As readers may recall, California previously attempted to enact a “Digital Financial Assets Act” by introducing the following legislation: AB 2269 In related part, AB 2269 would (1) create strict licensing requirements for entities that engage in, or are deemed capable of engaging in, “digital financial business activities” with or on behalf of California residents; , and (2) proposed substantive licensing requirements. Ongoing reporting and operational obligations. Both are modeled after California’s New York State “bitlicense” requirements for crypto businesses.
Fortunately, Governor Newsom vetoed AB2269 in September 2022, calling the measure premature. In his veto communication, Governor Newsom announced his commitment to creating a “transparent regulatory environment” that fosters responsible innovation and consumer protection in California, amid a “rapidly evolving federal regulatory landscape.” emphasized the goal. As a result, the industry is prepared for only a temporary reprieve from digital asset regulation, followed by a coordinated effort between California and federal regulators to oversee digital asset business activities. . unfortunatelyCalifornia appears to have chosen to reintroduce a revised version of the Digital Financial Assets Act, AB39Instead.
Like its predecessor, AB 39 provides hereafter: July 1, 2025, “claims that a person must not engage in digital financial asset business activities with or on behalf of a resident, or may engage in digital financial asset business activities on behalf of a resident.” should not be done”. provided, however, that (1) the person is licensed; (2) have submitted their application by July 1, 2025 and are awaiting approval of their application; or (3) the person is exempt from licensure. look New Cal. Fin. Code § 3201. The term “Digital Financial Asset Business Activities” is defined to mean “(1).” [e]Exchange, transfer, store, or engage in digital financial asset management, either directly or through agreements with digital financial asset management service vendors;[;] (2) [h]Storing electronic precious metals or electronic certificates representing interests in precious metals on behalf of others, or issuing shares or electronic certificates representing interests in precious metals;[;] (3) [e]x Change one or more digital representations of value used within one or more online games, gaming platforms, or gaming families into any of the following: (A) Digital Financial Assets offered by or on behalf of the same publisher as the original digital file’s publisher;Received value representation [or] (B) any legal tender, bank or credit union credit other than an online game, gaming platform, or family of games provided by or on behalf of the same publisher from which you received the original digital representation of value; ” The term “digital financial asset” is defined as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and is not fiat, whether or not denominated in fiat currency.” ” includes certain limited exemptions. look New Cal. Fin. Code §§ 3102(g) and (i). Importantly, AB 39 includes stablecoins within the scope of the term “digital assets” and the new Cal. Fin. Code §§ 3601 through 3605 provide certain regulatory obligations for the business activities of digital financial assets related to stablecoins.
In addition to the licensing requirements listed above, please note the following regarding AB 39:
- AB 39 authorizes the Department of Financial Protection and Innovation (“DFPI”) to conduct inspections of licensees.
- AB 39 requires that for all digital financial asset business activities conducted with or on behalf of a resident, a licensee must maintain a general ledger at least monthly that lists all assets for a period of five years from the date of the activity. Certain records must be maintained, including: Licensee’s Debt, Capital, Income and Expenses;
- AB 39 provides that DFPI, as a licensee or not a licensee, is engaged in, engaged in, or seeking to engage in digital financial asset business activities with or on behalf of residents of a particular territory. authorizes enforcement actions to be taken against individuals who are If the licensee or person materially violates the provisions of AB 39, any rules or orders adopted under AB 39, or any California law other than AB 39 that applies to the violator’s digital financial asset business activities; Residents, including , or their representatives. AB 39 also authorizes DFPI to prescribe civil penalties for such violations.
- AB 39 requires licensees, prior to engaging in digital financial asset business activities with a resident, to identify the resident, including the schedule of fees and charges that may be levied, and how the fees and charges are calculated if they are not applicable. Requires individuals to make certain disclosures. Pre-set and disclosed fees and fee timing.
Knowing the state of the game, this measure seems very likely to pass this year. I sincerely hope that the California Legislature continues to refine AB 39 to address some of its more problematic provisions. To give one example of such a provision, AB 39 imposes restrictions on a person who “seeks to engage” in a business activity in digital financial assets, to what extent such a person must be engaged in a business activity. Authorizes DFPI to take enforcement action without defining . “We’re about to go to war.” Because the hurdles that DFPI must meet before taking enforcement action are so low, new and innovative companies seeking to engage in virtual currency business activities essentially have no right to submit proposals in California. They will be responsible for formulating their own business plans. Such provisions would significantly undermine the “transparent regulatory environment” that Governor Newsom advocated in his veto of AB 2269.
It will be important for entities engaged in virtual currency business activities to refer to the full text of the bill to determine how the new law will affect their business operations.