The cryptocurrency sector could be subject to new regulation in California, and industry lobbyists are backing down to ensure their businesses can still operate under the proposed new scrutiny.
The Golden State, home to nearly a quarter of North America’s blockchain companies, is trying to regulate the sector after last year’s FTX crash and other cryptocurrency market turmoil. With no imminent federal action, state legislators want to establish a basic regulatory framework.
Some California lawmakers are already considering other aspects of the diverse industry that have yet to face regulation, from non-fungible tokens, or NFTs, to decentralized autonomous organizations, or DAOs. Those more complicated bills and issues, however, won’t be reviewed until next year.
“That (legislative activity) is really opening up the conversation to move from a reactive space to leadership in terms of how we are talking about what to do in California,” said Charles Belle, executive director of the Blockchain Advocacy Coalition, a California organization. Focused policy group that supports blockchain, which is how cryptocurrency transactions are recorded. “These are great questions to have.”
Licensing bill sees some changes
The primary legislative focus is to replicate New York’s crypto licensing system with its own state measure (AB 39) that is awaiting a vote in the Assembly. The bill is likely to pass easily, as many legislators share the sentiment that consumers should be protected with licensing and documentation requirements that allow for greater oversight.
“It is clear that licensing is the natural next step for this industry,” said Assemblyman Timothy Grayson (D), author of the bill and chairman of the Assembly Banking and Finance Committee. “And it is equally clear that until we take that step, Californians will remain vulnerable to frequent and preventable financial scams.”
The bill’s biggest hurdle is Gov. Gavin Newsom (D), who vetoed a substantially similar bill last year and has advocated for innovation in the blockchain space. Officials in his administration previously said the state Department of Financial Protection and Innovation is already working on a foundation for a regulatory framework, as agency staff are concerned about the costly administrative burdens the bill would impose. To the department.
Lawmakers expressed their frustration at what they perceived as a slow response from the department at a briefing hearing in February. The department, according to a spokesperson, reneged on a promise in March to issue cryptographic guidelines for banks and credit unions because it has been concerned about recent high-profile bank failures.
Meanwhile, Grayson has been simplifying the requirements in his bill to make it easier for both the department and applicants to adhere to the proposal. He removed, for example, a requirement for 24/7 customer service and the need for certain disclosures to consumers.
But industry groups argue the reviews are not enough, arguing they would double New York’s onerous and time-consuming licensing process.
The Crypto Council for Innovation, which represents companies including Coinbase Global Inc. and Gemini Trust Co. LLC, asked Grayson to include concrete timelines for approval of the application process, as well as a narrower definition of what activities require a license. Industry groups have raised concerns about the measure’s conditional ban on stablecoins, whose values are pegged to currencies like the US dollar or commodities like gold. The collapse of a stablecoin in 2022 resulted in a ripple effect among several other cryptocurrency companies.
“The question is whether California has the capacity to absorb this series of requests. How long do they take to absorb? It takes time,” Belle said. “That requires money, right? Smaller companies don’t have the resources to wait a year for those gains to come. You’re just going to go.
Lawmakers also want to protect Californians from crypto kiosks, ATM-like machines where cryptocurrency can be bought or exchanged, according to legislation by state Sen. Monique Limón (D), who chairs the Senate Banking and Financial Institutions Committee. Kiosk operators would have to provide a list of kiosk locations to the Department of Financial Innovation and Protection and itemized receipts to consumers under their bill (SB 401).
More importantly, the measure would place limits on the fees a kiosk can charge and the amount a consumer can exchange. Fees may not exceed $5 or 2% of transaction value. A state resident would be unable to purchase or obtain more than $1,000 per day at a kiosk based on the bill.
Consumer advocates argue that the limits would serve as good protection for the state’s 3,500 kiosks, which they say attract less tech-savvy people into a risky industry. They allege that the kiosks have been used for scams and other fraudulent activities.
Crypto groups argue that the limits laid out in the bill would pose a serious threat to the existence of the industry, which relies on kiosks as a major way for customers to access and participate in the digital economy. The bill’s limits would push operators out of business, they argue, because they couldn’t make a profit from the machines.
Limón has said she is willing to consider more flexibility around the limits of her bill, which the Senate approved on Wednesday.
delayed to next year
Other minor bills are also advancing, such as a measure that would expand the definition of money laundering to include illegal actions through blockchain technology (AB 76) and legislation that would possibly lead to blockchain training at state community colleges ( SB 711). Both are awaiting votes in the plenary session of their respective chambers.
Lawmakers will revisit the issue of digital assets next year, regardless of whether or not the licensing bill passes. That includes a bill by Assemblyman Evan Low (D) that would regulate NFTs (AB 1336) and establish disclosure requirements around the tool used to record digital property. Another bill from Assemblyman Matt Haney (D) would give legal status to DAOs, groups of investors who put money into a shared crypto bank account and collectively decide how to spend or invest it, to help prop up the sector (AB 1229).
Those measures were shelved until next year to give lawmakers and staff more time to fully understand and analyze their impact.
“We hope to educate and gather more information and continue the legislative process early next year,” said Nate Allbee, a spokesman for Haney’s office.