On October 13, 2023, California Governor Gavin Newsom approved the Digital Financial Assets Law. Among its provisions, the law prohibits a person from engaging in digital financial asset business activity with or on behalf of a California resident unless, among other things, the person is licensed with California’s Department of Financial Protection and Innovation. “Digital financial asset” is defined as a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender.
There are also record-keeping requirements. The law requires a licensee to maintain, for all digital financial asset business activity with a resident for five years after the date of the activity. And there is a requirement to keep certain records, including a general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee. The law also authorizes the DFPI to take enforcement measures for violation of the law.
In addition, there is a requirement that, before engaging in digital financial asset business activity with a resident, a licensee make certain disclosures such as a schedule of fees and charges, the manner in which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
For many years, New York has issued a BitLicense, a mandatory requirement to open a virtual currency business in New York. There was much criticism of the BitLicense as crippling New York’s ability to compete in the crypto space and relatively few have been granted. Holders of a BitLicense, however, can receive a conditional license from California based on having a BitLicense.
One oddity concerning this new law also warrants mention. In his Signing Message accompanying the new law, Governor Newsom wrote as follows:
However, ambiguity of certain terms and the scope of this bill will require further refinement in both the regulatory process and in statute to provide clarity to both consumers, regulators and businesses subject to this new licensure framework. It is essential that we strike the appropriate balance between protecting consumers from harm and fostering a responsible innovation and I look forward to working with the author to achieve this.
Ambiguity in statutes, like ambiguity in contracts, is an invitation to litigation. One cannot help but wonder why known statutory ambiguities were not resolved before the Governor signed the law.
