I. Introduction

On October 13, Governor Gavin Newsom signed into law a comprehensive licensing regime for digital asset companies operating in California. Until this point, California had refrained from taking a definitive position on whether a broad swath of digital asset businesses required licensure under California's existing money transmission law, contrary to the approach taken by most other states.1 Under the Digital Financial Assets Law, A.B. 39 (the Law), certain digital asset companies will now be barred from operating in California effective July 1, 2025, unless they hold a license from California's Department of Financial Protection and Innovation (DFPI). The Law is California's first comprehensive framework for regulating digital assets as well as the first state-level statutory crypto licensing framework in the United States to include specific provisions for stablecoins. The Law also comes amid an ongoing debate over the role of federal versus state oversight of an industry still reeling from a series of high-profile scandals and a long "crypto winter."2

Under the Law, a person3 is generally required to obtain a license from DFPI and comply with various safety and soundness requirements, recordkeeping rules and disclosure requirements to engage in (or hold themselves out as engaging in) "digital financial asset business activity" (defined in the statute and described in detail below) with or on behalf of a California resident. Licensees and those required to obtain a license (covered persons) under the Law will also be prohibited from exchanging, transferring, storing or engaging in the administration of stablecoins—whether directly or indirectly—unless the stablecoin is issued by a bank or is licensed by DFPI.4 Further, the Law grants DFPI broad examination and enforcement powers, including the authority to bring enforcement proceedings against an entity that "has engaged, is engaging, or is about to engage in" digital financial asset business activity.5

II. Key Provisions

Below, we lay out notable provisions of the Law, along with a comparative analysis relative to other crypto regulatory regimes (in particular, the New York BitLicense). We also identify/discuss certain provisions that may require additional clarification from California regulators and lawmakers.

Licensing Trigger. Unless exempt, licensure is required under the Law for any person engaged in "digital financial asset business activity," or holding themselves out as being able to engage in such activity, with or on behalf of a resident of California.6

"Digital financial asset business activity" is broadly defined to include:7

(1) 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;

(2) 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

(3) exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either a digital financial asset offered by or on

behalf of the same publisher or legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher.

A "digital financial asset," in turn, is "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."8 This definition may not capture certain categories of digital assets, such as non-fungible tokens (NFTs) that do not serve as a store of value, medium of exchange or unit of account. The term "digital financial asset" also expressly excludes, among other things,9 securities registered with or exempt from registration with the Securities and Exchange Commission (SEC) and securities qualified with or exempt from qualifications with DFPI—meaning that if an asset is deemed a security under federal or California law, activities involving that asset would not trigger the Law. While past SEC guidance makes clear that compliance with state licensing requirements should be evaluated separately from compliance with federal securities laws, this specific carve-out serves as a reminder of this obligation.10 Market participants should closely monitor statements and actions from the SEC and other securities regulators to determine to which aspects of their business the Law will apply.

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1. See, e.g., California Dep't of Financial Protection and Innovation, Request for Interpretive Opinion – Purchase and Sale of Digital Assets; Payment Processing Services (Dec. 6, 2021), https://dfpi.ca.gov/2022/03/21/purchase-and-sale-of-digital-assets-payment-processing-services/ (noting that, at that time, DFPI "[has] not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission" such that it "does not require licensure under the [Money Transmission Act] for [a] company to receive fiat currency from [a] customer for transfer in the form of digital assets to [a] merchant"); California Dep't of Financial Protection and Innovation, Request for Interpretive Opinion (Apr. 8, 2022), https://dfpi.ca.gov/2022/04/15/purchase-and-sale-of-virtual-currency ("The Department has not concluded whether the issuance of a wallet storing virtual currency is money transmission activity that is subject to regulation.").

2. See, e.g., Billy Bambrough, A Wall Street Giant Has Suddenly Declared Crypto 'Winter' Over, forbes (Oct. 24, 2023), https://www.forbes.com/sites/digital-assets/2023/10/24/a-wall-street-giant-has-declared-cryptowinter-over-as-bitcoin-smashes-30000-and-the-price-of-ethereum-and-xrp-suddenly-soar/?sh=8f330e3917f1.

3. "Person" means "an individual, partnership, estate, business or nonprofit entity, or other legal entity." Digital Financial Assets Law § 3102(p).

4. Digital Financial Assets Law § 3601(a).

5. Digital Financial Assets Law § 3403(a) (emphasis added).

6. Digital Financial Assets Law § 3201.

7. Digital Financial Assets Law § 3102(i).

8. Digital Financial Assets Law § 3102(g).

9. This definition also excludes (1) 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; (2) 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 (3) a security registered with or exempt from registration with the SEC or a security qualified with or exempt from qualifications with the department. Id.

10. See, e.g., Securities and Exchange Commission, Re: Proposed Coin Listing Policy Framework (Jan. 27, 2020), https://www.sec.gov/files/staff-comments-to%20nysdfs-1-27-20.pdf  ("Market participants should not rely on a model framework, whitelist, or state license when evaluating compliance with the federal securities laws – without also undergoing careful legal analysis under the federal securities laws.").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.