Hawaii's Guide To Cryptocurrency Investing

Cryptocurrency is growing in popularity in Hawaii, but the regulatory environment has made it difficult for crypto exchanges to operate in the state. In 2017, the Hawaii Division of Financial Institutions (DFI) enforced a new law that required cryptocurrency exchanges to hold cash reserves equal to their digital assets. This led to many major exchanges, such as Coinbase and Binance, leaving the state. However, in recent years, Hawaii has taken steps to welcome cryptocurrencies, such as by launching a digital currency regulatory sandbox initiative in 2020, which allowed a select number of crypto companies to offer services without abiding by the 2017 rules. As of 2024, Hawaii has loosened state-wide crypto restrictions, and there are now over a dozen licensed and regulated exchanges available to Hawaiians. To buy cryptocurrency in Hawaii, residents can use exchanges such as Gemini, Kraken, Crypto.com, and Uphold, or peer-to-peer trading sites such as Localbitcoins.com.

Hawaii's regulatory environment for crypto

Hawaii has historically been unfriendly towards cryptocurrencies, with regulations making it nearly impossible for crypto companies to operate in the state. However, in January 2024, the state's stance shifted significantly. The Hawaii Department of Commerce and Consumer Affairs announced that cryptocurrency activities would no longer be subject to the state's money transmitter law, meaning that crypto companies would no longer need a Hawaii-issued money transmitter license to conduct business within the state. This decision was the result of the Digital Currency Innovation Lab (DCIL), a pilot program launched in 2020 in collaboration with the Hawaii Technology Development Corporation (HTDC). The program allowed selected crypto companies to temporarily serve Hawaii customers without fear of regulatory action, while data was collected to inform future legislation.

The conclusion of the DCIL program means that crypto companies in Hawaii will be able to operate as unregulated businesses. However, they will still need to comply with applicable federal licensing or registration requirements and state laws of general applicability, such as consumer protection laws.

While this change in regulatory posture has opened up crypto investment opportunities for Hawaiians, it is important to note that the state has not created a crypto-specific license. The previous requirement for crypto companies to hold cash reserves equal to their digital assets was a significant barrier to entry, and its removal has allowed a small number of crypto exchanges to enter the Hawaiian market. These include Uphold, Kraken, and Crypto.com, which are licensed as Money Service Businesses (MSB) through the Financial Crimes Enforcement Network (FinCEN).

Hawaiians interested in investing in cryptocurrency must do so through these approved exchanges. When choosing an exchange, it is essential to consider factors such as the number of coins supported, supported payment methods, and additional features like an NFT marketplace. It is also crucial to understand the associated risks and volatility of the cryptocurrency market and to secure your crypto wallet to minimize the risk of hacking.

Crypto exchanges in Hawaii

Hawaii has historically had strict crypto laws, which have made it difficult for crypto companies to operate in the state. However, in recent years, the state has loosened its restrictions and now allows certain crypto companies to operate without a state money transmitter license.

• Uphold — Allows users to trade between cryptocurrencies, precious metals, and national currencies. Uphold supports BTC, ETH, and ADA. It charges a deposit fee of $20 for bank transfer wires of up to $5,000.
• Kraken — A well-established cryptocurrency exchange offering features for both beginner and advanced crypto investors. Kraken offers low trading fees, an advanced trading platform, and educational resources for beginners.
• Crypto.com — Allows users to buy and sell over 250 cryptocurrencies with high liquidity. Crypto.com provides up-to-date price information and supports earning for a wide range of altcoins and an NFT marketplace.
• Gemini — A trusted and regulated exchange that offers instant deposits, low fees, and a range of cryptocurrencies, including BTC, ETH, and SOL. Transaction fees start at $0.99 for transactions up to $10, and there are no deposit fees for crypto or wire transfers.
• BlockFi — A comprehensive financial platform that offers interest-bearing accounts, crypto-backed loans, and a VISA credit card. BlockFi also provides add-on services, such as cashback rewards in Bitcoin for purchases made with the VISA card.
• Unchained — Offers a secure way to buy bitcoins and provides Bitcoin IRAs and inheritance planning.
• Bitcoin IRA — Offers a tax-advantaged way to acquire Bitcoin via an IRA.
• River — Provides a clean interface and low fees for buying bitcoin. River allows for automatic purchases and is available in all US states except New York and Nevada.

It is important to note that Hawaii residents cannot use all the same exchanges as people in other US states due to the state's unique crypto regulations. Additionally, some popular exchanges like Coinbase, Binance, and Binance.US do not currently offer their services in Hawaii.

Crypto wallets

Hot Wallets

Hot wallets are digital tools that are always connected to the internet. They can be accessed from a mobile or desktop device, or through the web or browser extensions. Hot wallets are more susceptible to cyberattacks but offer greater convenience and ease of access. Examples of hot wallets include:

• Coinbase Wallet
• MetaMask
• Trust Wallet
• Electrum
• BlueWallet
• Exodus
• Crypto.com
• Zengo

Cold Wallets

Cold wallets store your digital keys offline, either on a hardware device such as a USB drive or on a physical medium like paper. Cold wallets are harder for malicious users to access but are limited in function and risk being lost or destroyed. Examples of cold wallets include:

• Ledger Nano S Plus
• KeepKey
• SafePal

When choosing a crypto wallet, it is important to consider factors such as security, functionality, cost, the number of supported currencies, and ease of use. Additionally, it is crucial to enable all available security features and stay vigilant against suspicious activity to protect your crypto assets.

Crypto taxes in Hawaii

While Hawaii doesn't offer guidance on sales or state taxation on cryptocurrency transactions, the IRS treats cryptocurrencies as property. This means that you need to follow the same tax rules as other property transactions. So, if you exchanged one cryptocurrency for another, exchanged crypto for fiat currency, or received rewards in crypto, you need to report capital gains or losses.

The IRS has provided a list of FAQs on virtual currency transactions, including how to determine if your gain or loss is short-term or long-term. If you held the virtual currency for one year or less, your gain or loss is short-term. If you held it for more than a year, it is long-term. You can calculate this by finding the difference between your adjusted basis in the virtual currency and the amount you received in exchange. You must then report this on your federal income tax return in US dollars.

Additionally, if you receive virtual currency as payment for performing services, you must recognise this as ordinary income. The amount of income you must recognise is the fair market value of the virtual currency in US dollars when received. You must report this ordinary income on Form 1040, U.S. Individual Tax Return, or other applicable forms.

It is important to note that Hawaii taxpayers can get their guidance from the IRS and apply them to Hawaii taxes.

Crypto security

With the popularity of cryptocurrencies, crypto companies, exchanges, and wallets have become attractive targets for cybercriminals. As such, it is important to take measures to protect your crypto investments and personal information from potential cyber threats. Here are some essential guidelines for crypto security:

• Use Secure Wallets: Crypto wallets are crucial for digital currency security. It is recommended to use hardware-based wallets as they are generally considered more secure than software-based wallets. Keep your wallet's private keys safe and consider using multi-signature wallets for added security.
• Implement Two-Factor Authentication (2FA): 2FA adds an extra layer of security to your accounts. Even if your password is compromised, an additional code sent to your device is required to access your account.
• Avoid Storing Coins on Exchanges: The principle of "not your keys, not your coins" emphasizes the importance of self-custody. If you don't hold the private keys to your digital assets, you don't truly own them. Therefore, it is advisable to transfer your cryptocurrencies from exchanges to your personal wallets.
• Keep Software Up-to-date: Regularly update your devices, wallets, and apps to protect against newly discovered threats. Updates often include security enhancements.
• Use Secure Networks: Avoid conducting crypto transactions over public Wi-Fi networks as they can be insecure and make it easier for hackers to intercept your data.
• Be Vigilant About Phishing Attempts: Phishing attacks are common in the crypto space. Always double-check emails and messages, especially those asking for sensitive information or prompting you to take urgent actions.
• Secure Your Password: Use unique and complex passwords for each service. Avoid simple or short passwords and consider using password managers to securely store and manage your credentials.
• Educate Yourself: Understanding the technology behind cryptocurrencies and the various threats is crucial. Stay updated with the latest security trends and threats in the crypto space.
• Choose Secure Exchanges: Research the security measures implemented by cryptocurrency exchanges before committing to one. Look for features like 2FA, cold storage, and withdrawal whitelists.
• Be Wary of Scams: Fraudulent investment opportunities, illegitimate crypto platforms, fake wallets, and Ponzi schemes are common in the crypto space. Do your own research and be skeptical of new token projects or unsolicited emails/solicitations.

By following these guidelines and staying vigilant, you can significantly reduce your exposure to risks and help keep your crypto investments secure.

Frequently asked questions