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California has followed New York and signed its very own BitLicense bill for the crypto industry.
Signed by California Gov. Gavin Newsom last week, the Digital Financial Assets Law—which would come into action from July 2025—wants to install a “robust regulatory framework” for the state.
It’s reminiscent of New York’s 2015 BitLicense bill—which means not all those working in the space are happy.
When New York dropped its bill back in 2015, it was met with anger from the digital asset industry. Kraken, one of America’s biggest crypto brands, at the time called it “abominable” and was one of many companies—along with Bitfinex and LocalBitcoins—that left the state altogether.
America’s biggest crypto exchange Coinbase also at the time criticized the bill for duplicating federal anti-money laundering (AML) obligations and proposed changes. (This year, it paid a $50 million penalty to regulators for “significant failures in its compliance program.”)
But will California BitLicense be different? According to some in the industry, maybe. Coinbase’s chief legal officer Paul Grewal said he was so far “encouraged” by how things were going.
First, the worries: California state is home to a quarter of the country’s blockchain firms, including major ones like Jack Dorsey’s Block (which didn’t respond to our request for comment.) The initial fear is that, like with New York’s BitLicense, ambiguous rules could drive away digital asset companies.
As it stands, the bill “would prohibit a person from engaging in digital financial asset business activity” unless certain criteria are met. The criteria is quite stringent and would require a person to be licensed with the Department of Financial Protection and Innovation to run a business.
Experts told Decrypt that the bill’s current wording is ambiguous. Terms could “unintentionally pigeonhole” unrelated activity, the Crypto Council for Innovation’s associate director of government affairs, Peter Herzog, told Decrypt.
It also potentially requires decentralized systems to obtain a license merely because their smart contracts have emergency pause functionality. It’s also not clear whether non-fungible tokens (NFTs) are to be included and what will happen to non-fiat stablecoins.
That’s why many in the industry were pleased when California governor Newsom, who previously vetoed a previous blockchain bill with similar proposal, said the bill would “require further refinement” because of its ambiguities.
Paul Grewal, the chief legal officer at America’s biggest crypto exchange, wrote on Twitter Friday that “while we’re concerned with ambiguities in what was passed, we’re encouraged by Gavin Newsom’s statement calling this out.”
While we're concerned with ambiguities in what was passed, we're encouraged by @GavinNewsom's statement calling this out and emphasizing that "it is essential that we strike the appropriate balance between protecting consumers from harm and fostering responsible innovation." 2/3
— paulgrewal.eth (@iampaulgrewal) October 17, 2023
The exchange added that they had no plans to leave the state in an email to Decrypt.
And Kraken’s attitude to the California bill is far more measured than when it called New York’s legislation “a creature so foul, so cruel.” The San Francisco-based company told Decrypt that it “remains committed to working with California lawmakers and the Department of Financial Protection and Innovation to ensure continued access to the highest quality services for our California clients.”
Blockchain and software company Consensys, which has a large portion of its staff in California, also said it was keeping its eye on the bill. Bill Hughes, senior counsel and director of global regulatory matters at Consensys, told Decrypt that while financial legislation is “almost always ambiguous,” the company was keeping its eye on how the bill advances.
“There’s a lot of time to ensure that the regulator is as educated as possible as to what the risks are,” he said, adding that crypto ecosystem participants would help shape the legislation.
“It’s going to be important for the industry to lean in and engage with the [Department of Financial Protection and Innovation] to ensure the regulations that they’re going to be promulgating,” he added.
Crypto Council’s Herzog added that while the state still had “a lot of work to do to ensure they get this right,” the council was “grateful for Governor Newsom’s recognition that the legislature must work to narrow the statute’s scope and increase clarity for future licensees through further legislation.”
Edited by Stacy Elliott.