I. Introduction
Rising interest rates and a general economic downturn in 2022
has impacted the value of digital assets, including the relatively
well-established likes of Bitcoin and Ether. In addition to market
headwind, momentum around federal digital assets regulation is
growing, culminating in the proposed “Responsible Financial
Innovation Act” (the “RFIA”). The RFIA would, among
other things, clarify the treatment of decentralized autonomous
organizations (“DAOs”) and create a new asset class -
“ancillary assets” – which would encompass most digital
assets (including those that qualify as investment contracts), and
would be regulated as commodities by the CFTC.1>
Despite the market downturn, and perhaps in response to movement
at the federal level, the Ohio legislature has made digital assets
a legislative priority in 2022. First, Ohio House Bill 177.05
(“HB 177.05”) passed in March. HB 177.05 grants Ohio
governmental entities authority to leverage distributed ledger
technology (“DLT”). A second bill, House Bill 585
(“HB 585”), would codify the legal status of DAOs in Ohio
and Special Purpose Depository Institutions (“SPDI”) if
passed.
There are important nuances to consider as market regulatory
forces collide and the repercussions of such collisions echo
throughout the blockchain technology and digital asset
ecosystem.
II. Analyzing The Statutes: HB 177.05 & HB 585
a. HB 177.05: Ohio & DLT
Before HB 177.05, governmental entities in Ohio were limited in
how they could leverage DLT. Adoption was relegated to half-cocked
pet projects, including when, in 2018, Ohio became the first state
to authorize the collection of taxes in Bitcoin through
OhioCrypto.com.2 Then-Treasurer Josh Mandel spearheaded
the effort, ostensibly to solidify Ohio as a blockchain technology
destination for entrepreneurs, investors, and early adopters.
Despite some early momentum, OhioCrypto.com shut down in 2019 after
worries mounted that the platform was created
unlawfully.3
Now, with the passage of HB 177.05, governmental entities are
explicitly allowed to leverage DLT, including blockchain
technology, so long as such use is “in the exercise of [such
governmental entity’s] authority.” 4 The scope
of “governmental entity” is far-reaching, including any
“political subdivision” as defined in Section 2744.01 of
the Ohio Revised Code, thereby capturing any and all
instrumentalities of the State of Ohio including any
“municipal corporation, township, county school district, or
other body corporate and politic responsible for governmental
activities in a geographic area smaller than that of the
state.”5>
HB 177.05 regains momentum lost by OhioCrypto’s failure by
giving governmental entities the leeway necessary to explore
innovative solutions and applications afforded by DLT, even if tax
collection remains an unviable use case. This momentum comes at an
opportune time, as companies, including large, publicly reported
companies, are devoting significant resources to exploring
applications of blockchain technology to governance. HB 177.05
provides Ohio a competitive advantage over states that are ignoring
the rise of alternative DLT use cases.6 Companies
devoted to exploring alternative DLT use cases may now find Ohio an
acceptable sandbox in which to play.
B. HB 585: Ohio DAOs
Operating or joining a DAO has traditionally been a risky
project. If enacted, HB 585 would clarify and codify the legal
status of DAOs in Ohio.7
Under HB 585, all DAOs incorporated in Ohio would be required to
file articles of organization with the Ohio Secretary of State, in
the same way that a limited liability company would be
organized.8 It would be at this point – initial
organization – that organizers would indicate whether the DAO
will be member-managed (similar to a limited liability company) or
algorithmically managed.9 Further, if a DAO formed in
Ohio elects to leverage smart contract technology, the articles of
organization must include a publicly-available identifier of any
such smart contract.10
Critically, Ohio DAOs would not have the ability to self-define
what constitutes a quorum.11 A quorum is met only when
fifty percent of the DAO members approve an
action.12> Further, to the extent that an Ohio DAO
leverages smart contract technology as part of its management, such
contract must “be able to be updated, modified, or otherwise
upgraded.”13 Viewed from a critical eye, these two
provisions might signal skepticism governance through smart
contract. Alternatively, this can be seen as a critical embrace of
smart contract technology as a means of corporate governance
– similar to bylaws or an operating agreement, each of which
must be disclosed to equity-holders in a corporation or a limited
liability company as the case may be, smart contracts are simply
joining a long line of governance mechanisms, each of which must be
consented to by the participants in their respective corporate
forms.
If enacted, HB 585 will position Ohio as a destination for DAO
formation and the first Midwest state to codify DAOs.14
That said, in order to maintain a competitive advantage, the Ohio
legislature will need to consider increasing flexibility around DAO
governance, just as the Wyoming legislature did when it recently
passed an amendment permitting Wyoming DAOs to self-define a
quorum.15 This amendment allows Wyoming DAOs to scale
more rapidly—a priority for developers and investors. As
developers look for opportunities, jurisdictions that fail to
accommodate the logistics of scale may fall behind.
C. HB 585: SPDIs
In addition to codifying DAOs, HB 585 would permit the formation
of SPDIs—entities formed to provide custodial services over
digital assets.16 By permitting the creation of SPDIs,
HB 585 would open Ohio to current and prospective entrepreneurs
seeking to serve as depositors of digital assets (including
cryptocurrencies). The bill distinguishes between three categories
of crypto-assets:
(1) “Digital Consumer Assets,”
(2) “Digital Securities,” and
(3) “Virtual Currencies.”17
“Digital Consumer Assets” are defined broadly,
including any digital asset “used or bought primarily for
consumptive, personal, or household purposes”18 as
well as any “open blockchain token constituting intangible
personal property as provided by law,” and “any other
digital asset that is not a digital security or virtual
currency.” This definition would likely capture non-fungible
tokens, (commonly referred to as NFTs), so long as the NFTs are not
used for speculative or investment purposes. “Digital
Securities” would include any digital “investment
property.”19 “Virtual currencies” would
include any digital asset used as money not recognized as legal
tender in the United States.20
In addition to classifying digital assets, HB 585 contains
numerous provisions that reduce risk associated with SPDIs,
including the following requirements:
- SPDIs would be required to hold highly liquid reserves backing
100% of the assets on deposit, as well as pledge the assets or
furnish a surety bond to the Ohio Department of
Commerce.21 - Reserves would have to be held as on-premises U.S. dollars,
currency held in a Federal Reserve Bank or FDIC insured financial
institution, or other highly liquid investments such as
treasuries.22 - Any group wishing to charter an SPDI would need to meet a
minimum capital of $10,000,000 in fully paid in capital
stock.23
If enacted, HB 585would position Ohio as an early leader in
meeting the growing demand for crypto-servicing. SPDIs would
provide institutional legitimacy to crypto-holders incorporated or
doing business in Ohio, thereby helping to meet the growing demand
for regulatory clarity and fostering a market for crypto-assets in
Ohio.
III. Conclusion
As the value of cryptocurrencies and other digital assets
continues to flex in response to market forces, the significance of
alternative use cases of DLT, including DAOs, will grow. DLT, and
more specifically blockchain technology, offers unique solutions
for governance, back-office operations, supply chain maintenance,
and other functions outside of simple value storage.
So-called “fly-over” states, such as Ohio, have the
opportunity to attract market participants and the digital asset
ecosystem by passing comprehensive digital assets legislation ahead
of, or parallel with, federal legislation. As it was when part of
the Northwest Territory, the passage of HB 177.05 and the proposal
of HB 585, position Ohio at the dawn of a new frontier.
*Tanner Dowdy is a summer associate at Dinsmore & Shohl,
LLP, and is not licensed to practice law.
Footnotes
1. Responsible Financial Innovation Act, S.
4356, 117th Congress (2022).
2. Cryptocurrency for Ohio Tax Payments,
Blockchain Research Institute, (May 2019),
https://www.blockchainresearchinstitute.org/wp-content/uploads/2019/06/Marke-Cryptocurrency-for-Tax.pdf.
3 Id.
4 House Bill 177, The Ohio Legislature,
https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA134-HB-177.
5 O.R.C. 2744.01
6 Id.
7 House Bill 585, The Ohio Legislature,
https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA134-HB-585.
8 Id.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Research Institute, supra note
12.
15 Troutman Pepper, Wyoming Amends DAO Legislation
Enabling DAOs to Dictate Quorum Threshold on an Individual
Basis, JDSUPRA (May 5, 2022).
16 House Bill, supra note 11.
17 Id.
18 Id.
19 Id.
20 Id.
21 Id.
22 Id.
23 Id.
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