Gavin Newsom’s Awkward Crypto Timing

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Alameda, California.

Governor Gavin Newsom is one of the Democratic parties’ most prominent proponents and advocates of blockchain and crypto technology. But Newsom’s recent efforts to boost the sector and push back against new state-level regulation have suffered from awkward timing.

In May, Newsom issued an executive order to promote blockchain research, spur innovation, and explore how the technology could be used in government. A few days later, two major cryptocurrencies imploded and crypto markets crashed. Less than two months later, the Celsius Network, one of the largest cryptocurrency exchanges, declared bankruptcy, affecting more than 48,000 Californians with assets worth $650 million.

After the Celsius debacle, a new state-level attempt to regulate the industry climbed through both houses of the California legislature, passing Aug. 30 with just six dissenting votes.

Three weeks later, Newsom vetoed that bill, saying it was premature for the state to move forward without considering upcoming federal regulations.

Newsom’s unfortunate timing quickly struck again. In the months following his veto, crypto exchange FTX filed for bankruptcy, former FTX CEO Sam Bankman-Fried (a supporter of Newsoms’ executive order) was charged with multiple federal crimes, and crypto prices fell again. Despite Newsom’s expectations, federal legislation regulating the nascent but volatile crypto industry remains in limbo.

Newsom did not express regret for the veto. In an interview, he said his executive order didn’t go as far as many people in the industry wanted it to, and noted that California took a different approach than New York, which pursued regulation. particularly strict cryptography, as well as Wyoming, which has such a lax regime it has been described as the Delaware of digital assets.

I think California’s approach was a restrained approach, Newsom said. We’ve tried to look at this through the prism, in the long run, of how this is going to fundamentally change relationships, especially in the financial sector. Blockchain in particular is something that I see becoming more and more prevalent in our lives.

In Sacramento, however, lawmakers and advocates who pushed California’s latest attempt to regulate blockchain and crypto aren’t convinced the state has struck the right balance and are preparing to try again.

During the last legislative session, the industry raised concerns about the costs of complying with fair and reasonable rules, said Assemblyman Tim Grayson, chairman of the Banking and Finance Committee and author of AB 2269, the bill Newsom vetoed. As we now know, the costs of doing nothing are so much higher: real people are being hurt.

I appreciate the industry players who have already come to me in good faith to work on a policy that promotes responsible innovation while protecting consumers, Grayson added.

Industry stakeholders have been eager to intervene before. Payment processors Block Inc., Paypal and Stripe; financial giants Fidelity and JP Morgan Chase; OpenSea non-fungible token market; crypto financial services company Blockchain.com; Coinbase crypto exchange; software giant Salesforce; and business groups including the Electronic Transactions Assn., TechNet, and the Blockchain Advocacy Coalition have spent more than $400,000 lobbying the Assembly, state Senate, executive branch, and Newsom himself. between April 1 and the end of August, according to California lobbying filings.

All of these organizations lobbied the crypto regulation bill that Newsom vetoed. In a letter of opposition to Grayson, the bill’s author, the Blockchain Advocacy Coalition wrote that the bill needed more clarity and flexibility to avoid the potential stifling of a nascent but promising industry. . The coalition also objected to unclear definitions of digital asset terms and onerous registration requirements. Others in the cryptocurrency industry saw the bill as a job killer that would drive innovation out of California and undermine Newsoms’ executive order.

Any new legislative effort to regulate the industry is likely to be another boon for top lobbyists in Sacramentos, warned Robert Herrell, executive director of the Consumer Federation of California, a nonprofit advocacy group that has been l a leading supporter of the bill that Newsom vetoed.

[Big Tech companies] have nearly limitless resources and they constantly seek favor with elected officials at all levels, Herrell said. It gives them access that consumers don’t have. None of the people left holding the bag after Celsius [and FTX] went bankrupt have that kind of access.

Salesforce lobbied Newsom directly on NFTs and blockchain technology, according to the company’s lobbying disclosure. On May 18, Salesforce offered Newsom a $130 dinner, according to the lobbying report. The report doesn’t say whether the lobbying in question took place over the dinner, but a Salesforce spokesperson said it didn’t. Marc Benioff, the billionaire CEO of Salesforce, is Newsoms’ close friend and godfather to the governor’s eldest son.

Newsom views NFTs and blockchains separately from cryptocurrencies and does not recall crypto being discussed at the Salesforce dinner, he told The Times.

I didn’t even know they cared about this space, Salesforce in particular, so that’s news to me, Newsom said. I know so many people from Salesforce, including Marc Benioff. I was just with Marc and we didn’t have a single conversation about crypto.

The bill Newsom vetoed would have required cryptocurrency exchanges to disclose their assets and financial stability, temporarily banned a category of cryptocurrency called unbacked or algo stablecoins, and required companies that trade crypto assets or manage customer money to obtain a license from the California Department of Financial Protection and Innovation by January 1, 2025.

Newsom said in his veto statement that his administration had conducted extensive research and advocacy campaigns to gather feedback on approaches that balance benefits and risks for consumers.

But Newsom and his top aides have not met with the California Consumer Federation, Herrell said.

Herrell was proud that he was able to assemble a broad coalition of odd bedfellows to back the crypto regulation bill, he said. We have worked hard to build this coalition, Herrell said. The events of the past few months have just confirmed what many of us already knew, which is that this is a Wild West market in crypto. It lacks fundamental fundamental rules of the road and fundamental fundamental consumer protections.

Newsom’s veto statement suggested he was counting on federal action to spell out those rules of the road. But with Bankman-Fried the main force pushing for regulatory changes in Washington facing federal charges, and Republicans poised to take control of the House of Representatives, congressional action on crypto regulation looks unlikely in the near future. term.

Looking back, Newsom’s veto over California’s crypto regulations looks pretty bad, said Rep. Brad Sherman (D-Northridge), one of the leading anti-crypto voices in Congress.

We generally don’t like people being defrauded, and the Securities and Exchange Commission is moving slowly, Sherman, who wants crypto to be banned, told The Times. Congress is an immobilized mess, and state legislators can step in, and at least make sure that when you’re investing in something really bad, you’re not defrauded. If you’re going to be in the business of holding other people’s money, you need to be regulated, audited, and bonded.

Newsom seems to have pivoted a bit following the FTX crisis. Last month, his office released an executive report that examined the ramifications of his executive order on crypto. The report found that people who have historically been underserved by traditional banking have fallen victim to hacks, scams, fraud and product meltdowns. He also cited three major risks in the crypto market: fraud, misinformation, and privacy and security.

The California legislature is moving forward. Grayson has already introduced a new bill, AB 39, that would require all businesses involved in money transfers to adopt a definition that would include crypto companies registering with state financial regulators.

State Sen. Monique Limn (D-Goleta), chair of the California Senate’s Banking and Financial Institutions Committee, appears ready to revisit a new version of the bill Newsom vetoed or go further.

If all crypto companies complied with the consumer protection provisions of AB 2269, I’m sure California consumers and retail investors would face less risk in this space, Limn told The Times. I look forward to working with President Grayson as he leads legislative efforts that put California consumers first in the upcoming legislative session.

Times editor Taryn Luna contributed to this report.

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