California Scraps Licenses in Proposed Bitcoin Regulation Overhaul

California is once again moving forward with legislation that would update its money transmitter rules to capture digital currency startups.

AccessTimeIconAug 10, 2016 at 3:45 p.m. UTC
Updated Sep 11, 2021 at 12:26 p.m. UTC

The state of California is once again moving forward with legislation that would update its money transmitter rules to capture businesses engaged in digital currency activities.

Deemed inactive last September, Assembly Bill 1326 was re-introduced by the legislature this week and has since been read and amended. Given the discussion that surrounded earlier versions of the bill, the update is already being scrutinized, though signs suggest pros and cons remain.

Most notably, the bill no longer proposes to license businesses engaged in financial applications of the technology, but would instead create a new Digital Currency Business Enrollment Program. Lasting five years, the proposed program appears focused on helping the state learn more about the emerging technology.

According to the bill, companies that store, transmit, exchange or issue digital currency qualify as digital currency businesses and would be required to pay a non-refundable $5,000 fee to participate in the program, a cost equal to the New York BitLicense application fee.

In addition, there is a continuing cost of $2,500 annually, and the text proposes giving the program commissioner the authority to impose "a claim for civil penalties" of up to $25,000.

The revised text reads:

"The bill would prohibit a person from engaging in the digital currency business without enrolling in the program and would prohibit the conduct of digital currency business through an unenrolled agent."

Elsewhere, the bill includes new definitions for digital currency, labelling the technology a "digital representation of value".

Concerns raised

Due to certain revisions and vague wordings, the bill text has drawn early critics.

One person who helped consult California's Assembly Banking and Finance Committee leading up to the bill's amendment said that in spite of the softer language, other changes could result in even harsher requirements.

Digital currency lawyer and research director for non-profit Coin Center, Peter Van Valkenburgh, told CoinDesk:

"We like that it's enrollment, but we don’t like that because there’s such a big penalty, that it's essentially a license — and we don't like that there's so many kinds of companies that could potentially be subject."

According to Van Valkenburgh, the non-profit advocacy group supports requiring licensing of a business or individual if they are in a "position of trust" with their customers. Those who will be required to enroll in this program don’t necessarily qualify, he said.

Van Valkenburgh joins multiple other skeptics in expressing concern over the bill.

Questions of control

Ambiguities in the terms of who would be subject to the bill open up the door for what Van Valkenburgh believes constitutes unnecessary control.

Other examples he was concerned about included the potential inclusion of sidechains and cross-chain atomic swaps under the exchanges category and the definitions of what it means to transmit and custody a digital currency.

In particular, he says that that lack of bonding requirements and specific consumer protections at this early stage, along with the time limit on the measure that would see its provisions expire in January 2021, shows an open-mindedness to the rapidly changing nature of the industry.

"By not mandating a particular form of consumer protections the enrollment seems to show a certain amount of humility by the regulators," said Van Valkenburgh.

Still, he emphasized the change amounted to a "radical shift" away from the direction he believed the state was heading.

He concluded:

"What’s important to keep in mind is that the language we were dealing with last year is almost entirely different than this year. So something major has changed."

The bill's author, Matthew Dababneh of California's 45th District, was not immediately available for comment.


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