The cryptocurrency lobbying industry won another victory Friday (Sept. 23) when California’s governor vetoed a bill that would have created a crypto regulation framework it said would force smaller and startup FinTechs out of the state where a great deal of the technical talent and most of the early-stage funding is located.
But the win could be very short-lived.
The Digital Financial Assets Law that passed both houses of the state legislature overwhelmingly last month has been called a California BitLicense law, referring to New York’s crypto licensing regime that is blamed for driving businesses out of the state — the highest profile being the Kraken cryptocurrency exchange, which moved to San Francisco.
Praising Gov. Gavin Newsom’s veto, the Blockchain Association, a crypto-industry lobbying group, said the legislation “threatened to choke innovation and stop California’s burgeoning crypto industry in its tracks.”
While the New York Department of Financial Services’ BitLicense is widely seen as the gold standard in regulation, getting one is so cost- and labor-intensive that industry opponents say it is not doable for startups and smaller firms.
It has, the Blockchain Association noted in urging the veto, “created an environment where only the biggest and most wealthy can manage to comply, while those who are just getting off the ground are left in the cold.”
Beyond that, plenty of larger firms choose not to do business in New York. Aside from Kraken, the United States arms of the two largest crypto exchanges, FTX US and Binance.US, do not serve New Yorkers.
FTX US’s terms give a sense of the industry’s opinion of New York’s BitLicense: “FTX US does not onboard or provide services to personal accounts of current residents of New York State (U.S.), Ontario (Canada), Cuba, Crimea and Sevastopol, Luhansk People’s Republic, Donetsk People’s Republic, Iran, Afghanistan, Syria, North Korea or Antigua and Barbuda.”
Given the high concentration of FinTechs in California and New York, if crypto-focused companies thought they faced unworkable requirements in both of the two largest FinTech markets, it would be a big disadvantage. It would also force the industry to test the arguments made by a growing number of states like Wyoming, Texas and North Carolina that FinTechs don’t need to be clustered as much as they are around California’s technology hub and New York’s financial one to take on traditional finance.
It’s worth noting that while Newsom’s Friday veto notice used the standard political language of crypto regulation — wanting a regulatory framework that “fosters responsible innovation and protects consumers” — it didn’t actually say the Digital Financial Assets Law was bad in any way.
Noting that research and outreach under his May executive order to establish such a framework is still in progress, as is that under President Joe Biden’s own executive order, it “is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions,” Newsom wrote.
Primarily, it talked of the need to ensure that the final rules “incorporate California values such as equity, inclusivity, and environmental protection” and provide a sufficiently “flexible approach … to ensure regulatory oversight can keep up with rapidly evolving technology and use cases and is tailored with the proper tools to address trends and mitigate consumer harm.”
What it did not do was suggest that the overall approach of the Digital Financial Assets Law was wrong or that it threatened to choke off innovation, which suggests that the crypto FinTech business will be fighting off rules it says will be too much for small startups again soon.
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