Even after crypto firms' struggled with New York’s BitLicense, industry representatives see some positives in California's version of the licensing system and praise the listening skills of Governor Gavin Newsom's administration.
Industry lobbyists say they'll keep trying to make changes to California’s new law before it’s implemented in 2025.
Crypto insiders feel they've been burned before in the cauldron of New York’s BitLicense, but they suggest that California’s implementation leaves some room for hope.
With the U.S. Congress and federal regulators mostly absent from efforts to build a new system of rules for digital assets, the states have stepped in to set down some standards, but until now New York was credited with the most wide-reaching law to govern crypto. California is more than a year away from implementing its version, but the industry has noticed the state's willingness to sit down and talk with crypto experts.
"Others states could take a cue from California’s collaboration with industry to produce law and regulation," said Kristopher Klaich, deputy policy director at the Chamber of Digital Commerce.
California Governor Gavin Newsom, who had vetoed a similar bill last year, signed Assembly Bill 39 last week, which he said will give the Department of Financial Protection and Innovation (DFPI) "robust" regulation and enforcement power over crypto. Newsom also signaled the state will be open to more tinkering when he said that "ambiguity of certain terms and the scope of this bill will require further refinement" before its target date in 18 months.
"It’s clear much more work needs to be done to increase clarity for future licensees and narrow the statute’s scope," said Peter Herzog, head of state policy for the Crypto Council for Innovation. "We’re grateful that Governor Newsom recognized this reality in his signing statement."
"The bill has come a long way since last session’s veto of its predecessor," Herzog added.
The new law sets up the DFPI as the gatekeeper for digital asset activities, and licensed crypto firms would be subject to examinations, record keeping and fee disclosures to customers.
If it were a country, California by itself would easily be in the top ten global economies, far outpacing New York, according to economic data from the Federal Reserve Bank of St. Louis. But New York got out way ahead on crypto regulation. The difference – from the perspective of an industry that's highly critical of New York's final product – is that California officials including Newsom apparently listened.
"That he vetoed a similar bill last year, and he and the bill’s authors were willing to work with industry to improve it, demonstrates that they do not want to cripple the industry in California," Klaich said. "It is a reasonable regulatory regime largely on par with other states’ money transmitter licensing, and notably grants conditional licensing to firms that possess New York’s more onerous BitLicense."
Still, companies are eyeing the details warily.
New York may have advanced the U.S. regulatory picture for crypto "but it was largely seen by those in the industry as being overly restrictive when it comes to regulating open-source, decentralized systems," said Zachary Townsend, co-founder and CEO of bitcoin-based life insurer Meanwhile.
"There’s concern that California might be going down the same path as New York, instead of taking a step forward and analyzing what worked well and what didn’t with the N.Y. BitLicense. Because of that, the California bill is being met with caution."
The industry will have more opportunities to weigh in before its July 1, 2025 launch.
"To me it’s simple: The government has a duty to respond when people are being hurt, and until we license crypto companies, Californians will continue to be frequent targets of financial scams," said Timothy Grayson, the bill's author and the chairman of the California Assembly's Banking and Finance Committee, in a statement about his legislation.
The California governor also signed a bill last week that will establish regulations for crypto kiosks.
So why can't the U.S. government approve crypto regulations, too?
Most lawmakers, lobbyists and federal regulators – apart from Securities and Exchange Commission (SEC) Chair Gary Gensler – tend to believe that comprehensive regulation requires a new law. Congress – especially the House of Representatives – has shown some willingness to work on crypto issues. However, the partisan divide there and the Senate's resistance to picking up the baton have left action unlikely in the short term, made worse by House Republicans who fired their speaker and can't quickly replace him even as budget deadlines loom.
For now, that leaves individual regulators. The SEC has been eager to stake its claim to crypto oversight under existing securities laws. Still, most of the relevant U.S. financial regulators have agreed that new laws are in order.
Edited by Parikshit Mishra.