California Digital Financial Asset Law Vetoed by Governor Newson
September 26, 2022
Two weeks ago, it looked promising that California would follow New York’s steps to enact a law that regulates cryptocurrencies and other digital financial assets. On September 12, 2022, a new bill which would have created a “Digital Financial Assets Law” (DFAL) was enrolled and presented to Governor Newsom for signature. The bill received 71 “yes” votes and 0 “no” votes within California State Assembly and 31 “yes” votes and 6 “no” votes on the Senate floor. Governor Newsom, however, determined that it was premature to have such regulation and vetoed the bill on September 26.
The primary goal of this bill was to reduce consumer risks. “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,” Assembly Member Timothy Grayson (D-Concord), the bill’s sponsor, said in a prior statement.
If enacted, the DFAL would prohibit any person or company from engaging in digital financial asset business activity without a license from the California Department of Financial Protection and Innovation. Also, licensee would be required to maintain records of all California client activities for at least five years, which would essentially destroy the important anonymity feature of most cryptocurrencies. The proposed law would apply to any person, including an individual, business, or any other legal entity, conducting digital financial asset business activity “with or on behalf of” a resident of California. Practically, the law would make California another “Bitlicense regime”, like the New York. What would make the DFAL different from the regulations in NY is that it would almost eliminate stablecoins transactions for small businesses. According to the proposed rules, a California-licensed entity would not be allowed to deal stablecoins unless the stablecoins are issued by a bank or a licensed issuer that holds eligible securities as reserve with the aggregate market value of not less than all outstanding stablecoins issued or sold in the United States.
Considering that the Bill received overwhelming supports from the legislative branch, it was a shock for some proponents when the Governor vetoed the Bill. However, the Governor believed that “it is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions.” He claimed that “such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.” Newsom also highlighted that he would like to see federal regulations to “come into sharper focus for digital financial assets” before working with the legislature to establish crypto licensing regulations.  Despite the veto, Governor Newsom expressed his supports for future regulations on digital financing assets.
Noticeably, this is California’s second attempt to impose regulations on digital financial assets. The first such bill, AB-1326, was proposed in 2015 and made dormant by a State Senator.