California's Leap Towards Crypto Regulation

By  Noah Washington October 20, 2023

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  • California passes the Digital Financial Assets Law to regulate the crypto industry through licensing and oversight
  • The law is similar to New York's BitLicense but aims for a more balanced approach after criticisms of stifling innovation
  • The law could influence other states and future federal regulations on crypto

California has become the latest state to join the growing trend of regulating the cryptocurrency industry, with the introduction of the Digital Financial Assets Law. This move follows in the footsteps of New York, which introduced its own BitLicense in 2014, as states increasingly seek to establish a regulatory framework for the rapidly growing crypto industry.

California's Digital Financial Assets Law

Recently, California Governor Gavin Newsom signed the Digital Financial Assets Law, or DFAL, marking a significant milestone in the state's journey toward crypto regulation​​. The law stipulates that any entity wishing to engage in digital financial asset business activity within or on behalf of a California resident must obtain a license from the state's Department of Financial Protection and Innovation.

This encompasses a broad spectrum of activities, ranging from cryptocurrency trading and investing to lending. The law imposes a series of record-keeping requirements, compelling licensees to maintain detailed records of all digital financial asset business activities with a resident for a span of five years post-activity.

Alternative to BitLicense

The California Digital Financial Assets Law offers a unique proposition to existing New York BitLicense holders. It provides a pathway for conditional licensure in California, thereby fostering a regulatory relationship between the two states​​.

New York's BitLicense has faced substantial criticism for its stringent regulatory framework, which many argue has stifled innovation and deterred crypto businesses from operating in the state. California seems to have learned from the New York narrative, striving for a balanced approach that shields consumers while promoting responsible innovation​​.

The BitLicense, instituted in New York, has significantly impacted the cryptocurrency landscape in the state. The law swiftly altered the region's crypto realm, with 22 applications received in its initial round, while 15 companies ceased operations due to the new regulations​​.

Over time, the BitLicense became a subject of criticism, causing an exodus of crypto businesses from New York due to the associated regulatory hurdles and costs​​. Additionally, a newer provision necessitated companies holding a BitLicense to pay regulatory assessment fees to continue operations within the state​​. The enactment and enforcement of BitLicense rules led to an outflow of Bitcoin businesses, both large and small, from New York, leaving the residents with fewer legitimate avenues to engage in the trillion-dollar industry​​.

Impact and Industry Reactions

California's proactive stance towards cryptocurrency regulation might set a precedent, reflecting the state's bellwether role in regulatory oversight​. On a broader scale, this state-level regulatory initiative could influence future federal cryptocurrency policies by serving as a model, especially if it proves successful in balancing consumer protection with innovation and economic growth.

The law's influence extends beyond the US, as it reflects a global trend of evolving cryptocurrency regulations. Comparatively, California's approach seeks to learn from New York's experiences, possibly aligning more with European or Asian markets that might have a more balanced regulatory framework.

2021 map of crypto regulations. Source: Statista

California Governor Gavin Newsom has taken a nuanced stance on blockchain and cryptocurrency technologies. While expressing support for their potential to promote financial inclusion, improve efficiency, and create new economic opportunities, Newsom has also emphasized the need for proper regulation to protect consumers and investors.

Getting Ahead of the Curve

"Too often government lags behind technological advancements, so we're getting ahead of the curve on this, laying the foundation to allow for consumers and businesses to thrive," Newsom said in an earlier statement .

Newsome fought against criticism from some legislators like Representative Maxine Waters who denounced the proposal as a "wish list of Big Crypto"​​, this illustrates the delicate balance between fostering a conducive economic environment and ensuring consumer protection in the crypto landscape.

However, some of the criticism is valid as the law was drafted prior to recent events such as the FTX collapse. Questions remain about whether its provisions should be updated to address issues like centralized lending platforms and how to strengthen protections for crypto depositors and borrowers.

California Embraces Regulation

As the dust settles on the new law, the crypto industry should watch closely, with the ramifications likely to reverberate beyond California. Seamlessly transitioning to this proactive regulatory approach, California may emerge as a leader in regulating the cryptocurrency landscape.

California is attempting to take measured actions aimed at fostering innovation while safeguarding consumers. This is true from the Department of Financial Protection and Innovation's crackdown on crypto scams to Newsom's Executive Order supporting crypto companies.

As the world tackles crypto's challenges, California's stance with this new law establishes an influential precedent for proactive regulation.