CA Digital Assets License Coming 2024
Published Date: 7.15.2022
Jurisdiction - California
Proposed Bill - AB 2269 Digital Financial Assets Law
Tentative Effective date - January 1, 2024
Primary Audience - Digital Asset Business, Virtual Asset Service Provider, Financial Infrastructure Providers, Money Transmitters, Crypto Exchange, Fractional Digital Assets Services, Crypto Wallet, Crypto Lending, NFT Marketplace.
Summary: California Assembly Member Grayson and Co-author Assembly Member Stone have introduced Assembly Bill No. 2269 - Digital Financial Asset Business: Regulation. The proposed bill, if enacted, would prohibit a person from engaging in digital financial asset business activity or hold themselves out as being able to engage in digital financial asset business activity, with or on behalf of a California resident unless certain criteria under the Bill are met, including whether the person is licensed or registered with the Department of Financial Protection and Innovation.
7 - Key Takeaways:
- A new License is hitting the Market: The bill proposes a Registration and Licensure approach. Those transacting less than $35,000 annually will be required to register with the state (a less onerous exercise compared to full licensure). However, those transacting more than $35,000 annually will be required to be licensed by the state to conduct business.
- In-Depth Disclosure: Beyond the standard Control Persons, licensees will be required to disclose any person(s) that will manage any electronic server the applicant expects to use. The Bill also includes written disclosure requirements to Consumers and the Public. Disclosures must address transaction fees, product risks, and asset safeguards including insurance policies.
- Insolvency Tracking: The state will closely track digital asset businesses' net worth and liquidity. The bill presents significant measures that, if adopted, would seek to protect consumers against losses due to insolvency. Although minimum net-worth numbers are not reflected in the Bill, the criteria used to determine these numbers are. The volume of transactions per year is only one element of this calculation; additional elements include the composition of total assets; the licensee’s leverage; and product types and services offered by the licensee. Audited financial statements will be required if digital financial asset business activity exceeds $2,000,000within in the state of California.
- Fees: The Bill does not yet specify the cost for licensure, but we can estimate fees to minimally reflect those associated with the state’s Money Transmission License.
- Prohibited Digital Financial Assets: In general, the bill will prohibit licensees from transacting with stablecoins not backed reserve assets. A licensee will be prohibited from the exchange, transfer, or storage of a digital financial asset or to engage in digital financial asset administration, directly or through an agreement with a digital financial asset control services vendor.
- Compliance Program: A comprehensive compliance program is required from all potential licensees. Elements of the Compliance Program that must be shared with the state during the application process including but not limited to:
(1) An information security program and an operational security program;
(2) A business continuity program;
(3) A disaster recovery program;
(4) An anti-fraud program;
(5) A program to prevent money laundering;
(6) A program to prevent funding of terrorist activity; and
(7) A compliance program designed to ensure compliance with all other relevant laws of this state or federal laws.
- Non-compliance will get pricey: The Bill introduces daily civil penalties for non-compliance for both licensed and unlicensed violations. Non-licensed persons in violation of this Act will face daily civil penalties up to $100,000 USD per day, and licensees in violation of the Act will face daily penalties up to $20,000 USD per day.
We will continue to track and share the developments of this bill as it moves through the California Assembly. If you are engaged in digital asset business activities and would like to talk about your licensing strategy, in California or elsewhere, please feel free to book a call with us today.
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