California’s Digital Financial Assets Law: A Comprehensive Framework for Regulation
In October 2023, California passed the Digital Financial Assets law, which establishes a comprehensive framework for regulating digital asset markets. Starting from July 2025, crypto companies and individuals will be required to obtain a license to operate or offer digital financial asset business activities involving California residents.
Understanding Key Definitions
The law defines “digital financial asset” as digital mediums of exchange, units of account, or stores of value. However, it excludes certain transactions such as merchant affinity or rewards programs, digital representations of value used in online games, and registered securities.
Stablecoins are also defined in the law as digital financial assets pegged to the US dollar or another national currency with the intention of maintaining a stable nominal value.
Regulation and Enforcement Responsibilities
The California Department of Financial Protection and Innovation (DFPI) is granted broad enforcement power under the law. The DFPI can take enforcement actions against those engaged in or about to engage in digital financial business activities. However, Governor Gavin Newsom has called for clarifications to address ambiguities in the law.
Impact on Exchanges
Exchanges are subject to various requirements under the law. They must assess whether listed assets may be deemed securities by federal or California regulators and provide full disclosure of material facts related to conflicts of interest. Exchanges must conduct comprehensive risk assessments to protect consumers from cybersecurity risks and establish policies for reevaluating or ceasing the listing of assets. They are also obligated to ensure favorable exchange rates for consumers.
Effects on Stablecoins
The DFPI has discretion in approving stablecoins for exchange, transfer, or storage. They consider factors like the issuer’s assets, ability to fund redemption requests, and may require licenses to protect consumer interests. The law also mandates that stablecoin issuers own eligible securities of equal or greater value than the outstanding stablecoins.
Streamlined Licensure for Bitlicense Holders
Companies or individuals holding a New York Bitlicense or limited purpose trust company charter issued before January 1, 2023, may be granted conditional licenses if they meet licensure requirements and provide the necessary fingerprints.
Hot Take: California’s Progressive Approach to Digital Asset Regulation
California’s Digital Financial Assets law marks an important step in establishing a comprehensive regulatory framework for digital asset markets. By requiring licenses and imposing specific obligations on exchanges and stablecoin issuers, the state aims to protect consumers and ensure the stability of digital financial assets. However, further clarifications are needed to address ambiguities in the law and provide clearer guidelines for compliance. As the industry continues to evolve, California is positioning itself as a progressive jurisdiction that recognizes the importance of regulating this emerging sector.
This editorial was written by guest authors Wyatt Noble and Michael Handelsman for Kelman.Law
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