Regulation
California Enacts Landmark Crypto Licensing Law | CENTER
Until now, crypto companies have been able to operate in California without a license, but that will change starting in July 2025 under new state law”Digital Financial Activities Act” (the Act), signed by Governor Newsom on October 13. The law is California’s first comprehensive framework to regulate the digital asset market in the state, including provisions specific to stablecoins.
Under the law, unless exempted, companies must obtain a license and comply with various prudential requirements, recordkeeping rules and disclosure requirements to engage in (or pretend to engage in) “business activities relating to digital financial assets.” with or on behalf of a California Resident (as defined). The term digital financial asset is defined as a digital medium of exchange, unit of account or store of value. The definition of commercial activity relating to digital financial resources, i.e. those activities that trigger the licensing obligation, is broad: “(1) [e]xexchange, transfer or store a digital financial asset or engage in the administration of digital financial assets, either directly or through an agreement with a digital financial asset control service provider[;] (2) [h]aging of 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) [e]xchange one or more digital representations of value used within one or more online games, gaming platforms or game families for any of the following: (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) [l]legal tender or bank or credit union credit outside of the online game, gaming platform or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.
Some of the law’s requirements are similar to existing licensing requirements for money transmitters – the laws under which most states regulate digital asset business – including surety bond requirements, net worth requirements and record keeping obligations. Notably, however, there are several consequential provisions that relate specifically to digital assets.
Broad executive powers
The law gives the Department for Financial Protection and Innovation (DFPI) broad and, frankly, vague and worrying enforcement power. DFPI can initiate enforcement proceedings against an entity that “has engaged in, is engaged in, or is about to engage in business activities relating to digital financial assets.” There is no further guidance on how close in time an entity must be to qualify as “in the process of” engaging in any of the listed activities. Absent some limiting factor, the broad language of this provision could include entities that are in the early and middle stages of a product’s development. In his signing statement, Governor Newsom urged DFPI to engage in thoughtful rulemaking to, among other things, clarify ambiguities in the law.
Robust disclosure requirements
The law requires licensees to provide extensive consumer disclosure requirements before engaging in the business of digital financial assets. This pre-business disclosure must cover 10 different categories of information, including: (1) a schedule of fees and charges that may be assessed, including how they will be calculated and when they will be imposed; (2) whether the product is covered by certain insurance protections; and (3) a description of your rights and responsibilities for resolving errors. In some cases, the licensee must also provide a transaction confirmation that contains the required information.
Exchange requirements
Recalling the token listing requirements imposed by the BitLicense regime, the law imposes specialized obligations on exchanges. Among other things, an exchange is needed to identify the likelihood of a listed digital financial asset being deemed a security by federal or California regulators, which is no small feat when both regulators and courts do not are able to reach a consensus. Exchanges are also required to conduct a “comprehensive risk assessment”.[s]” of the listed tokens to ensure that consumers are protected from risks related to cybersecurity, protocol flaws, price manipulation and fraud. The above requirements do not apply to a token that has been approved for listing under the BitLicense regime by January 1, 2023 by the New York Department of Financial Services Exchanges must also ensure that exchange rates between assets are as “favorable as possible” for consumers.
Stablecoin-specific requirements
The law addresses stablecoins separately and it is clear that the legislator has contemplated the potential use of stablecoins as a payment instrument. The term stablecoin is defined as “a digital financial asset pegged to the United States dollar or other national currency and marketed in such a way as to establish a reasonable expectation or belief among the general public that the instrument will maintain a nominal value.” that is so stable as to make the nominal value effectively fixed”. A person may not exchange, transfer, or hold stablecoins unless the issuer of the stablecoin is an applicant, licensee, or certain financial institutions and holds eligible securities with an aggregate market value not less than the value of outstanding stablecoins issued or sold . DFPI has discretion in approving which stablecoins are approved for trading, transferring, or storing, looking at listed factors such as “quantity, nature, and quality of assets owned or held by the stablecoin issuer that may be used to fund any redemption requests “by the residents”. The law specifically provides that DFPI may require the issuer of a stablecoin to obtain a license. DFPI will approve the use of a stablecoin.
Bit license reciprocity
The Act allows a conditional license for applicants who hold a New York Bit license or limited purpose trust company charter with approval to conduct virtual currency business in New York issued on or before January 1, 2023.
The law ends the relative freedom that cryptocurrency companies have enjoyed in California. These companies have less than two years to evaluate the law’s impact on their businesses and comply. Please reach out to a member of our Digital Assets, Blockchain Technology and Cryptocurrency industry group for assistance.
We acknowledge the contribution to this publication of our first-year associate Joshua L. Durham.