California Crypto Rules Push Gains Momentum After FTX Debacle

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An effort to regulate cryptocurrency in California will come up again this year after Governor Gavin Newsom (D) vetoed a similar bill in September, fearing the measure could clash with other state efforts.

The collapse of FTX and other turmoil in the cryptocurrency market last year created a new sense of urgency regarding the establishment of collateral around crypto.

FTX’s flawed, unethical and likely illegal business practices have seriously damaged the credibility of an entire industry, said Charles Belle, executive director of the Blockchain Advocacy Coalition, a California-focused group that is pushing for a pro-blockchain policy. The industry needs regulatory clarity more than ever.

But separate, ongoing regulatory work by the Newsom administration could complicate any legislation.

There’s no letting up in efforts here, said Russ Heimerich, assistant secretary for communications at the California Business, Consumer Services and Housing Agency, which oversees the Department of Financial Protection and Innovation. The DFPI works very hard to protect consumers and to lay the groundwork for meaningful and thoughtful recommendations.

The Newsom administration wants to ensure that any new crypto regulations are implemented deliberately, with consideration given to potential federal standards. A key point may be the extent to which the new legislation will be able to adapt to the work that the DFPI is already doing.

A separate, and perhaps more immediate, problem is the state budget deficit. Newsom cited the cost of greater crypto regulation in his veto message last year, when the state was more cash-rich. Lawmakers are now being warned not to go overboard with costly legislative proposals as the state faces a projected $22.5 billion budget shortfall.

Another attempt

Assemblyman Timothy Grayson (D), who chairs the Banking and Finance Committee, will reintroduce regulatory language under AB 39, which he tabled earlier this month with a brief description. Hell add details later.

Grayson is changing the measurement from last year’s version to allay some industry concerns. Many of the planned components, which he shared in an interview, will be the same as the AB 2269 that Newsom vetoed.

From 2025, the bill states that businesses in the digital financial asset sector should be licensed by the DFPI. Licensees should disclose to consumers a fee schedule, consumer complaint processes and other information. Depending on its risks, licensees should also maintain a bond or trust account, as well as capital, as a form of insurance.

Although this year’s measure will propose lighter requirements, crypto exchanges will still have to meet certain consumer protection standards, such as disclosing conflicts of interest or mitigating risk. One difference is that they would be allowed to self-certify. AB 39 would also create a new path for those with New York cryptocurrency licenses to get approved more quickly in California. New York was the first state to establish a regulatory platform for digital currency.

It’s a lot easier, Grayson said. Were trying to show that they were ready to work. It’s not about banning. This is responsible innovation.

However, other planned changes tighten some regulations and may not be as industry-friendly.

A ban on non-reserve asset-backed stablecoins was a sticking point for the industry last year. In the new bill, this would become permanent instead of expiring in 2028, as last year’s bill provided. Consumer protections would also come into effect a year earlier, in 2024, and there would be more emphasis on requiring live customer service over the phone, Grayson said.

Cryptocurrency organizations are asking for more flexibility, instead of a blanket approach, from all licensees. Regulations and licensing requirements must be tailored to the risk of certain products or activities, they said.

Digital assets are innovative and dynamic. As such, legislation should define them based on their underlying activities or use cases, said Scott Talbott, senior vice president of government affairs for the Electronic Transactions Association. This approach will allow legislation to encourage innovation and protect consumers.

Grayson said he was open to further discussion, adding that it was at the start of the legislative session.

Lay the foundation

Heimerich said the Newsom administration is monitoring federal regulations as the DFPI conducts its work.

There will likely be revisited efforts on cryptocurrency regulation at the federal level, though a divided Congress and the fallout from the FTX scandal make further regulation uncertain.

At the state level, the DFPI laid the groundwork. It collected stakeholder input for a set of consumer protection principles, according to a December report. It implements a crypto-specific consumer complaint process and establishes a market surveillance voluntary investigation process. Timelines for those efforts have yet to be determined, a spokesperson said.

Crypto-related guidelines will also be issued by the department to state-licensed banks and credit unions in March, according to the report.

It’s not like we’re taking a very slow, very slow approach to this, Heimerich said when asked if the turmoil in the crypto market needs more urgency. We’re working very hard right now to work with consumer groups, to work with stakeholders to lay the groundwork. We can work fast, but also be deliberative.

Consumer advocates say regulations are needed now. Real people are being hurt, said Robert Herrell, executive director of the Consumer Federation of California. If there’s anything we’ve learned over the last year and a half, it’s that the longer you wait to get the proper licensing and regulatory regime in place, the more people get hurt.

Supporters of the Graysons bill will face the cost of setting up a regulatory framework given the state budget deficit. Newsom said last year that such a scheme could cost tens of millions of dollars.

Grayson said failing to protect consumers in the cryptocurrency market is even more costly. I’m really optimistic overall, especially working with the administration, because I know and believe that the governor and I actually share very similar goals, he said.

There is more

The Graysons bill won’t be the only measure this year in California dealing with digital assets. Assemblywoman Laurie Davies (R) introduced AB 76, which would simply add blockchain technology transactions to the crime of money laundering. She had cited the FTX scandal in a press release announcing her bill.

While not as ambitious as launching a regulatory framework, the Davies bill would close a loophole and be just as important to protecting Californians, said Michael Fern, who helped create the bill. and is a member of the California Conference of Bar Associations.

Sometimes the best way to change the law is not to take huge, really complicated, hundreds of page bills, but rather to find the simple solution, he said.

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