As Massachusetts' top securities authority, Secretary of the Commonwealth William Galvin hasn’t shied from applying a firm hand to fintechs.
Wary of bitcoin as well as digital asset companies attempting to operate in the state, Galvin in late 2017 was among a number of state and federal regulators who warned consumers against investing in bitcoin. Its “unregulated and ambiguous nature ... provides a fertile ground for investment scams and other financial fraud,” he said.
He promised an “aggressive crackdown” on initial coin offerings and promptly delivered, blocking ICOs attempted by five firms last year because they lacked authorization in Massachusetts to sell or offer what Galvin deemed unregistered securities. Additionally, one Boston startup settled a $350,000 fine for a crypto sale, and another was charged with violating state securities law.
Now, his office has launched a working group to help fintechs better understand securities laws. It includes representatives from Eastern Bank in Boston, a blockchain company named Arwen, legal experts, academics and others.
While the new group will monitor all developments in fintech, its initial focus appears to be on digital assets. Technology executives say they are hoping to identify what Galvin’s office has targeted for enforcement.
“I personally wouldn’t be doing this if all that was going to come out of it was more enforcement action,” said Sharon Goldberg, the CEO of Arwen, which provides security for consumers trading digital assets on exchanges. “Enforcement actions are fine, but we first need to know what the rules are.”
Galvin's office did not return requests for comment. Eastern Bank referred questions about the group to the regulator.
Goldberg said Arwen has spent a lot of money trying to understand how state and federal laws affect it.
That has a chilling effect on innovation, added Goldberg, who is also a computer science professor at Boston University. "[It] is very difficult because you’re afraid you’re breaking a rule and you may not actually know what that rule is."
Ethan Silver, chair of the broker-dealer practice at Lowenstein Sandler, described Arwen’s plight as the cost of doing business for digital asset companies.
Until there’s more clarity from regulators on issues such as digital asset custody, “everyone is sitting there scratching their head and saying we’re going to operate in an unknown way and have to hire lawyers and consultants to make sure we’re buttoned up in all these various things we’re trying to do,” said Silver.
Galvin said in the press release about the group that “this collaboration will help advise securities regulators on meeting the novel demands of this rapidly growing space.”
While Galvin in the press release did not specifically call out cryptocurrencies and the blockchain, those areas are sure to be a focus given his past history and the group’s makeup.
“Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product,” Galvin said in his 2017 statement.
Jackson Mueller, the Milken Institute’s fintech lead, said that while Massachusetts had been on his organization’s radar thanks to the state’s fintech venture capital activity, “things have progressed from there as we’ve seen the state get much more involved on the crypto front.”
Mueller added that while on the surface it might appear Galvin will focus strictly on digital assets, discussions likely will revolve around “fintechs that are in the money services business,” which will include anything crypto- or blockchain-related.
“If you look back to what the Conference of State Bank Supervisors came out with [last year] in their Vision 2020 initiative and suggestions from their own working groups, a lot of those recommendations were focused on MSBs and how to standardize the licensing process,” said Mueller.
Mueller and Silver don’t expect immediate regulatory recommendations to come from the Massachusetts group. But there are current examples Galvin can draw from as some states have embraced cryptos and blockchain more than others.
Ohio Treasurer Josh Mandel has been animated about the state embracing blockchain technology and cryptocurrencies.
“I’m a believer in the concept that the states are the laboratories for democracy, that most good ideas that have come out of government have been ignited at the state level,” Mandel told American Banker in December.
Wyoming has been the most progressive state when it comes to blockchain. The state last year passed 13 blockchain-related laws, which are intended to serve as a legal framework for companies to operate such businesses in Wyoming. One of the laws created a fintech sandbox.
New York has one of the most noteworthy, and perhaps controversial, crypto regulations in the country with its BitLicense, which is needed for digital asset companies to operate in the state.
Critics of New York’s regulation have pointed to long wait times for BitLicense approvals, forcing many companies to abandon the state altogether.
