California passes crypto bill; Governor calls for consultation
In a move that echoes the recent movements in global cryptocurrency regulation (for example see Australia and Hong Kong), Californian Governor Gavin Newsom has signed Assembly Bill 39, set to take effect in July 2025. Known as the Digital Financial Assets Law, this legislation marks California's answer to New York's "BitLicense" and could signify a positive step towards regulatory clarity for the blockchain industry in California.
However, the Digital Financial Assets Law has faced heavy industry criticism. Despite this, it successfully passed through the state's Assembly in September 2022, establishing the groundwork for regulation and enforcement in the cryptocurrency sector.
The core features of the law entail empowering California's Department of Financial Protection and Innovation (DFPI) to craft a comprehensive regulatory framework for blockchain dealings. This framework encompasses a licensing regime and grants the DFPI enforcement authority and rulemaking within the sector. Licensed crypto firms will be subjected to examinations, record-keeping, and fee disclosures to customers, ensuring a responsible and transparent cryptocurrency landscape. The DFPI has been allotted an 18-month implementation period to make changes to the regime.
Governor Newsom emphasised the need for striking a balance between consumer protection and fostering responsible innovation, stressing the collaborative nature of the process. Newsom articulated:
It is essential that we strike the appropriate balance between protecting consumers from harm and fostering responsible innovation, and I look forward to working with the author of the bill to achieve this.
The cryptocurrency community has long been wary of the "BitLicense" in New York, with CoinDesk saying it was 'lethal to start-ups', but could California's approach offer a glimmer of hope on the West Coast? With Congress and federal regulators taking a backseat in shaping Federal regulations for digital assets, other States have stepped in to set standards.
The California Governor had previously vetoed a similar bill but is now keen to improve upon it through industry collaboration. The crypto industry will have some opportunities to provide input and shape the regulatory landscape before the law's full implementation in 2025.
California, like many jurisdictions, says it wishes to strike the right balance between fostering innovation and safeguarding consumers, and industry feedback along the way is a key part of that journey.
Miles Jennings, General Counsel of a16z, posted his reservations on an X thread regarding the potential negative impact on gamers and the otherwise ambiguous definitions in the draft bill:
Of concern is that this same approach to in-game assets has been proposed in the Treasury consultation on Digital Asset exchange licensing.
While most lawmakers, lobbyists, and federal regulators believe that new federal laws are necessary, Congress remains divided on the issue. The SEC, under Chair Gary Gensler, has been active in a regulation by enforcement campaign, which is both expensive and economically inefficient, and the need for comprehensive regulation remains.
In the absence of Congressional action, California's Digital Financial Assets Law stands as a positive step towards responsible blockchain regulation and governance, demonstrating the potential for a collaborative approach between industry and regulators in shaping the future of the blockchain ecosystem, if industry concerns are heard, particularly around in-game and other NFT based assets.
By Michael Bacina, Steven Pettigrove and Luke Higgins