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I. Introduction
On October 13, Governor Gavin Newsom signed into law a
comprehensive licensing regime for digital asset companies
operating in California. Until this point, California had refrained
from taking a definitive position on whether a broad swath of
digital asset businesses required licensure under California’s
existing money transmission law, contrary to the approach taken by
most other states.1 Under the Digital Financial Assets Law, A.B. 39 (the
Law), certain digital asset companies will now be barred from
operating in California effective July 1, 2025, unless they hold a
license from California’s Department of Financial Protection
and Innovation (DFPI). The Law is California’s first
comprehensive framework for regulating digital assets as well as
the first state-level statutory crypto licensing framework in the
United States to include specific provisions for stablecoins. The
Law also comes amid an ongoing debate over the role of federal
versus state oversight of an industry still reeling from a series
of high-profile scandals and a long “crypto
winter.”2
Under the Law, a person3 is generally required to
obtain a license from DFPI and comply with various safety and
soundness requirements, recordkeeping rules and disclosure
requirements to engage in (or hold themselves out as engaging in)
“digital financial asset business activity” (defined in
the statute and described in detail below) with or on behalf of a
California resident. Licensees and those required to obtain a
license (covered persons) under the Law will also be prohibited
from exchanging, transferring, storing or engaging in the
administration of stablecoins—whether directly or
indirectly—unless the stablecoin is issued by a bank or is
licensed by DFPI.4 Further, the Law grants DFPI broad
examination and enforcement powers, including the authority to
bring enforcement proceedings against an entity that “has
engaged, is engaging, or is about to engage in” digital
financial asset business activity.5
II. Key Provisions
Below, we lay out notable provisions of the Law, along with a
comparative analysis relative to other crypto regulatory regimes
(in particular, the New York BitLicense). We also identify/discuss
certain provisions that may require additional clarification from
California regulators and lawmakers.
Licensing Trigger. Unless exempt, licensure is
required under the Law for any person engaged in “digital
financial asset business activity,” or holding themselves out
as being able to engage in such activity, with or on behalf of a
resident of California.6
“Digital financial
asset business activity” is broadly defined to
include:7
(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;
or
(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 digital financial asset
offered by or on
behalf of the same publisher or 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.
A “digital financial asset,” in turn, is “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.”8 This definition may not capture certain
categories of digital assets, such as non-fungible tokens (NFTs)
that do not serve as a store of value, medium of exchange or unit
of account. The term “digital financial asset” also
expressly excludes, among other things,9 securities
registered with or exempt from registration with the Securities and
Exchange Commission (SEC) and securities qualified with or exempt
from qualifications with DFPI—meaning that if an asset is
deemed a security under federal or California law, activities
involving that asset would not trigger the Law. While past SEC
guidance makes clear that compliance with state licensing
requirements should be evaluated separately from compliance with
federal securities laws, this specific carve-out serves as a
reminder of this obligation.10 Market participants
should closely monitor statements and actions from the SEC and
other securities regulators to determine to which aspects of their
business the Law will apply.
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Footnotes
1. See, e.g., California Dep’t of Financial
Protection and Innovation, Request for Interpretive Opinion
– Purchase and Sale of Digital Assets; Payment Processing
Services (Dec. 6, 2021), https://dfpi.ca.gov/2022/03/21/purchase-and-sale-of-digital-assets-payment-processing-services/ (noting
that, at that time, DFPI “[has] not yet determined that
payment processing transactions involving digital assets constitute
receiving money for transmission” such that it “does not
require licensure under the [Money Transmission Act] for [a]
company to receive fiat currency from [a] customer for transfer in
the form of digital assets to [a] merchant”); California
Dep’t of Financial Protection and Innovation, Request for
Interpretive Opinion (Apr. 8, 2022), https://dfpi.ca.gov/2022/04/15/purchase-and-sale-of-virtual-currency (“The
Department has not concluded whether the issuance of a wallet
storing virtual currency is money transmission activity that is
subject to regulation.”).
2. See, e.g., Billy Bambrough, A Wall
Street Giant Has Suddenly Declared Crypto ‘Winter’
Over, forbes (Oct. 24, 2023), https://www.forbes.com/sites/digital-assets/2023/10/24/a-wall-street-giant-has-declared-cryptowinter-over-as-bitcoin-smashes-30000-and-the-price-of-ethereum-and-xrp-suddenly-soar/?sh=8f330e3917f1.
3. “Person” means “an individual,
partnership, estate, business or nonprofit entity, or other legal
entity.” Digital Financial Assets Law §
3102(p).
4. Digital Financial Assets Law §
3601(a).
5. Digital Financial Assets Law § 3403(a) (emphasis
added).
6. Digital Financial Assets Law § 3201.
7. Digital Financial Assets Law §
3102(i).
8. Digital Financial Assets Law §
3102(g).
9. This definition also excludes (1) a transaction in
which a merchant grants, as part of an affinity or rewards program,
value that cannot be taken from or exchanged with the merchant for
legal tender, bank or credit union credit, or a digital financial
asset; (2) a digital representation of value issued by or on behalf
of a publisher and used solely within an online game, game
platform, or family of games sold by the same publisher or offered
on the same game platform; and (3) a security registered with or
exempt from registration with the SEC or a security qualified with
or exempt from qualifications with the department. Id.
10. See, e.g., Securities and Exchange
Commission, Re: Proposed Coin Listing Policy Framework (Jan. 27,
2020), https://www.sec.gov/files/staff-comments-to%20nysdfs-1-27-20.pdf
(“Market participants should not rely on a model framework,
whitelist, or state license when evaluating compliance with the
federal securities laws – without also undergoing careful
legal analysis under the federal securities
laws.”).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
