California Enacts Digital Financial Assets Law

On October 13, 2023, California enacted the Digital Financial Assets law. This instrumentality is California’s archetypal broad model for regularisation of integer plus markets, and immoderate of its provisions whitethorn dependable acquainted to those versed successful the state’s wealth transmitter licensing requirements. Under this caller law, connected and aft July 2025, crypto companies and everyone other volition need, successful summation to different criteria, a licence to run oregon clasp themselves retired arsenic being capable to run integer fiscal plus concern activity, with oregon connected behalf of California residents.

The pursuing editorial was written by impermanent authors Wyatt Noble and Michael Handelsman for Kelman.Law

Key Definitions

Before diving into the cardinal provisions of the Digital Financial Assets law, it’s important to recognize precisely what immoderate of its cardinal presumption mean, what they cover, and what they don’t. Under the law, “digital fiscal asset” means integer mediums of exchange, units of account, oregon stores of value. However, “digital fiscal asset” “does not see immoderate of the following: (A) [a] transaction successful which a merchant grants, arsenic portion of an affinity oregon rewards program, worth that cannot beryllium taken from oregon exchanged with the merchant for ineligible tender, slope oregon recognition national credit, oregon a integer fiscal asset[;] (B) [a] integer practice of worth issued by oregon connected behalf of a steadfast and utilized solely wrong an online game, crippled platform, oregon household of games sold by the aforesaid steadfast oregon offered connected the aforesaid crippled platform[;] (C) [a] information registered with oregon exempt from registration with the United States Securities and Exchange Commission oregon a information qualified with oregon exempt from qualifications with the department.”

The word “digital fiscal plus concern activity” tin beryllium understood to mean those activities that trigger the law’s licensing requirement. Specifically, “digital fiscal assets concern enactment is defined as: “(1) [e]xchanging, transferring, oregon storing a integer fiscal plus oregon engaging successful integer fiscal plus administration, whether straight oregon done an statement with a integer fiscal plus power services vendor[;] (2) [h]olding physics precious metals oregon physics certificates representing interests successful precious metals connected behalf of different idiosyncratic oregon issuing shares oregon physics certificates representing interests successful precious metals[;] (3) [e]xchanging 1 oregon much integer representations of worth utilized wrong 1 oregon much online games, crippled platforms, oregon household of games for either of the following: (A) [a] integer fiscal plus offered by oregon connected behalf of the aforesaid steadfast from which the archetypal integer practice of worth was received [or] (B) [l]egal tender oregon slope oregon recognition national recognition extracurricular the online game, crippled platform, oregon household of games offered by oregon connected behalf of the aforesaid steadfast from which the archetypal integer practice of worth was received.”

Stablecoins are defined arsenic “a integer fiscal plus that is pegged to the United States dollar oregon different nationalist currency and is marketed successful a mode that intends to found a tenable anticipation oregon content among the wide nationalist that the instrumentality volition clasp a nominal worth that is truthful unchangeable arsenic to render the nominal worth efficaciously fixed.”

Who Will Handle Regulation and Enforcement?

The caller instrumentality grants the California Department of Financial Protection and Innovation (DFPI) wide enforcement power. Now, the DFPI whitethorn bring enforcement actions against those that are “engaged, [are] engaging, oregon [are] astir to prosecute successful integer fiscal concern activity.” If this seems a spot wide and vague, that’s due to the fact that it is, but further changes narrowing the DFPI’s scope whitethorn beryllium coming. California Governor Gavin Newsom has already called for the DFPI to clarify ambiguities successful the law, and helium is apt not the lone California nonmigratory who volition propulsion for greater clarity.

How are Exchanges Impacted?

Among different requirements, exchanges indispensable place the probability that integer fiscal assets listed connected their platforms “would beryllium deemed a information by national oregon California regulators.” However, the instrumentality provides nary guidance arsenic to however exchanges should marque specified an assessment. Exchanges indispensable besides supply “full and just disclosure of each worldly facts relating to conflicts of involvement that are associated with” assets connected their platforms. Additionally, exchanges indispensable behaviour “comprehensive hazard assessment[s] designed to guarantee consumers are adequately protected from cybersecurity risk, hazard of malfeasance, including theft, risks related to codification oregon protocol defects, oregon market-related risks, including terms manipulation and fraud.” Further, exchanges indispensable found “policies and procedures to reevaluate the appropriateness of the continued listing oregon offering of the integer fiscal asset, including an valuation of whether worldly changes person occurred,” and conversely indispensable besides found “policies and procedures to cease listing oregon offering the integer fiscal asset, including notification to affected consumers and counterparties.” Finally, exchanges are besides required to “use tenable diligence” to guarantee that speech rates betwixt assets are arsenic “favorable arsenic possible” to consumers “under prevailing marketplace conditions.”

How Are Stablecoins Affected?

The instrumentality grants the DFPI discretion successful deciding which stablecoins are approved for exchange, transfer, oregon storage. In truthful doing, the DFPI volition look to the “amount, nature, and prime of assets owned oregon held by the issuer of the stablecoin that whitethorn beryllium utilized to money immoderate redemption requests from residents.” Additionally, the DFPI commissioner whitethorn necessitate stablecoin issuers to get licenses “to support the interests of residents who whitethorn usage the stablecoin arsenic outgo for goods oregon services oregon arsenic a store of value.” In furtherance of user protection, the instrumentality besides requires that the “issuer[s] of … stablecoin[s] astatine each times ain eligible securities having an aggregate marketplace worth computed successful accordance with United States mostly accepted accounting principles of not little than the aggregate magnitude of each of its outstanding stablecoins issued oregon sold.”

Streamlined Licensure for Bitlicense Holders

Those fewer companies oregon individuals holding a New York Bitlicense oregon constricted intent spot institution charter with support to behaviour virtual currency concern successful New York issued connected oregon earlier 1 January 2023, whitethorn beryllium granted conditional licenses provided they person “supplied each fingerprints required” and conscionable each different requirements for licensure.

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