Governor Gavin Newsom of California has signed the Digital Financial Asset Law, setting the stage for a more regulated cryptocurrency environment in the state. The law assigns the Department of Financial Protection and Innovation (DFPI) as the overseeing body for licensing and regulating specific activities related to digital assets. The law allows for an 18-month implementation period. Additionally, it aims to protect consumers, curb fraudulent activities, and hold businesses accountable for illicit actions. Newsom highlighted the necessity of striking a balance between innovation and consumer protection.
Moreover, this is not the first time California has navigated the complex waters of cryptocurrency regulation. Last year, the DFPI held consultations with Coinbase, a key player in the crypto industry, on how to regulate digital assets. Coinbase advised the DFPI to clarify the classification of different digital assets. Besides, the state has been proactive in making crypto-friendly moves, indicating its willingness to adapt to an industry known for rapid changes.
Challenges and precedents
The United States has been grappling with cryptocurrency regulation for some time now. Calls for clear guidelines have been loud but met with inconsistent responses. For instance, Coinbase recently petitioned the Securities and Exchange Commission (SEC) to establish well-defined rules, following legal disputes arising from alleged security rule violations. Despite these challenges, no comprehensive framework has emerged at the national level. Consequently, the ambiguity has led to closures of several crypto-related firms in the U.S. Some stakeholders argue that unless the government takes decisive action, this trend will continue.
Governor Newsom’s new law marks a shift in his previous stance. In 2022, he rejected a similar bill for its lack of flexibility. However, the newly signed law builds upon California’s existing money transmission laws. It mandates businesses and individuals engaged in digital asset activities to secure a DFPI license. It also imposes stringent auditing requirements on cryptocurrency firms and mandates a five-year record-keeping period. Failure to comply will trigger enforcement measures. The law is set to take effect in July 2025.
Significantly, the new law comes at a time when the federal government is also scrutinizing cryptocurrency. Measures are being considered at the federal level, including the application of the Electronic Fund Transfer Act to cryptocurrencies. The Consumer Financial Protection Bureau plans to authorize this measure to mitigate harm from unauthorized transfers and hacks.
This new development in California could set the stage for broader regulatory adjustments in the U.S. crypto market. While some might see it as a restrictive move, it can also be viewed as a necessary step to ensure consumer safety and industry accountability. With California often serving as a trendsetter in technological innovation, this law might just be the spark needed for other states, or even the federal government, to follow suit.