The outcome of this month’s US presidential election, coupled with the prospect of a crypto-friendly President and Congress, has sparked a torrent of enthusiasm that has been building throughout the crypto industry. cryptography this year. While there still remains a long and winding road to clear, thoughtful, and comprehensive regulation of crypto in the United States, there is good reason to expect more regulatory clarity and more selective enforcement at the federal level.
However, while crypto regulatory reform at the federal level has captured the attention of the crypto industry, most financial services activities in the United States are also regulated at the state level. As a result, U.S. state laws and regulators will continue to have an important role to play in many digital asset products and markets in the United States, including the use of cryptocurrencies, tokenization, and of traditional financial assets (such as stablecoins and others). “real-world crypto-assets (RWAs), as well as the broader use of distributed ledger technology and blockchain to support financial transactions. Even as new federal laws are passed to create clearer regulatory frameworks – and crypto antagonists are removed from key federal agency positions – state-level legal and regulatory barriers to bringing products to market and digital asset services will persist.
In this legal update, we discuss the role that state laws and regulators will continue to play in digital asset products and markets.
State regulators will continue to have jurisdiction
In recent years, calls for regulatory clarity in crypto have primarily been directed at federal regulators who oversee securities, commodities and banking. The U.S. election results make it more likely that updates to federal crypto laws and new leadership of federal regulatory agencies could finally bring the clarity sought, as well as a less skeptical view of crypto activities in general. Even if this happens, many crypto businesses and companies developing digital asset products and services must still comply with state rules that apply to all financial services businesses (such as issuers of money) and crypto-specific rules like New York’s BitLicense and California’s Digital Financial. Heritage Law (DFAL).1
For example, financial services companies such as banks, insurance companies and payment providers seeking to market digital asset products and services will need to satisfy these state regulators. And where a business engages in activities related to digital assets or cryptocurrencies that fall within existing definitions of financial services activities, it will also be regulated by the laws that apply to that activity. For example, many businesses that require a BitLicense in New York also have a money services license or trust license. These licenses carry a number of obligations that should be considered the basic requirements for businesses trading digital asset products and services in New York; The main requirements for trading digital asset products and services arise from general financial services laws.
Beyond this baseline, in New York, the BitLicense is also required by the New York State Department of Financial Services (NYDFS) for companies conducting virtual currency activities in New York. However, “virtual currency activities” are defined broadly and are intended to be applied to a wide range of activities in New York. The BitLicense adds increased general and crypto-specific requirements, and existing supervision or registration with a federal authority generally does not exempt a business from the requirement to obtain a BitLicense if it conducts virtual currency activities .
State regulators, such as those in New York and California, oversee some of the most important financial markets and financial institutions in the world, and they will continue to have a keen interest in crypto regulation. Despite what happens at the federal level, the interests and perspectives of these regulators do not always align. For example, regulators in blue states could respond to Republican control of the White House and Congress by increasing their own regulation and oversight in areas over which they have jurisdiction.
State law issues remain unresolved
Important state law issues that affect the digital assets industry, such as laws relating to real estate ownership and legal responsibilities, will not be resolved by changes to federal laws.
For example, “not your keys, not your crypto” continues to be an accurate, but unsatisfactory, description of ownership laws as they generally apply to the ownership of digital assets in the United States. The term is often used to highlight the risks associated with centralized custody of digital assets and the lack of recourse that the “owners” of these assets may have in the event of loss of access or control of the assets if the custodian of the assets assets is hacked or becomes insolvent. This legal uncertainty will not be affected by any modification to the federal regulatory framework.
Additionally, the legal status of decentralized autonomous organizations (DAOs) in the United States remains unclear and subject to litigation. Despite the adoption of DAO-specific laws in states such as Wyoming and Delaware, most DAOs have refused to create formal legal entities under these laws and seek the formal legal protections these laws can provide. While many DAOs choose instead to form “wrapper” legal entities overseas, many do not, choosing to operate without any generally recognized legal entity structure. As a result, members of DAOs – or token holders who participated in governance – may potentially be exposed to broad liability for the actions of the DAO. For example, courts have considered DAOs to be partnerships under state law, with each member of the DAO considered a general partner of the DAO and therefore fully responsible for its actions.
However, work to modernize state laws to address some of this uncertainty has begun outside of and unconnected to federal regulatory regimes. For example, the 2022 amendments to the Uniform Commercial Code added Article 12 which addresses blockchain and distributed ledger technologies more broadly. The amendments to Article 12 aim to provide consistent legal treatment of digital assets and blockchain records by establishing, for example, definitions and rules around the “control” of electronic records (i.e. keys cryptographic) and the “transfer” of interests. So far, Article 12 has been promulgated by 25 stateswith bill introductions in five other state legislatures (as of November 2024).2
Key takeaways
The evolution of state laws on digital assets – both cryptocurrencies and tokenization, as well as other uses of blockchain technology – will continue on a parallel – but unrelated – path with the updates federal regulations in this area. As a result, the interplay between state law and any new federal laws and regulations should remain a primary focus for companies creating products and services in this space.
1 The DFAL is currently scheduled to take effect on July 1, 2026.
2 The New York City Bar has issued a committee report in support of New York State’s adoption of the amendments to Section 12, reissued in July 2024.
