On September 23, 2022, California Gov. Gavin Newsom vetoed Assembly Bill 2269, known as the Digital Financial Assets Law, which would have introduced a new licensing regime for digital asset companies operating in California. Without the governor’s veto, these companies would have been subject to ongoing oversight and scrutiny by the California Department of Financial Protection and Innovation (DFPI) and substantive requirements related to consumer disclosures and the development of policies and procedures to address perceived risk concerns.
In his veto message, Governor Newsom wrote: “[i]It is premature to legislate a license structure without taking both into account [previous research and outreach] Work and forthcoming federal action.” He added that “a more flexible approach is needed” and that “crafting a new regulatory program is a costly endeavor, and this bill would require a tens of millions of dollars in general fund loans in the early years.” In addition to the financial and logistical concerns surrounding the implementation of a new licensing regime, his veto likely factored in President Biden’s Framework for Responsible Development of Digital Assets, issued a week earlier.
The Digital Financial Assets Law was introduced in June 2022 to provide consumer protections in the cryptocurrency market and to cover crypto business activities likely outside the scope of the California Money Transmission Act. AB 2269 suggested that, subject to limited exceptions, a license would be required to “enter into or hold a business involving digital financial assets [oneself] to be able to transact business in digital financial assets with or on behalf of residents.” The legislation defined “digital financial assets” as a digital representation of value used as a medium of exchange, a unit of account, or a place of storage of value, and that is not legal tender, regardless of whether it is legal tender or not.
AB 2269 further defined “Digital Financial Asset Activities” to mean:
- Exchanging, transferring or storing a digital financial asset or engaging in the management of digital financial assets, whether directly or through an arrangement with a provider of digital financial asset control services.
- Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
- Exchanging one or more digital representations of value used in one or more online games, gaming platforms or a gaming family for any of the following:
- A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was obtained; or
- Legal tender or bank or credit union credit outside of the online game, game platform, or game family offered by or on behalf of the same publisher from which the original digital representation of value was obtained.
AB 2269 would have required applicants to meet the property and bond requirements at an amount left to the discretion of the DFPI. It would also have required applicants to develop and maintain operational policies and procedures that address concerns related to information and operational security, business continuity, disaster recovery, fraud prevention, prevention of money laundering, and prevention of terrorist financing.
Another feature of AB 2269 was to require licensees to provide certain consumer information prior to transacting digital financial asset transactions with a resident. These disclosures included fees and charges, whether products or services would be covered by some form of insurance, and information related to transactions after initiation – for example, whether a transfer or exchange is irrevocable, or options regarding unauthorized, erroneous, or accidental transfers or exchange. In addition, after a transaction, a licensee would have had to provide the consumer with the licensee’s name and contact information, details of the timing and value of the transaction, and the fees charged for the transaction.
Although AB 2269 was ultimately rejected, California will likely introduce a regulatory system to oversee crypto companies operating in the state at some point in the future. Such a focus on consumer protection is consistent with California’s executive order dated May 4, 2022, which describes:[i]It is the state’s goal to create a transparent and consistent business environment for companies doing business on the blockchain, including crypto assets and related financial technologies, that harmonizes federal and California laws that balance the benefits and risks for consumers and those of California includes values. such as equity, inclusivity and environmental protection.” It remains unclear whether future proposed regulatory regimes will include features of the Digital Financial Assets Act, but that will likely come into focus as more guidance is provided at the federal level.