On May 4, 2022, California Governor Gavin Newsom issued an executive order on digital assets largely echoing the positive sentiments of President Biden’s February executive order. The order looks to create transparent regulation around digital assets and drive innovation into the state. By directing state agencies to engage in a cooperative discussion with stakeholders and developers in web3, California seeks to create an informed supplement to the federal report on digital assets, which is due in September.
While the order outlines seven priorities for the state to focus on, the outlook can be distilled down to the following:
- Foster digital asset innovation within California’s borders;
- Engage with professionals in the field to gather information on the benefits of digital assets; and
- Explore possibilities to streamline government functions through blockchain technology.
Overall, the goal is to create regulations harmonious with the future, federal framework. The onus in achieving this goal is put on four agencies: Governor’s Office of Business and Economic Development (GO- Biz); the Business, Consumer Services and Housing Agency (BCSH); the Department of Financial Protection and Innovation (DFPI); and Government Operations Agency (GovOps).
GO-Biz is mainly tasked with collecting input from various builders in the space, with particular attention to financial technologies. Here, financial technologies likely means decentralized finance (DeFi), which has already expanded access to basic financial services for underbanked users through various payment systems, such as stablecoins.
DFPI is responsible for balancing the protection of consumers and incubating innovation. To kick-start efforts in a public dialogue, DFPI will solicit public comments regarding regulation of cryto-asset related financial products and services within 30 days of the Order. For consumer protection, DFPI has authority to initiate enforcement actions, but is also expected to publish education materials to guide consumers. DFPI’s efforts in this space will be particularly elucidating given the ageny’s hesitancy thus far to regulate many aspects of the crypto industry. The Order’s repeated goal of achieving harmonization with nationwide regulation should give some hope to the industry.
GovOps will explore government incorporating blockchain use cases into state operations. Pursuant to California’s “Request for Innovative Ideas” process, GovOps shall consider future adoption of the technology through a coordinated effort to listen to the crypto community. Addressing emerging, public needs gives crypto the opportunity to build rapport with regulators.
In this burgeoning industry, the Order is a welcome opportunity to achieve a thoughtful and consistent approach that does not compromise ingenuity or consumer protection.