California enacts comprehensive crypto regulation bill

(Kitco News) – The state of California has become the latest to enact a comprehensive framework for regulating the cryptocurrency industry after Governor Gavin Newsom signed Assembly Bill 39, which establishes the Digital Financial Assets Law.

Newsom signed the bill into law on Friday, more than a year after it was unanimously approved by the state’s assembly, despite facing heavy criticism from the cryptocurrency industry.

The Digital Financial Assets Law was originally introduced in February 2022 by Assembly Member Tim Grayson. “This bill will provide consumers basic but necessary protections and will promote a healthy cryptocurrency market by making it safer for everyone,” Grayson said.

The law is considered to be California’s version of New York’s BitLicense and will require cryptocurrency firms to obtain a license from the Department of Financial Protection and Innovation (DFPI) to ensure compliance with the state’s regulatory framework. It will also require firms to maintain detailed financial records, and provides regulators with the authority to conduct audits.

“[This bill] would require a licensee to maintain […] for five years after the date of the activity, certain records, including a general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee,” the law states.

The law defines cryptocurrencies 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, except as specified” under the new rules coming into effect in 2025.

Non-compliance with the new law will result in strict enforcement measures, including a civil penalty of up to $100,000 for each day of violation. The bill states that it will “become operative only if SB 401 of the 2023–24 Regular Session is enacted and takes effect on or before January 1, 2024.

According to a statement released by the office of Gavin Newsom, the law will make it mandatory for both individuals and firms to obtain a DFPI license to engage in digital asset business activities.

“Beginning July 1, 2025, this bill requires the Department of Financial Protection and Innovation (DFPI) to create a robust regulatory framework, including licensure and enforcement authority, for certain crypto activities,” the statement said. “Importantly, this bill appropriately provides DFPI with rulemaking authority and an 18-month implementation date to ensure the adopted regulatory framework can be thoughtfully tailored to address industry trends and mitigate consumer harm.”

The delayed implementation will give legislators in the state additional time to iron out the details and help clarify certain aspects of the bill.

“Ambiguity of certain terms and the scope of this bill will require further refinement in both the regulatory process and in statute to provide clarity to both consumers, regulators and businesses subject to this new licensure framework,” Newsom said. “It is essential that we strike the appropriate balance between protecting consumers from harm and fostering a responsible innovation environment and I look forward to working with the author to achieve this.”

The goal of the framework is to provide consumers and investors with stronger protections that help to prevent fraud and “ensure bad actors are held accountable,” he said.

Newsom’s endorsement of the crypto regulation bill represents a significant departure from his previous stance.

In Sept. 2022, the governor rejected a similar bill looking to establish a comprehensive regulatory framework for digital assets in California, saying it lacked the flexibility to accommodate the rapidly evolving crypto landscape.

“Digital assets are becoming increasingly popular in our financial ecosystem, with more consumers buying and selling cryptocurrencies each year,” Newsom said at the time in a letter addressed to members of the California State Assembly. “It is premature to lock a licensing structure in statute without considering … forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases and is tailored with the proper tools to address trends and mitigate consumer harm.”

At the time, he proposed waiting for federal regulations before actively pursuing extensive crypto licensing efforts in conjunction with the state legislature.