California is making big strides toward the realization of its ambitious regulatory vision for cryptocurrency businesses in the state.
If you’re running a crypto business in the state (or plan to), here’s what you need to know and do.
California is serious about its cryptocurrency regulatory framework, with the state making big moves to roll out a welcome mat for cryptocurrency businesses. (Move over, Miami.)
Governor Gavin Newsom recently signed an executive order designed to “spur responsible web3 innovation, grow jobs, and protect consumers.” The press release announcing the executive order also brags that California is the leading state in the nation for creating a realistic and sensible regulatory framework for crypto businesses to thrive.
Sounds good, but is it too good to be true?
Let’s take a closer look at the executive order and what it means first. After, we’ll give members of the CrossTech community our opinion on what they need to do if they currently (or plan to) operate in California.
California’s crypto executive order explained.
The stated goal of the executive order is straightforward: allow emerging technology sectors to grow and innovate while also protecting consumers with a transparent and straightforward regulatory framework.
The release notes an interest in leveraging blockchain tech for public use, particularly state institutions, research, and work development. The recently rebranded Department of Financial Protection and Innovation (DFPI) will work with stakeholders both in the crypto space as well as federal agencies on regulations (and will coordinate with the White House specifically regarding President Biden’s recent crypto executive order).
Above all, Newsom seems to want California to continue to be recognized as a world leader in technological development and sees Web3/blockchain/crypto as important emerging technologies (the release notes crypto’s $3 trillion market cap as of last November).
In fact, the Governor very explicitly wants to get ahead of the emerging trend now:
“Too often government lags behind technological advancements,” the governor is quoted as saying. “so we’re getting ahead of the curve on this, laying the foundation to allow for consumers and business to thrive.”
To achieve these goals, the order lays out seven priorities (briefly summarized below):
- Create a transparent and consistent business environment for crypto-related businesses
- Gather stakeholder feedback to inform the regulatory framework
- Talk with technical experts to figure out more blockchain applications
- Become the “premiere” global location where crypto companies innovate and grow
- Work with federal regulators on the recent crypto Executive Order
- Figure out how blockchain can serve the public good
- Encourage job creation and new research projects
The executive order can be found online in its entirety at:
Will it be good for business?
California crypto regulation in context.
Crypto regulations vary widely by state, and the picture is changing all the time. While many states have moved away from so-called “no action” or “no opinion” determinations on crypto and are beginning to require money transmitter licensure, few states have crypto-specific regulatory frameworks. Most famous (or infamous) is the New York “BitLicense,” which has been critiqued by many in the crypto industry for being too onerous in its requirements, and too tedious in the approval process.
Since 2020, California has taken an open interest in the cryptocurrency sector, re-launching its Department of Business Operations (DBO) as the above-mentioned DFPI, increasing its funding substantially, and explicitly charging the department with exploring emerging technologies, including cryptocurrency.
Though initial plans for the DFPI were initially delayed due to the COVID-19 pandemic, they were back on track by Fall 2020. Regardless, it was clear from almost the very beginning that the implications of Newsom’s insistence on allocating funding for the DFPI would eventually have on cryptocurrency regulation in the state.
This new executive order shows that California is quite serious about its intention to become a crypto-friendly regulatory landscape and one that asserts a leadership role in crypto regulation for the rest of the country.
But will those intentions ultimately prove good or bad for cryptos operating in the state?
Regulating the environment to help nudge along the growth of the crypto ecosystem is a tightrope balancing act. Though California seems to acknowledge these challenges, it’s still a tricky needle to thread.
Regulations need to be permissive enough to encourage businesses to establish a home in California. If the state wants to lead the crypto sector, it needs to compete with Florida (particularly Miami). That state has successfully lured both talent and media its way by providing a much more hospitable environment for crypto to thrive in, as well as genuinely enthusiastic policymakers in state government.
On the other hand, the state’s main role in crypto regulation is going to be in consumer protection (already a major concern nationwide in the cryptocurrency sector). Newsom’s order calls for the DFPI to develop guidelines for disclosures by businesses (including state-chartered banks and credit unions) offering crypto-related financial products.
The DFPI promises to take a more involved approach to consumer protection, responding to consumer complaints, working closely with crypto companies to resolve those complaints, and taking enforcement action as needed.
While the DFPI will provide best practices and materials to businesses to aid in consumer protection, California will need to be careful not to slip into overregulation of the crypto industry, which will push smaller companies out of the state and dissuade new startups from launching or competing for customers in the Golden State.
What crypto businesses need to do right now
Ultimately, how should crypto businesses operating or seeking to operate in California respond to these developments? How do they need to play their cards here? Is California worth doing business in, or will these regulations ultimately prove to be a hassle? First and foremost, participate in the DPFI’s public comment period, which extends until August 5, 2022. The DFPI is seeking comments on its seven regulatory priorities (which are outlined above), as well as a description of the economic impact (if known) of the recommendation for California businesses and consumers.
We anticipate significant participation from nearly all corners of the marketplace, ranging from consumer advocacy groups to law enforcement to money transmitters, and (yes, even) bankers. Make sure your voice is heard.
From our conversations here in Sacramento, it was made clear that the DFPI is truly interested in hearing from and values the input of the industry. Far from mere formality, the DFPI is genuinely interested in a thoughtful commentary in order to craft a prudent regulatory framework that both protects consumers and promotes innovation and growth here in California.
Outside of participation in the policymaking or political process, there is much that crypto businesses can and ought to do right away. First and foremost, be proactive when it comes to consumer protection, as this remains the number one point of regulatory emphasis. (Not only that, but it’s also just good business.)
Generally, institutions should deploy the following three-pronged approach to address consumer protection strategically:
- Disclosures – In financial services, disclosures generally refer to the act of releasing relevant information that may influence the consumer’s decision to engage in a transaction or business relationship with the institution. This may include information pertaining to certain practices, most notably, but not exclusively, data collection, data privacy, data protection, and information sharing.
- Notice of Risks – Purchasing, holding, collateralizing, selling, exchanging, and otherwise transacting in cryptocurrency poses several significant risks to consumers. Cryptocurrency businesses should communicate these summarized risks to consumers via conspicuous text on their official company website or platform and/or other forms of written, telephonic, or electronic correspondence. Further, consumers should be able to directly contact the business at any time to request a list of the aforementioned notice of risks. institutions should research and identify the categories of risk that it believes consumers should be made aware of and carefully consider prior to transacting with the institution.
- Consumer Complaint Remediation – Cryptocurrency businesses should establish procedures and processes which set forth the standards and processes that will govern its handling and resolution of consumer complaints. The goal is to create a formal mechanism for ensuring all consumer complaints are addressed, documented, and promptly resolved. Moreover, the policy should set forth standards to utilize in identifying opportunities for improvement in its business practices and processes, resulting in a seamless consumer experience. The policy must apply to all consumer complaints related to any aspect of the institution’s services, business, and activities.
Participating in Public Comment with the DFPI
To participate in public comment, DFPI Commissioner Clothilde Hewlett invites interested parties to submit comments by August 5, 2022.Comments may be submitted electronically to email@example.com (include “Invitation for Comments – Crypto Asset-Related Financial Products and Services ” in the subject line). Comments may also be mailed to:
Department of Financial Protection and Innovation, Legal Division
Attn: Sandra Navarro, Regulations Coordinator
2101 Arena Boulevard
Sacramento, CA 95834
Joe Ciccolo is the Founder & President of BitAML, a compliance advisory firm exclusively serving the Bitcoin and cryptocurrency market. Founded in 2015, BitAML has served hundreds of innovative clients, including bitcoin ATM operators, cryptocurrency exchanges, remittance services, OTC desks, trading platforms, DeFi projects, NFT marketplaces, cryptocurrency hedge funds, prepaid crypto cards, and lenders. Headquartered in Sacramento, California, BitAML is actively engaging with policymakers, regulators, and stakeholders regarding the state’s future regulatory framework for cryptocurrency businesses.