How Bad Policy Harms Coinbase Customers in Hawaii
Throughout our five years of successful operations and tremendous growth, Coinbase has strived to become the most trusted digital currency business in the world. A core component of our success is our commitment to providing continuous, secure service in as many places as we can operate safely and lawfully. Unfortunately, Hawaii will no longer be included among the locations we support and our Hawaii customers deserve to know why.
The Hawaii Division of Financial Institutions (DFI) has stated that digital currency businesses operating in Hawaii are required to be licensed under the state’s Money Transmission Act. Coinbase has no objection to this policy. In fact, Coinbase is currently licensed to engage in money transmission in thirty-eight U.S. jurisdictions and we submitted a comprehensive application for licensure in Hawaii way back in 2014.
In September of last year the DFI informed Coinbase that it imposed a policy which would set Hawaii apart from nearly every other state in America and which will make it impossible for Coinbase to operate there: Coinbase and other digital currency businesses will be required to maintain cash reserves (or similar, liquid assets referred to as “permissible investments”) in an amount equal to the aggregate face value of digital currency funds held on behalf of customers. In other words, if Coinbase holds one bitcoin for a Hawaii customer, the practical outcome of this policy will require Coinbase to also hold the equivalent cash value of that bitcoin, currently well over $1,000, as redundant collateral.
This policy is obviously untenable. No digital currency business — and frankly, no commercially viable business anywhere — has the capital to supplement every customer bitcoin with redundant dollar collateral. Even if Coinbase could manage the extraordinary capital strain and massive exchange rate exposure inherent to this policy, it would do nothing to further our customers’ paramount interest: that Coinbase absolutely secures digital currency held on their behalf and makes their funds available, in full, anytime they wish to spend or liquidate. To repeat: DFI’s dollar-collateral policy does nothing to protect customer funds. To the contrary, compliance with this policy would siphon millions of dollars away from critical operations, recruitment and retention of expert staff, and constant reinvestment in the business necessary to guarantee the security of customer digital currency. We cannot accept this tradeoff.
Where does this leave Coinbase’s Hawaii customers? Unfortunately, with no good options. We will require all Hawaii-resident customers to close their accounts within the next thirty days and we will implement controls to prevent Hawaii residents from establishing Coinbase accounts for the indefinite future. Worse, Hawaii customers wishing to hold onto their digital currency will need to send their funds to another wallet service and we cannot recommend any service which meets Coinbase’s security standards and which is licensed to operate in Hawaii.
Although it comes as little consolation to Hawaii customers, Coinbase hopes to work with policymakers to either change the law or DFI’s policy. We are heartened that members of the Hawaii State House of Representatives have recently introduced a bill that would create a digital currency and blockchain working group. We look forward to working with them, the DFI, and others to help Hawaii join nearly every other State in the Union by adopting policies that will make it practicable to operate a successful digital currency businesses in Hawaii and we hope to be back in Hawaii sometime soon.
