A bill to add licensure and regulations to cryptocurrency financial services based in the state passed the Assembly on Tuesday, bringing the piece of legislation to Governor Gavin Newsom to either sign or veto.
Assembly Bill 2269, authored by Assemblyman Tim Grayson (D-Concord), would require anyone who engages in digital financial asset business activity or engages in such activity on behalf of a resident to be licensed with the Department of Financial Protection and Innovation. The Department itself would conduct examinations of a licensee and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
Under AB 2269, also known as the Digital Financial Assets Law, the Department would also be allowed to take enforcement measures against those who are unlicensed. If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident, the department may give a civil penalty of up to $100,000 per day they are in violation. If a licensee materially violates a provision of this division, the department may give a civil penalty of up to $20,0000 for each day of violation.
Licensees would also need to disclose fee schedules and charges set up in advance per client. If passed, the bill would come into law on January 1, 2025.
Assemblyman Grayson wrote the bill due to the lack of regulations in the cryptocurrency market, with those deciding to invest in crypto being vulnerable to scams, financial services issues, and other problems that are growing due to the market not being regulated.
“The excitement around cryptocurrency and digital financial assets is palpable, and I’m impressed by the market’s ability to help consumers feel empowered to make financial investments and participate in a system that has, in many cases, felt closed off to them,” said Assemblyman Grayson earlier this year. “While the newness of cryptocurrency is part of what makes investing exciting, it also makes it riskier for consumers because cryptocurrency businesses are not adequately regulated and do not have to follow many of the same rules that apply to everyone else. This bill will provide consumers basic but necessary protections and will promote a healthy cryptocurrency market by making it safer for everyone.”
Many financial institutions and consumer advocates backed the bill, noting that those going into the market are vulnerable without basic protections.
“Consumers need basic protections to ensure that they don’t get ripped off by financial schemes that prioritize unlimited instantaneous transactions more than protecting California consumers,” noted Consumer Federation of California (CFC) Executive Director Robert Herrell. “CFC is pleased to work with Assemblymember Grayson on this critically important legislation that balances the need for innovation with the foundational notion that consumers must be protected. Fortune favors the balanced and wise, not just the so-called ‘brave’. Hundreds of millions in self-promotion from the crypto industry shouldn’t overshadow the need for solid consumer protection.”
Possible cryptocurrency licensure, regulations in California
Business groups and crypto organizations opposed the regulations in the last few months, noting that they would not only stymie crypto in California, but would also lead to disinvestment from many in California, including many crypto companies in Silicon Valley who would likely move out of state.
“A lot of New York and San Francisco area Crypto firms have been moving to states like Florida due to regulation worries,” explained cryptocurrency researcher Gav Davis to the Globe on Wednesday. “New York regulations in particular have led many to move to Miami in the past year. If California does the same, those in California will be much more likely to move. Those into crypto love it being the wild west right now, so if a state tries to rope them in, they’ll go to a state that doesn’t have them. That simple.”
Despite the opposition, only some Republicans and Democrats either voted against or abstained during voting. In the Senate vote on Monday it passed 31-6 with 3 abstentions, with the bill passing the next day in the Assembly 71-0 with 9 abstentions.
The bill is now on the desk of Gavin Newsom.
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