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On August 30, 2022, the California State Legislature passed (and
Governor Newsom is expected to sign into law) a “Digital
Financial Assets Law,” which will impose licensing
requirements on digital asset companies and cryptocurrency
exchanges beginning January 1, 2025.
California’s new Digital Financial Asset Law
(“DFAL”) will impose a variety of regulatory requirements
on digital asset companies and cryptocurrency exchanges. Governor
Newsom is expected to sign the DFAL into law, and new licensing
requirements will spring into effect on January 1, 2025. The DFAL
will prohibit a person from engaging in digital financial asset
business activity without a license from the California Department
of Financial Protection and Innovation (“Department”).
Under the proposed law, “digital financial asset
activity” will include exchanging, transferring or storing a
digital financial asset, or engaging in digital financial asset
administration both directly or through a vendor. It will also
include holding electronic precious metals and related activities
as well as online gaming assets tied to legal tender or the
original value. “Digital financial assets” will be
defined as a digital representation of value that is used as a
medium of exchange, unit of account, or store of value and that is
not already legal tender. The DFAL will 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, as defined in the
DFAL. The license application will require extensive background
information.
A primary goal of the DFAL is to reduce consumer risk. The
sponsor stated that DFAL indicates the legislature understands
“that a healthy cryptocurrency market can only exist if simple
guardrails are established.” The bill fashions these
guardrails in the form of licensing and other compliance
requirements for businesses and extensive oversight opportunities
for the Department. To date, the Department has taken a relatively
light-touch approach with respect to some digital asset companies,
including cryptocurrency exchanges, issuing a number of no-action
letters in which it held that these companies were not subject to
existing California money transmission licensing and compliance
requirements. However, pursuant to the new DFAL, licensing
requirements and several other strictures will be imposed on
digital asset businesses.
Among other requirements, licensees will be required to maintain
records of all California client activity for at least five years
(a requirement that may sit uneasily with technologies focused on
the preservation of anonymity). Licensees must also maintain a
monthly ledger that outlines all assets, liabilities, capital
income, and expenses of the licensee. Prior to engaging a
California resident as a customer or client, each business will be
required to make disclosures about fee totals, fee timing, and fee
calculation. Licensees will be required to create and staff a
24-hour, toll-free helpline with live customer assistance.
Licensees will also be required to create and maintain a set of
security and other policies and procedures, including information
security, business continuity, disaster recovery, antifraud, and
AML and OFAC compliance programs.
The DFAL will also grant the Department broad oversight and
enforcement authority. The DFAL will allow the Department to
conduct examinations of licensees and take enforcement measures
against both licensed and unlicensed operators. Examinations can be
undertaken at any time without notice to the business and at the
business’ expense. Enforcement measures include judicial
actions and fines of up to $20,000 per day for licensees-and
$100,000 per day for unlicensed businesses.
In practice, the proposed California law is similar to New
York’s “BitLicense” regulation. But unlike the
BitLicense, …….