Opinion: Illinois is on the brink of massive crypto regulation. Entrepreneurs will pay the price.

The Illinois General Assembly has advanced a sweeping measure that will have enormous consequences for Chicago’s tech ecosystem and the more than 300 startups and legacy institutions innovating in blockchain and cryptocurrency in Illinois.

The Digital Assets and Consumer Protection Act (DACPA) — sponsored by state Sen. Mark Walker of Buffalo Grove — was proposed under the guise of consumer protection but, in reality, would do very little to protect Illinois consumers. If signed into law, it would impose heavy-handed regulations and a burdensome licensing regime on Illinois entrepreneurs and give sweeping regulatory authority to the Illinois Department of Financial and Professional Regulation (IDFPR), an agency in the midst of modernizing its processes to minimize licensing delays that it self-described as a “crisis” as recently as last year.

Let me be clear: The digital assets community — including blockchain and crypto entrepreneurs — supports smart, targeted regulation to protect consumers and hold bad actors accountable. But this bill doesn’t achieve that, and it will fail entrepreneurs and consumers in several ways.

First, the bill offers Illinois consumers a false sense of security against crypto fraud and bad actors, the majority of whom operate offshore and will not adhere to the requirements of this legislation. Legitimate Chicago-based crypto companies by and large are not the ones targeting elderly consumers, but they will bear the costs of this bill.

Second, the bill would regulate not only centralized exchanges or other companies that custody crypto for Illinois users, but potentially would extend to a host of startups, students, and technologists experimenting with ways to use blockchain to solve real world problems. The outcome would be a two-tier system innovation where well-resourced legacy organizations will be the only ones with the capital and resources to navigate licensure. That runs contrary to everything Illinois stands for.

What’s more, cryptocurrency companies operating already are subject to plenty of oversight. The Illinois Department of Financial and Professional Regulation, the Illinois Attorney General, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Department of Justice could all bring actions against someone defrauding an Illinois resident. Beyond that, many companies interacting with the financial assets of Illinois consumers are required to hold a Money Transmitter License issued through the IDFPR, and companies holding crypto assets also already may need to seek an Illinois trust license. Adding more bureaucracy and confusion into this burgeoning industry serves no one.

Also concerning is that this bill assumes the IDFPR — already operating on constrained resources — is prepared to regulate one of the most technologically complex and fast-moving sectors in the world within the next several months with just the handful of new staff they would hire. The agency already is responsible for regulating professional licensing for more than 1.2 million Illinois residents, and it has struggled to keep pace with the existing demand. Just last year, Illinois doctors and nurses found themselves at risk of losing their jobs because of delayed licenses.

To its credit, IDFPR rolled out a new online application system — CORE — four months ago. But as of today, the agency has only converted three of its more than 300 licenses to the online system and has publicly stated it will take more than two years to convert the rest. It’s irresponsible to assume it can handle licensing for the multitude of companies providing cryptocurrency services to Illinois residents with such a short runway.

Illinois doesn’t have to guess what will happen if these bills get signed into law. We can just look to New York state, which enacted a similar licensing regime — the New York BitLicense — via regulatory guidance in 2015. Since then, the state’s regulatory body has approved just 34 BitLicense applications, spurring many crypto companies to geoblock New York residents. Illinois’ version of the license extends broader regulatory authority than New York’s BitLicense, so it’s safe to say the consequences will be more significant.

Right now, we’re seeing a substantial number of crypto companies considering reshoring to the United States, and with regulations like DACPA, Illinois will continue to fall down the list of realistic places to build technology-forward companies.

While lawmakers may believe they are protecting consumers, they are pushing innovators, investors, and job creators to friendlier jurisdictions. Illinois needs a regulatory structure for cryptocurrency that is narrowly targeted, functional, and manageable. Until the IDFPR is fully modernized and the law is significantly narrowed in scope, Senate Bill 1797 and House Bill 742 should not move forward.

• Senate Bill 1797 passed the Illinois Senate on April 10. It was assigned to the Illinois House Financial Institutions and Licensing Committee on April 17.

• Katherine Kirkpatrick Bos is general counsel of StarkWare, developer of a cryptographic zero-knowledge proof system that seeks to improve scalability in blockchains, and a board member of the Illinois Blockchain Association.