California Legislators Continue To Assess How To Regulate Digital Assets

By Jeremy McLaughlin and Josh Durham

For the fifth time since June 2022, California Senators have amended their proposed “Digital Financial Assets Law,” signaling a genuine desire to pass the bill as the Senate inches toward workable legislation.

The Digital Financial Assets Law (Assembly Bill No. 2269) would amend California’s Financial Code to bring digital assets within its purview. Drawing analogies to money transmission licensing, the bill would prohibit a person from engaging in “digital financial asset business activity” or holding itself out as being able to do so unless they were licensed. With certain exceptions, the bill defines a “digital financial asset” 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 legal tender, whether or not denominated in legal tender.”
The activities that require licensure are:

  1. Exchanging, transferring, or storing a digital financial asset or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor.
  2. Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
  3. Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either: (A) a digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received; or (B) legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.

The bill provides an extensive list of exemptions. Notably, the law would not apply to services governed by the Securities Exchange Act of 1934, or California’s Corporate Securities Law of 1968. In addition, only entities whose activities are reasonably valued to be in excess of $50,000 will be targeted by this bill, which allows for some flexibility for some startups and small players.

The most recent amendments have pushed back the effective date to January 1, 2025, and integrated the bill with the California Financial Information Privacy Act. This change will generally impose financial privacy protections on digital asset services providers, which may prove to be an unexpected challenge since the most prominent blockchains are entirely public.

Companies and technologists should be prepared if/when California’s “Digital Financial Assets Law” is adopted since it continues to make its way through the legislature as a genuine push to regulate digital assets.

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