California Crypto Bill Would Be as Tough as New York’s BitLicense, Critics Say

With a comprehensive crypto licensing bill awaiting California Governor Gavin Newsom’s signature, the U.S.’s largest market has jumped into the fight over consumer protection and innovation that is dominating federal attempts to create a regulatory regime for digital assets.

Along the way, it is also diving into another debate over whether stablecoins must be issued by banks and backed by fiat reserves. The bill’s requirements come with a fair bit of lead time, going into effect in January 2025 — by which time some of the bills working their way through Congress could well override state regulations.

Learn more: A Primer on US Stablecoin Regulations

People First

California’s bill tends to come down on the consumer protection side, with the Blockchain Association saying that it “threatens to undermine” the commitment California’s Democratic governor made to foster “this next wave of innovators” in his May executive order calling for crypto regulation.

See also: California Governor Orders Study Into Crypto, Blockchain Regulations

“The bill’s licensing provisions are designed to install the same type of onerous licensing and reporting regime that has stunted the growth of the crypto industry and limited access to safe and reliable crypto products and services in New York,” it said, referring to the New York Department of Financial Services’ BitLicense.

2/ State Assembly Bill A.B. 2269 creates shortsighted and unhelpful restrictions that would impede crypto innovators’ ability to operate and push many out of the state.

This proposal is inconsistent with the Governor’s vision for crypto policy in California.

— Blockchain Association (@BlockchainAssn) August 29, 2022

While widely considered the gold standard of regulation in the U.S., the BitLicense has also limited crypto commerce, and companies like San Francisco-based exchange Kraken have decamped to the West Coast after calling the BitLicense too much. Many crypto firms do not serve New York residents.

The bill’s author on the other hand, Democratic Assemblyman Timothy Grayson, called the Digital Financial Assets Law “a smart, balanced policy” on Twitter, noting “the Legislature’s understanding that a healthy #cryptocurrency market can only exist if simple guardrails are established.”

He also tweeted, “California is now set to forge a path for responsible innovation.”

Stablecoin Structure

Compared to the federal debate, California takes a halfway position on the regulation of stablecoins in particular. This comes in two parts: bank issuance and peg-supporting reserves. Interestingly, the stablecoin-specific parts of the law would end three years later, on Jan. 1, 2028.

In terms of issuers, the Federal debate is largely around whether they must not only be banks, but if they must also be insured by the Federal Deposit Insurance Corp. (FDIC).

Both California’s bill and ones floating around Congress, notably the Responsible Financial Innovation Act by Sens. Cynthia Lummis and Kirsten Gillibrand, would allow for state-chartered banks.

Read more: Senate Crypto Bill Debuts, and Crypto Industry Gets Big Wins

Along with federal- and state-chartered banks, California’s bill would allow industrial loan companies, state-chartered trust companies or limited purpose trust companies to issue stablecoins if licensed by the state’s Department of Financial Protection and Innovation.

The bill does mandate a 100% backing reserve of cash or eligible securities — generally meaning assets like highly liquid short-term Treasuries — like most stablecoin legislation in and out of the U.S. requires since the $48 billion collapse of the Terra/LUNA algorithmic stablecoin ecosystem in May. They must be audited according to the U.S. generally accepted accounting principles, or GAAP.

Interestingly, it does not seem to mandate that the funds all be kept in U.S. dollars, and it seems to say that the issuer only has to have backing “of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.”

For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.