THIRTIETH LEGISLATURE, 2020
STATE OF HAWAII
A BILL FOR AN ACT
relating to DIGITAL assets.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to title 22 to be appropriately designated and to read as follows:
§ -1 Definitions. (a) As used in this chapter:
"Digital asset" means a representation of economic, proprietary, or access rights that is stored in a computer readable format and includes digital consumer assets, digital securities, and virtual currency.
"Digital consumer asset" means a digital asset that is used or bought primarily for consumptive, personal, or household purposes and includes:
(1) An open blockchain token constituting intangible personal property as otherwise provided by law; and
(2) Any other digital asset that is not deemed to be a "digital security" or a "virtual currency."
"Digital security" means a digital asset that constitutes a security, as defined in section 485A-102, but excludes digital consumer assets and virtual currency.
"Virtual currency" means a digital asset that is:
(1) Used as a medium of exchange, unit of account, or store of value; and
(2) Not recognized as legal tender by the United States government.
(b) The terms defined in subsection (a) are mutually exclusive.
§ -2 Classification of digital assets as property; applicability to Uniform Commercial Code. (a) Digital assets shall be classified in the following manner:
(1) Digital consumer assets are intangible personal property and shall be considered general intangibles, as defined in section 490:9-102, only for the purposes of article 9 of chapter 490;
(2) Digital securities are intangible personal property and shall be considered securities, as defined in section 490:8-102, and investment property, as defined in section 490:9-102, only for the purposes of articles 8 and 9 of chapter 490; and
(3) Virtual currency is intangible personal property and shall be considered money, notwithstanding section 490:1-201, only for the purposes of article 9 of chapter 490.
(b) Consistent with section 490:8-102, a digital asset may be treated as a financial asset under that section pursuant to a written agreement with the owner of the digital asset. If treated as a financial asset, the digital asset shall remain intangible personal property.
(c) A bank providing custodial services under chapter 556A shall be considered to meet the requirements of section 490:8-102 with regard to a "securities intermediary."
(d) Classification of digital assets under this section shall be construed in a manner to give the greatest effect to this chapter but shall not be construed to apply to any other asset.
§ -3 Perfection of security interests in digital assets; financing statements. (a) Notwithstanding the financing statement requirement specified by section 490:9-310(a) as otherwise applied to general intangibles or any other provision of law, perfection of a security interest in a digital asset may be achieved through control, as defined in subsection (e). A security interest held by a secured party having control of a digital asset has priority over a security interest held by a secured party that does not have control of the asset.
(b) Before a secured party may take control of a digital asset under this section, the secured party shall enter into a control agreement with the debtor. A control agreement may also set forth the terms under which a secured party may pledge its security interest in the digital asset as collateral for another transaction.
(c) A secured party may file a financing statement with the office described under section 490:9-501, including to perfect a security interest in proceeds from a digital asset pursuant to section 490:9‑315(d).
(d) Notwithstanding any other provision of law, including article 9 of chapter 490, a transferee takes a digital asset free of any security interest two years after the transferee takes the asset for value and does not have actual notice of an adverse claim. This subsection shall apply only to a security interest perfected by a method other than control.
(e) As used in this section:
"Control," consistent with subsection (f), is equivalent to the term "possession" when used in article 9 of chapter 490, and means the following:
(1) A secured party, or an agent, custodian, fiduciary, or trustee of the party, has the exclusive legal authority to conduct a transaction relating to a digital asset, including by means of a private key or the use of a multi‑signature arrangement authorized by the secured party; and
(2) A smart contract created by a secured party that has the exclusive legal authority to conduct a transaction relating to a digital asset. As used in this paragraph, "smart contract" means an automated transaction, as defined in section 489E-2, or any substantially similar analogue, which comprises code, script, or programming language that executes the terms of an agreement, and which may include taking custody of and transferring an asset, or issuing executable instructions for these actions, based upon the occurrence or nonoccurrence of specified conditions.
"Multi‑signature arrangement" means a system of access control relating to a digital asset for the purposes of preventing unauthorized transactions relating to the asset, in which two or more private keys are required to conduct a transaction, or any substantially similar analogue.
"Private key" means a unique element of cryptographic data, or any substantially similar analogue, that is:
(1) Held by a person;
(2) Paired with a unique, publicly available element of cryptographic data; and
(3) Associated with an algorithm that is necessary to carry out an encryption or decryption required to execute a transaction.
(f) Perfection by control creates a possessory security interest and does not require physical possession. For purposes of article 9 of chapter 490 and this section, a digital asset is located in the State if:
(1) The asset is held by a custodian incorporated or organized in the State;
(2) The debtor or secured party is physically located in the State; or
(3) The debtor or secured party is incorporated or organized in the State.
§ -4 Digital asset custodial services. (a) A bank may provide custodial services consistent with this section upon providing sixty days written notice to the commissioner. The provisions of this section are cumulative and not exclusive as an optional framework for enhanced supervision of digital asset custody. If a bank elects to provide custodial services under this section, it shall comply with all provisions of this section.
(b) A bank may serve as a qualified custodian, as specified by the United States Securities and Exchange Commission in 17 C.F.R. section 275.206(4)‑2. In performing custodial services under this section, a bank shall:
(1) Implement all accounting, account statement, internal control, notice, and other standards specified by applicable state or federal law and rules for custodial services;
(2) Maintain information technology best practices relating to digital assets held in custody. The commissioner may specify required best practices by rule;
(3) Fully comply with applicable federal anti‑money laundering, customer identification, and beneficial ownership requirements; and
(4) Take other actions necessary to carry out this section, which may include exercising fiduciary powers similar to those permitted to national banks and ensuring compliance with federal law governing digital assets classified as commodities.
(c) A bank providing custodial services shall enter into an agreement with, and pay for, an independent public accountant to conduct an examination conforming to the requirements of 17 C.F.R. section 275.206(4)‑2(a)(4) and (6). The accountant shall transmit the results of the examination to the commissioner within one hundred twenty days of the examination and may file the results with the United States Securities and Exchange Commission as its rules may provide. Material discrepancies in an examination shall be reported to the commissioner within one day. The commissioner shall review examination results upon receipt within a reasonable time and during any regular examination conducted under section 412:2-200.
(d) Digital assets held in custody under this section are not depository liabilities or assets of the bank. A bank, or a subsidiary, may register as an investment adviser, investment company, or broker dealer as necessary. A bank shall maintain control over a digital asset while in custody. A customer shall elect, pursuant to a written agreement with the bank, one of the following relationships for each digital asset held in custody:
(1) Custody under a bailment as a nonfungible or fungible asset. Assets held under this paragraph shall be strictly segregated from other assets; or
(2) Custody under a bailment pursuant to subsection (e).
(e) If a customer makes an election under subsection (d)(2), the bank may, based only upon customer instructions, undertake transactions with the digital asset. A bank maintains control pursuant to subsection (d) by entering into an agreement with the counterparty to a transaction that contains a time for return of the asset. The bank shall not be liable for any loss suffered with respect to a transaction under this subsection, except for liability consistent with fiduciary and trust powers as a custodian under this section.
(f) A bank and a customer shall agree in writing regarding the source code version that the bank will use for each digital asset and the treatment of each asset under chapter 490 if necessary. Any ambiguity under this subsection shall be resolved in favor of the customer.
(g) A bank shall provide clear, written notice to each customer and require written acknowledgement of the following:
(1) Prior to the implementation of any updates, material source code updates relating to digital assets held in custody, except in emergencies that may include security vulnerabilities;
(2) The heightened risk of loss from transactions under subsection (e);
(3) That some risk of loss as a pro rata creditor exists as the result of custody as a fungible asset or custody under a bailment pursuant to subsection (d)(2);
(4) That custody under subsection (d)(2) may not result in the digital assets of the customer being strictly segregated from other customer assets; and
(5) That the bank is not liable for losses suffered under subsection (e), except for liability consistent with fiduciary and trust powers as a custodian under this section.
(h) A bank and a customer shall agree in writing to a time period within which the bank shall return a digital asset held in custody under this section. If a customer makes an election under subsection (d)(2), the bank and the customer may also agree in writing to the form in which the digital asset shall be returned.
(i) All ancillary or subsidiary proceeds relating to digital assets held in custody under this section shall accrue to the benefit of the customer, except as specified by a written agreement with the customer. The bank may elect not to collect certain ancillary or subsidiary proceeds; provided that the election is disclosed in writing. A customer who makes an election under subsection (d)(2) may withdraw the digital asset in a form that permits the collection of the ancillary or subsidiary proceeds.
(j) A bank may not authorize or permit rehypothecation of digital assets under this section. The bank may not engage in any activity to use or exercise discretionary authority relating to a digital asset except as based upon customer instructions.
(k) A bank may not take any action under this section that would likely impair the solvency or the safety and soundness of the bank, as determined by the commissioner after considering the nature of custodial services customary in the banking industry.
(l) A bank that provides custodial services under this section shall pay a supervision fee equal to $1 relating to assets held in custody under this section as of December 31 of each year, with payment of the supervision fee made on or before the following January 31. The supervision fee shall be deposited by the commissioner into the compliance resolution fund established under section 26-9(o) and may be expended for any purpose authorized for that fund. Banks providing custodial services outside of this section shall not be required to pay this supervision fee.
(m) The commissioner may adopt rules to implement this section.
(n) As used in this section:
"Bank" has the meaning ascribed to it in section 412:5-100.
"Commissioner" has the meaning ascribed to it in section 412:1-109.
"Custodial services" means the safekeeping and management of customer currency and digital assets through the exercise of fiduciary and trust powers under this section as a custodian and includes fund administration and the execution of customer instructions.
§ -5 Jurisdiction of courts. The courts of this State shall have jurisdiction to hear claims in both law and equity relating to digital assets including those arising from this chapter and chapter 490."
SECTION 2. Section 412:5-205, Hawaii Revised Statutes, is amended to read as follows:
"§412:5-205 Authority to engage in trust business. (a) A bank may not engage in any activity requiring a charter as a trust company under article 8 of this chapter, including without limitation serving as trustee, personal representative, registrar or transfer agent for stocks and bonds, guardian, agent, assignee, or receiver, or in any other fiduciary capacity, unless it has received the approval of the commissioner under this section. If approved, the trust business may be conducted through a subsidiary, division or department of the bank.
(b) The bank shall file an application for such approval with the commissioner on a form prescribed by the commissioner, together with an application fee assessed pursuant to section 412:2-105.2. The application shall contain the following information:
(1) Appropriate board resolutions authorizing the establishment of a trust company, division, or department;
(2) Employment history, education, management experience, and other biographical information for all executive officers, trust officers, and managers of the trust company, division, or department;
(3) Proposed policies concerning common trust funds, overdrafts, disaster recovery plans, dividends, management of assets and liabilities, conflicts of interest, investments, and fee schedules. The commissioner may consider any existing bank policies that will be adapted and used for its trust business;
(4) A business plan and financial projections regarding profitability of the proposed trust business;
(5) Evidence that the bank has or will have the financial ability, responsibility, and experience to engage in the trust business; and
(6) Any other information that the commissioner may require.
(c) If the proposed trust business will be conducted in a subsidiary of a bank, the application shall contain the following additional information:
(1) The name of the subsidiary, the location of its principal office, and any lease agreements for such principal office;
(2) Employment history, education, management experience, and other biographical information for all directors of the subsidiary; and
(3) A proposed capital plan.
(d) A bank engaging in the trust business shall establish and maintain the same amount of capital and surplus required of a trust company under article 3, in addition to any capital and surplus required to engage in the business of a bank under this article. A bank engaging in the trust business shall also maintain the reserves required of a trust company under section 412:8-202.
(e) The commissioner's decision shall be in the form of a written order, and if approved, may contain such conditions and restrictions as may be in the public interest. The application shall be approved only if the commissioner is satisfied that the proposed trust business will not jeopardize the safety and soundness of the bank; that the applicant has sufficient capital, surplus, and cash reserves; that the proposed management of the trust business is financially responsible, honest, and qualified; and that the trust business will be carried on in a safe and sound manner. If the commissioner grants approval to a bank to carry on its trust business through a subsidiary, the commissioner shall issue a trust charter to such subsidiary.
(f) Any bank [
which] that is
authorized to engage in the trust business through a division or department of
the bank shall maintain books, records, and accounts for its trust business
that are separate from its banking business.
(g) A bank [
which] that is
authorized to engage in the trust business through a subsidiary shall not be
considered a trust holding company under this chapter.
(h) Any bank that is authorized to engage in the trust business under this section with respect to such trust business shall also be subject to all the provisions applicable to trust companies under article 8; provided that if there is any conflict between the provisions of article 8 and this article with respect to the operation of a trust business, the provisions of article 8 shall control with respect to such trust business.
(i) Any bank that is authorized to engage in the trust business under this section may exercise all the powers enumerated under section -4."
SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 4. This Act shall take effect upon its approval.
Digital Assets; Investment Securities; Secured Transactions; Banks
Classifies digital assets under the Uniform Commercial Code. Specifies the manner of perfecting a security interest in digital assets. Authorizes banks to hold digital assets in their custody. Authorizes courts to hear claims relating to digital assets.
The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.