Jake Morabito Testimony on Digital Assets and Cryptocurrency Innovation in Michigan

Jake Morabito, Senior Director of ALEC’s Communications and Technology Task Force, was recently invited to testify before the Michigan House Communications and Technology Committee on policy developments and our trusted policy solutions in digital assets, blockchain, and cryptocurrency across the states.

You can read his full testimony below and watch the recording here.

Chair Greene, Vice Chair Kunse, Vice Chair Scott, and Members of the Committee:

My name is Jake Morabito, and I serve as Senior Director of the Communications and Technology Task Force—as well as the Energy, Environment, and Agriculture Task Force—at the American Legislative Exchange Council. Thank you for the opportunity to speak before your committee today to share more about ALEC’s nonpartisan research and analysis, as well as the efforts of our members across all 50 states on digital assets, blockchain, and cryptocurrency policy. I hope you find this testimony valuable as Michigan considers its own approach in this area.

For some brief background, ALEC is a Virginia-based nonprofit, nonpartisan organization of state legislators from across the country. Our members discuss and develop model public policies rooted in the foundational Jeffersonian tradition of limited government, free markets, and federalism—values that empower states and citizens alike. To help the Committee and your colleagues decide the best regulatory approach that fits the needs and interests of Michiganders, I will share more about three essential ALEC model policies developed by our members that will help your state establish a strong foundation for our digital future.

Members of ALEC’s Communications and Technology Task Force include legislative leaders and policy experts who believe in the proven light-touch regulatory approach that solidified the United States as the clear global leader in emerging technology. ALEC legislators lead the charge with pragmatic policies that grow the digital economy, increase economic opportunity for all, and ensure the next wave of tech innovation happens here on American shores—not overseas in Europe, China, or elsewhere.

ALEC members have played a critical role in shaping the governance of state tech policy, from state consumer data privacy laws to policies on artificial intelligence that balance the need for innovation while combatting illegal deepfake images, to protecting America’s children and teens online. And our members will continue to lead the way in the years ahead as new challenges unfold.

Which brings us to today’s hearing focused on digital assets and blockchain. While much of the policy discussion is taking place at the federal level with the change in Administration, there are plenty of opportunities for states like Michigan to weigh in. States can lead the way by encouraging a free-market, limited government approach for digital assets policy, demonstrating how to enable responsible blockchain innovation in your state, safeguarding the financial privacy of Michiganders, fighting back against excessive government overreach and surveillance, prosecuting fraud and holding bad actors accountable, and finally providing legal certainty for investors and digital entrepreneurs seeking to do business responsibly in the State of Michigan.

I would like to begin with a recommendation that any new laws on emerging technologies—whether it’s digital assets, cryptocurrencies, or artificial intelligence—remain technology-neutral, and instead target specific harmful conduct. Although there are many beneficial use cases of digital assets and cryptocurrency, I, too, am concerned by the headlines of bad actors who seek to abuse new technology to commit scams, perpetuate fraud, or commit financial crimes. The good news is that in many of these cases, states and federal agencies already have strong laws on the books and enforcement mechanisms available—it is just a matter of adapting the existing regulatory framework to a new challenge.

If there are any genuine gaps or loopholes in the law that could be exploited, it could be appropriate to pursue targeted legislation to address those concerns, similar to how nearly three-quarters of the states at this point have adopted legislation to crack down on the risk of AI CSAM and the distribution of non-consensual intimate images. Law enforcement will also need to get up to speed on the ins and outs of this industry to help distinguish the legitimate actors and use cases from the fraudulent ones.

I will now provide an overview of ALEC’s model policy solutions in the digital assets space. Although Bitcoin is approaching nearly two decades of history at this point, and it seems that digital assets are becoming more mainstream than ever, this is still a relatively nascent industry. The policy choices that state and federal governments make today at this early phase could make or break the future of this promising technology.

Federal policy in this area has been in flux. Congress continues to debate the contours of federal legislation on digital assets and cryptocurrency. Many Biden Administration-era policies are likely to be revised by the new Trump Administration or eliminated by Congress entirely through the Congressional Review Act. Therefore, the ideal place for state legislators to start when crafting digital assets policy is with ALEC’s model Smart Cryptocurrency Rules Act, which lays the groundwork to foster digital asset innovation at the state level. ALEC’s Smart Cryptocurrency Rules Act has five main components.

First, our model policy establishes key definitions in state code for terms such as “digital assets,” “cryptocurrency,” “virtual currency,” “digital assets,” and “mining.” Harmonizing these definitions across state law early will provide much-needed regulatory clarity for individuals and businesses, while some of these questions remain unresolved at the federal level. The model policy makes clear that for the purposes of state law and regulation, virtual currencies and digital assets are considered to be personal digital property and should therefore follow the rules established by the state’s Property Code.

Next, to streamline the regulatory process and ease the burden on innovators in the digital assets space, our model policy provides for mutual recognition of money transmitter licenses across states for virtual currency exchanges, brokers, and other digital asset-related companies. These firms are typically required to apply for money transmitter licenses across the 50 states to offer their services. Instead of mandating that emerging crypto and digital asset businesses submit to a duplicative licensure regimes before they can even open their doors, our model offers a more permissive approach that allows businesses who already have an active money transmitter license from any state to begin services in this state, provided that sufficient proof is provided and accepted as a reciprocal license within 30 days.

Finally, the ALEC model Smart Cryptocurrency Rules Act expressly preempts all municipal or county-level regulations and restrictions relating to digital assets, and declares that public utilities should not penalize, discriminate, or differentiate between crypto mining and other commercial or industrial zoned uses of electricity.

In addition to these common-sense steps to foster digital asset innovation in your state, ALEC’s model Reject CBDCs and Protect Financial Privacy Act pushes back against efforts to establish a Central Bank Digital Currency, or CBDC, in the United States, also sometimes referred to as a “digital dollar.” Many states—including Indiana, Georgia, and most recently Wyoming and Montana—have enacted similar legislation, and several more, such as South Carolina and Arizona, are considering their own anti-CBDC laws in this legislative session.

According to the Congressional Research Service, the Federal Reserve and the U.S. Treasury Department began formally exploring the possibility of an official U.S.-backed Central Bank Digital Currency as early as 2021. It is important to note that a CBDC is not the same as Bitcoin, Ethereum, or other private, decentralized forms of cryptocurrency that operate independently of any government. A CBDC would be under the direct control of the Federal Reserve, which would result in serious implications for Americans’ financial freedom and privacy.

So, why should states act now? While Congress would likely need to expressly authorize a CBDC in legislation, there is a risk that America could sleepwalk into this new regime should an overreaching future Treasury Department or Federal Reserve allow this experiment to proceed any further than it already has. The current President may oppose CBDCs, but there is no guarantee a future president will hold the same position. Last year, the U.S. House passed the CBDC Anti-Surveillance State Act, which would have prohibited the Federal Reserve from directly or indirectly issuing a CBDC in the United States. States should not hesitate to act now in partnership with Congress before it’s too late.

Much in the same vein as last year’s federal bill, ALEC’s model policy expressly prohibits state government agencies from accepting payments made with a CBDC for government services or requiring payments to be made with a CBDC. State agencies would be further barred from cooperating with efforts to test, adopt, or implement a Central Bank Digital Currency.

Finally, moving to our third model policy, Michigan should consider joining 14 other states in adopting a state-level regulatory sandbox program. Launching a regulatory relief program will make it easier for individuals and businesses to bring innovative products to market faster than current regulations may allow, while maintaining necessary guardrails in the public interest.

By creating a dedicated Digital Assets or Fintech Sandbox, or even a universal regulatory sandbox for all industries and business types, states can offer responsible entrepreneurs the breathing room to explore their new ideas in the real world, when they may have been stopped by excessive government regulation in the past. Under the supervision of the Office of the Attorney General, businesses could apply for temporary regulatory mitigation through the sandbox program, paving the way for regulatory reform and eliminating outdated red tape if the experiments are successful. A successful experiment would make policymakers think twice about whether some antiquated regulations need to be reformed or taken off the books entirely.

Sandbox participants would be required to abide by the terms of their agreement with the State and make sure public health and consumer safety standards are upheld. Michigan can learn from states like Arizona and Utah, which have successfully applied the regulatory sandbox framework across a range of use cases, from novel ideas improving legal services to artificial intelligence regulation and the use of AI in mental health services.

With Michigan’s help, our innovators and digital leaders will chart a course for another century of American dominance in all things emerging technology. And following the proven, light-touch, harms-based approach to regulation is the key to us getting there. Thank you again for the opportunity to speak this morning, and I welcome any questions.

Respectfully submitted,

Jake Morabito

Senior Director, Communications and Technology Task Force

American Legislative Exchange Council (ALEC)