii citizens but such is life. Lol!

  • Investing in the stock market is risky too. The Hawaii policy makers should read the meaning of fractional reserve banking. Coinbase provides a useful service.

  • Transhumanity

    This demonstrates that cryptocurrencies are skating on thin ice in the U.S. Any or even all the states could easily enact similar laws and make things difficult. Other than vending machines, I know of no legal way in the U.S. to purchase Bitcoin and Ether at a reasonable price. Vending machines are fairly pricey charging 11% to 14%. Buying from private parties is an option, but totally out of it costwise, in my opinion.

  • Rhian Campbell

    I love in Hawaii and am a Coinbase user; I think it is really unfair to impose these rules on Coinbase. If our banks don’t hold 100% of our cash in a room somewhere, than why should Coinbase do that? It doesn’t seem that the DFI commissioner asked any of the state’s residents what they would like! I know there are ways around this, but I’m not happy that my options are becoming more limited by a regulation that doesn’t make sense. To my fellow Hawaii state bit-coiners, please write the commissioner to tell them what you think:

    Division of Financial Institutions
    Department of Commerce and Consumer Affairs
    King Kalakaua Building
    335 Merchant Street, Rm. 221
    Honolulu, HI 96813

    • Kc

      Aloha ,thanks for the address , I will be sending my letter out in Monday! Yes I think this whole Hawaii ban sucks. I just started to use Coinbase , it was very easy for me to use. Hey Rhian is there any other exchange for us people in Hawaii to get bitcoin. I was only using Coinbase .

    • dakine

      So glad I left Hawaii and am now a resident elsewhere in the U.S. where innovation is embraced and people are progressive.

    • NietzschesNephew

      It really is a regressive socialist shithole, but at least the weather is nice

      • Rhian Campbell


        • NietzschesNephew

          any suggestions how to buy btc with a credit card while stuck in hawaii?

          I have a vpn, but its still not working on coinbase