The state of California, in the United States (US), plans to streamline the playing field by putting regulations for crypto players in place. The bill introduced by Assemblymember Timothy Grayson, titled “Digital financial asset businesses”, aims to set the regulatory framework for crypto businesses operating in California. The bill passed in the Senate on August 29, 2022, and by the Assembly on August 30, 2022, is expected to become law in 2025.
According to the bill, a digital financial asset means a digital representation of value that is used as a medium of exchange, a unit of account, or a store of value, and that is not legal tender, whether or not denominated in legal tender.
Entities that wish to engage in digital financial asset business activity on or after January 1, 2025, in California must, amongst other requirements must, be licensed by the Department of Financial Protection and Innovation (The department).
As per the proposed bill, applicants for digital financial asset business activity shall also be required to disclose any litigation, arbitration, administrative proceedings, bankruptcy, or receivership proceedings in any jurisdiction for up to ten years before their application. The Department shall notify all applicants of the outcomes of their applications. On notification, applicants will be given up to 31 days to accept any approval conditions or the application shall be deemed withdrawn.
To protect California residents engaging in digital financial asset business, the bill further proposes that licensees maintain a security bond or trust account in United States dollars in addition to capital that the department shall determine from time to time. The department shall also examine that all licensees are lawfully conducting their business.
Reporting requirements shall require licensees to advise the department of any changes in business activity and any changes in the control of a licensee or changes in the licensees’ company structure.
The department may take enforcement measures against licensees as they deem necessary. The bill proposes that: “If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division”
Additionally, the bill proposes that: “If a licensee materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation”.
Concerning stablecoins, the bill further proposes that: “A licensee shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1) The issuer of the stablecoin is licensed pursuant to this division or is a bank.
(2) The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed by the United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States”.
California has set out a detailed bill to protect its residents engaging in digital financial asset business activity. The state of New York instituted regulations for virtual currency business operators in 2015.