The move towards regulating cryptocurrency in California has gained a boost this year, after Gov. Gavin Newsom vetoed a similar bill from the Democratic Party (D) last September. There are still concerns that this measure could clash with other state efforts.

The FTX crash and other disruption in the crypto markets last year has created an urgent need for creating protections for digital currencies. Charles Belle, the executive director of the Blockchain Advocacy Coalition in California, commented, “FTX’s misguided, unethical and likely illegal practices have harmed the credibility of the whole industry. We need regulatory clarity now more than ever.”

However, the separate regulatory work of the Newsom Administration could make any law tricky. Russ Heimerich, the deputy secretary for communications at California Housing, Consumer Services and Business Agency, which oversees the Department of Financial Protection and Innovation, stated, “We can’t take it slow here. DFPI is hard at work to protect consumers and establish a basis for meaningful and thoughtful recommendations.”

The Newsom Administration wants to make sure that any new crypto regulations are applied in accordance with federal standards. One key question is whether the new legislation can accommodate the actions already taken by DFPI. Additionally, the state budget gap of $22.5 million is another problem, as Newsom mentioned in his veto message last January that the costs of further regulation of digital currency should be delayed until the state had more funds.

Another Try

Assemblyman Timothy Grayson (D), the chair of the Banking and Finance Committee, recently filed AB 39, along with a brief explanation. He noted that the bill has been increased in size compared to last year’s version, and many components will be identical to AB2269, which Newsom vetoed.

Starting in 2025, the bill will require companies involved in the digital asset space to obtain a license via the DFPI. Licensees will have to provide information about their fee schedule, complaints processes, and other data, and must have a trust or bond account as part of their insurance. They will be allowed to self-certify, and the license approval process will be faster than in New York, which was the first state to create a regulatory platform for cryptocurrencies.

Many organizations believe that more flexibility is necessary than a blanket approach to all licensees, and regulations should be tailored to certain activities or products. Scott Talbott, the senior vice president for government affairs at the Electronic Transactions Association, said, “Digital assets are innovative and dynamic. As such, legislation should define them based on their underlying activities or use cases. This will allow legislation to both promote innovation and protect consumers.”

The DFPI has been laying the groundwork for the regulation of cryptocurrencies by collecting stakeholder input and creating a set of “consumer protection principles.” They are also implementing a specific consumer complaint process and organizing a voluntary market monitoring consultation. A spokesperson for the agency said that timelines for those efforts are still being determined.

Meanwhile, the Newsom Administration is keeping an eye on federal regulations, although the outcome of those efforts is uncertain due to the turmoil caused by the FTX scandal. Consumer advocates believe regulations are needed now, and Robert Herrell, the executive director of the California Federation of Consumers, commented, “Real people are getting hurt. We have learned that the longer we wait to establish a legitimate licensing and regulatory regime, the more people will be impacted.”

There are more

Grayson’s bill won’t be the only measure in California when it comes to digital assets. Assemblywoman Laurie Davies (R) introduced AB 76, which would make blockchain technology transactions an offense to money laundering. She cited the FTX scam in a press release announcing the bill.

While not as expansive as launching regulatory frameworks, the bill would close an existing loophole and serve the same purpose in protecting Californians, according to Michael Fern, the creator of the bill and part of the Conference of California Bar Associations. He stated, “Sometimes the best way to alter the law is not to take huge, complicated bills that are hundreds of pages long, but to find the simple solution.”