Subject: Analysis of Ohio House Bill No. 18, regarding investments in exchange-traded products and digital assets.
Summary:
Ohio House Bill No. 18, titled the “Ohio Strategic Cryptocurrency Reserve Act,” proposes to amend several sections of the Ohio Revised Code to allow the Treasurer of State to invest certain interim funds in digital assets, specifically through exchange-traded products (ETPs). It also clarifies that state retirement systems are permitted to invest in exchange-traded products. The bill outlines definitions, restrictions, and custodial requirements for digital asset investments, and it reaffirms the fiduciary duties of retirement boards, emphasizing the goal of maximizing investment returns while prohibiting investment decisions primarily aimed at influencing social or environmental policies.
Key Themes and Ideas:
- Authorization for Digital Asset Investment: The core of the bill enables the Treasurer of State to invest interim moneys from specific funds (General Revenue Fund, Budget Stabilization Fund, and Deferred Prizes Trust Fund) into digital assets.
- “Subject to the requirements of this section, the treasurer of state may invest interim moneys from any of the following funds in digital assets…”
- Definition of Digital Asset: The bill provides a broad definition of “digital asset,” encompassing various forms of digital-only assets.
- “‘Digital asset’ means a virtual currency, cryptocurrency, native electronic asset, stablecoin, non-fungible token, or any other digital-only asset that confers economic, proprietary, or access rights or powers.”
- Exchange-Traded Product (ETP) Focus: The bill restricts digital asset investments to those held within ETPs, mitigating risk.
- “The treasurer of state shall not invest in digital assets that do not meet both of the following: (1) The digital assets are an exchange-traded product.”
- Market Capitalization Requirement: A minimum average market capitalization of $750 billion is required for the underlying digital assets in which the treasurer invests via ETPs.
- “(2) The average market capitalization of the digital assets over the preceding twelve months is at least seven hundred fifty billion dollars, as determined by the treasurer of state using a commercially reasonable method.”
- Custody and Security: Strict custody and security measures are outlined for holding digital assets. These include using a “secure custody solution” with specific characteristics or utilizing a “qualified custodian.”
- “Any digital asset acquired as an investment under this section must be held in one of the following ways: (1) Directly by the treasurer of state through the use of a secure custody solution; (2) On behalf of the state by a qualified custodian; (3) In the form of an exchange-traded product issued by an investment company registered under Chapter 1707. of the Revised Code.”
- Secure Custody Solution Requirements: The bill specifies detailed requirements for a secure custody solution. These requirements focus on the exclusive control and security of private keys, geographical diversification of hardware, multi-party governance, and disaster recovery protocols.
- “‘Secure custody solution’ means a technological product or blended product and service that has all of the following characteristics…The private keys that secure digital assets are exclusively known and accessible by the government entity…[and other characteristics].”
- Loan of Digital Assets: The Treasurer is allowed to loan acquired digital assets to further increase returns, if the treasurer determines there is no increased risk of investment.
- “The treasurer of state may loan the digital assets acquired as an investment under this section to bring further returns to the applicable fund if the treasurer of state determines that the loan does not increase the financial risk of the investment.”
- Retirement System Investments & Fiduciary Duty: The bill explicitly states that nothing prohibits state retirement boards from investing in exchange-traded products, as defined in the bill. It reiterates the fiduciary duty of these boards to maximize returns and prohibits investment decisions primarily aimed at social or environmental influence.
- “Nothing in this section shall be construed to prohibit the board from investing in an exchange-traded product as defined in section 135.146 of the Revised Code.”
- “The board, in accordance with its fiduciary duties described under this section, shall make investment decisions with the sole purpose of maximizing the return on its investments. The board shall not make an investment decision with the primary purpose of influencing any social or environmental policy or attempting to influence the governance of any corporation.”
- Investment Consideration: The board shall give consideration to investments that enhance the general welfare of the state and its citizens where the investments offer quality, return, and safety comparable to other investments currently available to the board. Equal consideration should be given to investments that involve minority owned and controlled firms and firms owned and controlled by women.
- “In exercising its fiduciary responsibility with respect to the investment of the funds, it shall be the intent of the board to give consideration to investments that enhance the general welfare of the state and its citizens where the investments offer quality, return, and safety comparable to other investments currently available to the board. In fulfilling this intent, equal consideration shall also be given to investments otherwise qualifying under this section that involve minority owned and controlled firms and firms owned and controlled by women, either alone or in joint venture with other firms.”
- Treasurer’s Authority to Regulate: The bill grants the treasurer the authority to adopt rules for the administration of the section allowing for the regulation of digital asset investment.
- “The treasurer of state may adopt rules for the purposes of administering this section.”
- Investment Limits: Limits are placed on the maximum percentage of a funds balance that can be invested in digital assets.
- “The investments in digital assets from any of the funds described in division (B)(1) to (3) of this section shall not exceed, in the aggregate, ten per cent of the balance of the fund at the time of the investment.”
Potential Implications:
- Increased Investment Diversification: The bill could allow Ohio to diversify its investment portfolio and potentially generate higher returns through digital asset investments.
- Risk Management: The focus on ETPs and the minimum market capitalization requirement attempts to mitigate some of the inherent risks associated with digital assets. The stringent custody requirements also aim to protect the state’s investments.
- Economic Signal: The bill could be seen as a signal that Ohio is embracing innovative financial technologies.
- Regulatory Framework: The bill establishes a framework for responsible digital asset investment by the state.
- Increased Scrutiny: Any investment in digital assets will likely be subject to increased scrutiny from the public and the media, given the volatility and complexity of the asset class.