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Following the rejection of a similar bill by Governor Gavin Newsom (Democrat) in September, amid concerns that efforts to regulate cryptocurrencies in California could compete with efforts in other states. It will show up again this year.
The collapse of FTX and other turmoil in the cryptocurrency market last year created a new sense of urgency for building safe havens around cryptocurrencies.
“FTX’s erroneous, unethical, and possibly illegal business practices have severely damaged the credibility of the entire industry,” said California, which is pushing pro-blockchain policies. Charles Belle, Executive Director of Blockchain Advocacy Coalition, a group, said. “The industry needs more regulatory clarity than ever before.”
But another ongoing regulatory work by the Newsom administration could complicate the law.
“We can’t afford to let our efforts down here,” said Russ Hymeric, deputy commissioner of communications for the California Business, Consumer Services and Housing Administration, which oversees the Department of Financial Protection and Innovation. “DFPI works hard to protect consumers and lay the foundation for meaningful and thoughtful recommendations.”
The Newsom administration wants to ensure that new crypto regulations are deliberately implemented in light of potential federal standards. A key point may be how well the new legislation can accommodate the work DFPI is already doing.
Another, perhaps more pressing problem is the state budget deficit. Newsom cited the cost of greater crypto regulation in last year’s veto message when states were richer in cash. With the state facing her $22.5 billion budget deficit, lawmakers are now warned against going too far with costly legislative proposals.
another attempt
Rep. Timothy Grayson (D), chairman of the Banking and Financial Services Committee, plans to reintroduce regulatory language under AB 39, which he filed with a brief earlier this month. He will add more details later.
Grayson is changing measures from last year’s version to allay industry concerns. Many of the planned components he shared in interviews are the same as his AB 2269, which Newsom rejected.
The bill states that from 2025, companies in the digital financial assets sector will have to obtain a DFPI license. Licensees must disclose tariffs, consumer complaints, and other information to consumers. Based on its risks, Licensee must also maintain a bond or trust account and capital as a form of insurance.
While this year’s bill proposes some lighter requirements, cryptocurrency exchanges must meet certain consumer protection standards, such as conflict of interest disclosure and risk mitigation. One difference is that self-authentication is allowed. AB 39 also creates a new pathway for people with New York cryptocurrency licenses to get approved in California more quickly. New York is the first state to set up a regulatory platform for digital currencies.
“Much easier,” said Grayson. “We try to show that we are willing to work. This is not about banning. This is about responsible innovation.”
Other planned changes, however, tighten some regulations and may be less favorable to the industry.
The ban on “stablecoins” not backed by reserve assets was an industry pain point last year. The new bill will make it permanent instead of expiring in 2028 as last year’s bill called for. Consumer protection is also one year old and will take effect in 2024, with more emphasis placed on his customer service requests over the phone, Grayson said.
Cryptocurrency organizations are demanding more flexibility rather than a one-size-fits-all approach to all licensees. Regulation and licensing requirements must be tailored to the risks of a particular product or activity, they said.
“Digital assets are innovative and dynamic. That is why the law must define them based on their underlying activities and use cases,” said Scott Scott, senior vice president of government affairs at the Electronic Trading Association. Talbot said. “This approach will allow the law to foster innovation and protect consumers.”
Grayson said there was room for further debate, adding that it was in the early stages of the legislative session.
foundation building
Heimrich said the Newsom administration is monitoring federal regulation as the DFPI conducts its work.
Efforts on cryptocurrency regulation at the federal level are likely to be reconsidered, but the split in Congress and the impact of the FTX scandal have made further regulation uncertain.
At the state level, DFPI has laid the groundwork. A December report called for stakeholder input on a set of “consumer protection principles.” Conducts consumer complaint processes specific to cryptocurrencies and organizes voluntary market surveillance investigation processes. A timeframe for these efforts has not yet been determined, according to a spokeswoman.
Crypto-related guidance will be issued by the ministry to state-owned banks and credit unions in March, according to the report.
“We are not taking a very slow approach to this,” Heimerich said when asked if the turmoil in the cryptocurrency market required urgency. “We are working pretty hard right now to work with consumer groups and work with stakeholders to build that foundation.
Consumer advocates say regulation is needed now. “Real people are hurting,” said Robert Herrell, executive director of the California Consumer Federation. The longer you wait for things to settle down, the more people get hurt.”
Proponents of Grayson’s bill will have to grapple with the costs of setting up a regulatory framework given the state’s budget deficit. Newsom said last year that such a regime could cost “tens of millions of dollars.”
Grayson said failing to protect consumers in the cryptocurrency market is even more costly. “I’m very optimistic overall, especially when it comes to working with the administration, because I know and am confident that the governor and I actually share very similar goals,” he said. He said.
There’s More
Grayson’s bill isn’t the only bill dealing with digital assets in California this year. Congressman Laurie Davis (R) has introduced AB 76, which only adds blockchain technology transactions to the crime of money laundering. She was citing her FTX scandal in the press release announcing her bill.
While not ambitious enough to launch a regulatory framework, Davis’ bill is equally important in closing loopholes and protecting Californians, said he helped draft the bill and is a member of the California Bar Association Conference. One Michael Fern said,
“The best way to change the law is to find simple solutions instead of putting out huge bills that are very complicated and have hundreds of pages,” he said.
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