California Enacts Digital Financial Assets Law
Time 4 Minute Read
Categories: Regulatory

On October 13, 2023, California Governor Gavin Newsom signed into law AB39, the Digital Financial Assets Law (the Act). The Act provides broad authority to California’s Department of Financial Protection and Innovation (Department) to license, regulate and examine certain businesses transacting in digital financial assets in California.

Under the Act, “digital financial asset” means a digital representation of value that is used as a medium of exchange, unit of account or store of value, and that is not legal tender, whether or not denominated in legal tender. “Digital financial asset” does not include any of the following:

  • A transaction in which a merchant grants, as part of an affinity or rewards program, value that cannot be taken from or exchanged with the merchant for legal tender, bank or credit union credit, or a digital financial asset;
  • a digital representation of value issued by or on behalf of a publisher and used solely within an online game, game platform or family of games sold by the same publisher or offered on the same game platform; and
  • a security registered with or exempt from registration with the United States Securities and Exchange Commission (SEC) or a security qualified with or exempt from qualifications with the Department.

“Digital financial asset business activity” under the Act means any of the following:

  • exchanging, transferring or storing a digital financial asset or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor;
  • holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals; or
  • exchanging one or more digital representations of value used within one or more online games, game platforms or family of games under certain circumstances.

Pursuant to the Act, on or after July 1, 2025, a person may not engage in a digital financial asset business activity in California without a license from the Department. The Act lays out detailed criteria for minimum information that must be included in the license application and requires the payment of an application fee. The Department has broad authority to grant or deny a license. Notably, the Act also permits the Department to grant a conditional license to the holder of a New York BitLicense.

Licensees must maintain a surety bond and minimum “capital and liquidity” in amounts determined by the Department. Licensees must also submit a detailed annual report to the Department that includes financial statements, with an audit required for businesses earning gross revenue in excess of $2 million. The Department is also authorized to make an annual assessment against license holders to offset the Department’s costs of administering the license.

The Act gives the Department wide authority to examine licensees, and to aid such examination, licensees are required to maintain detailed records of customer transactions as well as keep in place various prescribed policies and procedures. In the event of a licensee’s change of control, it must make a separate application to the Department. License holders must also make detailed disclosures to customers and the Department has broad powers to enforce the Act and assess sanctions for noncompliance or misconduct. A separate provision of the Act provides a series of limitations on a licensee’s ability to transact in stablecoins.

Additionally, the Act broadly exempts several categories of persons, including banks, trust companies, credit unions, broker-dealers, futures commission merchants, certain software and data storage providers, and merchants accepting payment in digital financial assets for certain goods and services. The Act grants the Department broad rule-writing authority to supplement the statutory text.

In a signing message, Governor Newsom indicated that “stronger consumer and investor protections will prevent fraud and ensure bad actors are held accountable.” But he also hoped that “further refinement in both the regulatory process and in statute” will “provide clarity to both consumers, regulators, and businesses subject to this new licensure.” To that end, Governor Newsom indicated that it is “essential that we strike the appropriate balance between protecting consumers from harm and fostering a responsible innovation environment.”

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    Scott brings in-depth knowledge of SEC policies, procedures and enforcement philosophy to each representation. Scott regularly advises clients across a broad sector of the economy facing sensitive reporting, compliance and ...

The Hunton Andrews Kurth Blockchain Blog features opinions and legal analysis as we follow the development and use of distributed ledger technology known as the blockchain.


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