Connecticut Bans State Crypto Investment, Sets Precedent

Governor Ned Lamont of Connecticut has signed House Bill 7082 into law, marking a significant shift in the state's stance on cryptocurrencies. The legislation, which passed through the state legislature before reaching the governor's desk, prohibits all state-level investment in Bitcoin and other virtual currencies. This move effectively blocks the state and its municipalities from accepting digital assets as payment or maintaining any reserves of virtual currency in public funds.

The bill introduces broad reforms to the regulation of money transmission businesses, consumer protections, and digital financial services. One of its most consequential provisions is found in Section 5, which states that neither the state nor any political subdivision of the state shall accept or require payment in the form of virtual currency for an amount due to the state or the political subdivision, or purchase, hold, invest in, or establish a reserve of virtual currency. This provision encompasses decentralized digital assets like Bitcoin and Ethereum, along with centralized tokens or other digital forms of value, effectively blocking state and local entities from adopting crypto in any area of public finance.

Apart from the formal restriction on the state’s ability to invest in digital assets, HB 7082 also updates Connecticut’s money transmission laws. It expands the legal definitions to include digital wallets, virtual currency kiosks, and the custody or transfer of virtual assets, ensuring that crypto-related services fall within state regulation. Businesses holding or transmitting virtual currency on behalf of others will be required to be licensed, unless they’re exempt, like banks or credit unions. Licensees must maintain full 1:1 reserves matching customer obligations and may only use approved custodians.

The legislation also introduces stricter compliance standards, including enhanced consumer disclosures and limits on how customer assets can be used. This move by Connecticut sets a precedent for other states considering similar regulations, sparking debate over state crypto investment bans and future regulations. The bill was signed into law on June 30, 2023, and marks Connecticut as the first state in the U.S. to completely ban government entities from holding any cryptocurrencies.

This legislation reflects a growing divide among US states regarding the acceptance and regulation of cryptocurrencies. While some states, such as Texas and New Hampshire, have approved bills to create crypto reserves, others have taken a more cautious approach. Connecticut's decision to prohibit the use of digital assets in government operations underscores the ongoing debate within the US over the role of cryptocurrencies in public finance and the need for clear regulatory frameworks.

The bill was introduced in February by state Representative Jason Doucette and was previously approved by the US state’s House of Representatives and Senate. The provisions barring the state government from accepting crypto or establishing a digital asset reserve take effect on Oct. 1. The legislation in the Connecticut state government marked a different path from that of several US states exploring the establishment of a Bitcoin reserve.

Brogan Law founder Aaron Brogan commented that the bill was a reflection of the divide between some Democrats and Republicans on digital assets, likely because of the nationalized debate with US President Donald Trump’s connections to the cryptocurrency industry. He said that the bill would do “nothing of substance.” “This is signaling that Connecticut is symbolically opposed to cryptocurrency, and to all the states that have established Bitcoin reserves,” said Brogan.