An Under-the-Radar California Bill Could Transform Crypto Nationwide

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California Gov. Gavin Newsom says he will evaluate the bill when it reaches his desk. Justin Sullivan/Getty Images

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As Washington just starts to wrap its arms around the digital-asset industry, an under-the-radar bill in California is threatening to upend the way crypto firms have done business for a decade.

The bill passed in late August implements many provisions including giving crypto customers more favorable prices when they trade that consumer-protection advocates have sought for years. It will also temporarily ban some of the shakiest crypto products and impose what the industry argues is an onerous licensing regime on firms. Analysts say some of the provisions would be difficult for companies to implement just in California, meaning the bill could have national implications.

The centerpiece of the bill is a new licensesimilar to one already required by New York statethat crypto companies would need to operate in California. But the California bill also addresses many of the hot-button issues that have paralyzed Congress.

Trading platforms like Coinbase (ticker: COIN) would need to offer their customers so-called best execution when they trade, meaning the company would need to use reasonable diligence to find the market or counterparty that offers the most favorable price. That is a standard rule for broker-dealers in stocks but until now hasnt been the case in crypto, leading some regulators to charge that companies might send orders to places that get them the most profit.

Harm is happening to consumers on a daily basis, and the basic foundational guardrails and protections arent there in this industry, and they need to be, says Robert Herrell, executive director at the Consumer Federation of California, which supports the bill. Herrell cited the May collapse of algorithmic stablecoin TerraUSD and the July bankruptcy of crypto lender Celsius Network as evidence of the problem.

The bill puts an effective ban until 2028 on algorithmic stablecoins by forbidding platforms with the California license to allow them to trade. Unlike traditional stablecoins, algorithmic stablecoins dont rely on reserves to hold their value. Instead they try to maintain their one-dollar peg by giving traders an arbitrage opportunity to swap the stablecoin with another cryptocurrency.

Under the bill, even some asset-backed stablecoin issuers, such as Circle Internet Financial and Tether Holdings, would need to get their own California licenses to remain available to customers.

Its unclear how that could happen for Tether , whose dollar-backed stablecoin, USDT, is the largest in the world with a market capitalization of about $69 billion. The company, which has been accused by regulators of lying about its reserves in the past, doesnt have operations in the US While we do not operate in the United States, we look forward to continuing to work with regulators to cement the existence of digital currencies and stablecoins as a staple of economic freedom and innovation, a Tether spokesman said. Tether in the past has said it has always maintained adequate reserves and has never failed to satisfy a redemption request.

Circle and Coinbase didnt respond to requests for comment.

Many of these concepts are brand new for crypto intermediaries, says Matthew Wholey, an analyst for Washington, DC-based PolicyPartner. Wholey noted that the California bill also creates a best interest standard for crypto companies that requires them to test investments suitability before offering them to customers.

On Wall Street, such standards are controversial and have led to pitched political battles. In crypto, where nearly all assets are volatile, Wholey notes, its unsettled what such a standard could even mean. It creates a wide range of qualitative suitability standards a firm must incorporate when making investment recommendations and listing assets for exchange, he says.

The bill moved through Californias senate and assembly at the end of their session in the last two weeks of August and seems to have mostly taken the industry by surprise. Only a handful associations even registered to lobby on the bill in the state.

The bill would effectively outlaw all of the crypto businesses that are currently thriving in California unless they are able to navigate an onerous, uncertain, and likely expensive licensing regime, wrote Blockchain Association senior policy manager A. Jae Gnazzo in a letter to California lawmakers in the days before the bill passed. We urge you to reconsider this bill.

The bill passed the Senate 31 to 6 and in the Assembly 71 to zero.

Now, the potential law will head to the desk of Calif. Govt. Gavin Newsom who has until Sept. 30 to sign or veto the bill. If he takes no action by then, it would become law, and companies would need to acquire the new license by 2025. Newsom in May signed an executive order that his office said was to spur responsible Web3 innovation in the state, something that crypto advocates say the bill countermands.

A spokesman for the governor declined to comment on the pending legislation. The bill will be evaluated on its merits when it reaches the Governors desk, the spokesman wrote in an email.

Write to Joe Light at [email protected]

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