AB 39: Digital financial asset businesses: regulatory oversight.
- Session Year: 2023-2024
- House: Assembly
- Latest Version Date: 2023-10-13
Current Status:
Passed
(2023-10-13: Chaptered by Secretary of State - Chapter 792, Statutes of 2023.)
Introduced
In Committee
First Chamber
In Committee
Second Chamber
Enacted
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after July 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
This bill would become operative only if SB 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after July 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
This bill would become operative only if SB 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January July 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
This bill would become operative only if SB 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or proposes is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified. The bill would exempt activity by specified entities, and would authorize the commissioner, by regulation or order, to further exempt any person or transaction, if the commissioner finds the exemption to be in the public interest, as provided.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but is engaging has engaged, is engaging, or proposes to engage in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill would make legislative findings and declarations relating to state oversight of the digital financial asset market.This bill, the Digital Financial Assets Law, would, on and after January 1, 2025, prohibit a person from engaging in digital financial asset business activity, or holding itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of certain criteria are met, including the person is licensed with the Department of Financial Protection and Innovation, as prescribed. The bill would define digital financial asset to mean 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, except as specified.
This bill would, among other things, authorize the department to conduct examinations of a licensee, as prescribed, and would require a licensee to maintain, for all digital financial asset business activity with, or on behalf of, a resident for 5 years after the date of the activity, certain records, including a general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
This bill would authorize the department to take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of certain instances, including the licensee or person materially violates the provisions of the bill, a rule adopted or order issued under the bill, or a law of this state other than the bill that applies to digital financial asset business activity of the violator with, or on behalf of, a resident. The bill would prescribe certain civil penalties for violations of its provisions.
This bill would require a covered person, before engaging in digital financial asset business activity with a resident, to make certain disclosures to the resident, including a schedule of fees and charges the covered may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges. The bill would define covered person to mean a person required to obtain a license under the Digital Financial Assets Law.
This bill would require an applicant, before submitting an application, to create and, during licensure, maintain in a record policies and procedures for, among other things, an information security program and an operational security program.
Existing law, the Money Transmission Act, generally prohibits a person from engaging in the business of money transmission, as defined, without a license from the Commissioner of Financial Protection and Innovation.
This bill would make legislative findings and declarations relating to state oversight of the digital financial asset market.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policymaking or policy implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(A)A person who is domiciled in this state.
(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(C)A person who has a place of business in this state.
(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)SAFE Act means the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Public Law 110-289).
(u)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(v)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(w)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(x)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(y)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(14)Any entity or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) to the extent those activities are conducted under authority of that act, are actually regulated by the Commodity Futures Trading Commission, and are entitled to preemption.
(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(17)A merchant that accepts a digital financial asset as payment for the purchase or sale of goods or services, which does not include digital financial assets.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after July 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before July 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, both of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and for the two-year period next preceding the submission of the application, if available.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)The number of residents with whom, or on behalf of, the applicant engaged in digital financial asset business activity in the month preceding the month in which the applicant submits an application for a license under this division to the department.
(W)An estimate of the anticipated number of residents with whom, or on behalf of, the applicant will engage in digital financial asset business activity by October 1 of the year following the year in which the applicant submits an application for a license under this division to the department.
(X)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of application review.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)The commissioner may issue a conditional license to an applicant pending compliance with the requirements of Section 3219 if all of the following conditions are met:
(1)The applicant has supplied all fingerprints required under Section 3219.
(2)The applicant meets all other requirements for licensure.
(3)Notwithstanding the commissioners reasonable efforts, the commissioner has been unable to complete the criminal history investigations required by Section 3219 with reasonable speed.
(c)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (h), between October 1 and November 1 of each year, a licensee shall submit to the department an annual report under subdivision (b).
(b)The annual report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation of the licensee, where permitted by applicable law.
(D)(i)Any data security breach or cybersecurity event of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (h), the later of the date the license was issued or the date the last annual report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (h), the end of the last month that ends not later than 30 days before the date of the annual report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee engages in its digital financial asset business activity.
(10)The number of residents with whom, or on behalf of, the licensee engaged in digital financial asset business activity between September 30 of the preceding year and October 1 of the year in which the licensee is submitting the annual report.
(11)Any other information the department requires by rule.
(c)(1)On or before February 28 of each year, a licensee and an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 shall pay its pro rata cost share of all costs and expenses reasonably incurred in the administration of this division, as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in both the year in which the assessment is made and the preceding year.
(2)The pro rata cost share described in paragraph (1) shall be the proportion of residents with whom, or on behalf of, a licensee or an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 engages in digital financial asset business activity bears to the aggregate residents with whom, or on behalf of, all licensees and applicants operating under this division without a license pursuant to subdivision (b) of Section 3201 engage in digital financial asset business activity, as determined by the commissioner, for the costs and expenses reasonably incurred in the administration of this division, not including any costs covered by the fees or cost recoveries under Section 3203 or cost recoveries under Section 3301.
(3)On or before January 31 of each year, the commissioner shall notify each licensee and applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 of the amount assessed and levied against it.
(4)The commissioner may use funds obtained by the commissioner through the enforcement of this division, including, but not limited to, moneys received through fines, penalties, settlements, or judgements, for the administration of this division, which shall offset amounts assessed and levied against pursuant to this subdivision.
(5)The department may adopt rules that change the calculation of the pro rata cost share and the dates on which assessment notifications and payments are due pursuant to this subdivision, except that the amount of the pro rata cost share shall not exceed the costs and expenses reasonably incurred in the administration of this division.
(d)(1)Following at least five business days notice to the licensee, the commissioner may by order summarily suspend or revoke the license of any licensee that fails to comply with subdivisions (a) to (c), inclusive, by March 31 of the year in which an assessment is made pursuant to subdivision (c).
(2)The licensee may request a hearing on the order within 30 days of receipt of the notice.
(3)If the licensee timely requests a hearing on the order and a hearing is not held within 60 days of that request, the order shall be deemed rescinded as of the effective date of the order.
(e)If the department suspends or revokes a license under this division for noncompliance with subdivisions (a) to (c), inclusive, the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (h), not later than 20 days after the license was suspended or revoked, the licensee files an annual report required by subdivision (a), a pro rata cost share required by subdivision (c), and pays any penalty assessed under Section 3407.
(f)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (e).
(g)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(h)The department may extend a period under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)Notwithstanding any other provision of law, the commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent between the United States Department of Justice and the commissioner for requesting information from, and distributing information to, the Department of Justice and the United States Department of Justice, including the Federal Bureau of Investigation pursuant to Section 5110 of the SAFE Act, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)(1)The commissioner shall require the submission of fingerprints for each applicant if the applicant is a natural person, and of each executive officer and responsible individual associated with the applicant, for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(2)The commissioner shall require the submission of fingerprints for any natural person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(3)If a person that has control of the applicant is not a natural person, the commissioner shall require a Federal Bureau of Investigation criminal history record check, including the submission of fingerprints, for each executive officer and responsible person associated with that person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(b)Section 461 of the Business and Professions Code shall not be applicable to the Department of Financial Protection and Innovation when using a national uniform application adopted or approved for use by the Nationwide Mortgage Licensing System and Registry in connection with this division.
(c)Notwithstanding any other provision of law, in connection with an application for a license under this division, the commissioner may require every applicant, at a minimum, to furnish to the Nationwide Mortgage Licensing System and Registry information described under subdivision (a) of this section.
(d)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain Federal Bureau of Investigation criminal history record check on individuals described in subdivision (a), pursuant to Section 5110 of the SAFE Act. For the purposes of this section, a Federal Bureau of Investigation criminal history record check shall include forwarding the individuals fingerprints to the Federal Bureau of Investigation.
(e)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain state criminal history background check information on applicants described in subdivision (a) using the procedures set forth in subdivisions (f) and (h).
(f)If the Nationwide Mortgage Licensing System and Registry electronically submits fingerprint images and related information, as required by the Department of Justice, for an applicant under this division for the purposes of obtaining information as to the existence and content of a record of state convictions and state arrests and to the existence and content of a record of state arrests for which the Department of Justice establishes that the person is free on bail or on their recognizance pending trial or appeal, the Department of Justice shall provide an electronic response to the Nationwide Mortgage Licensing System and Registry pursuant to paragraph (1) of subdivision (p) of Section 11105 of the Penal Code, and shall provide the same electronic response to the commissioner.
(g)The Nationwide Mortgage Licensing System and Registry may request from the Department of Justice subsequent arrest notification service, as provided pursuant to Section 11105.2 of the Penal Code, for all individuals described in subdivision (a) of this section. The Department of Justice shall provide the same electronic response to the commissioner.
(h)The Department of Justice shall charge a fee sufficient to cover the reasonable costs of processing the requests described in this section.
3221.(a)An applicant shall not be denied a license on the basis of a criminal conviction, or on the basis of acts underlying a criminal conviction, if the convicted person has obtained a certificate of rehabilitation under Chapter 3.5 (commencing with Section 4852.01) of Title 6 of Part 3 of the Penal Code or has been granted clemency or a pardon by a state or federal executive.
(b)An applicant shall not be denied a license on the basis of a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code. An applicant who has a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code shall provide the commissioner with proof of the dismissal if it is not reflected in the applicants criminal history record report.
(c)An applicant shall not be denied a license on the basis of an arrest that resulted in a disposition other than a conviction, including an arrest that resulted in an infraction, citation, or juvenile adjudication.
(d)If an applicant is denied a license based solely or in part on conviction history, the applicant shall be notified in writing of all of the following:
(1)The denial or disqualification of licensure.
(2)The procedure for the applicant to challenge the decision or to request reconsideration.
(3)That the applicant has the right to appeal the decision.
(4)The processes to request a copy of the applicants complete conviction history and to question the accuracy or completeness of the record.
3223.(a)Except as otherwise provided in Section 5111 of the SAFE Act, the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3225.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent annual report of the licensee under this division.
(2)A change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, is engaging, or is about to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.Whenever the commissioner deems it necessary for the general welfare of the public, the commissioner has continuous authority to exercise the powers set forth in this division whether or not an application for a license has been filed with the commissioner, any license has been issued, or if issued, has been surrendered, suspended, or revoked.
3415.(a)This chapter shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose the terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or California regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)(A)A covered exchange shall use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(i)The character of the market for the digital financial asset, including price and volatility.
(ii)The size and type of transaction.
(iii)The number of markets checked.
(iv)Accessibility of appropriate pricing.
(B)At least once every six months, a covered exchange shall review aggregated trading records of residents against benchmarks to determine execution quality, shall investigate the causes of any variance, and shall promptly take action to remedy issues identified in that review.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A covered person shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
3509.The requirements imposed on a covered person or a covered exchange under this chapter shall be operative on July 1, 2025.
6.Stablecoins3601.(a)Except as provided in Section 3603, a covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, is licensed pursuant to this division, or is a bank, a trust company licensed pursuant to Section 1042, or a national association authorized under federal law to engage in a trust banking business.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold.
(b)For purposes of this chapter:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082 or foreign currency eligible securities described in subdivision (c) of Section 2082 as required by the laws or regulations of other jurisdictions.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is pegged to the United States dollar or another national currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.
3603.(a)A covered person may exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin approved by the commissioner pursuant to subdivision (b), provided that the covered person complies with any requirements, restrictions, or prohibitions established by the commissioner pursuant to subdivision (c).
(b)(1)The commissioner may approve a stablecoin for exchange, transfer, or storage by a covered person, or for issuance pursuant to digital financial asset administration, if the commissioner determines that the stablecoin does not compromise the interests of residents who may use the stablecoin as a payment for goods and services or as a store of value.
(2)In determining whether to make an approval under paragraph (1), the commissioner shall consider all of the following factors:
(A)Any legally enforceable rights provided by the issuer of the stablecoin to holders of the stablecoin, including, but not limited to, rights to redeem the stablecoin for legal tender or bank or credit union credit.
(B)The amount, nature, and quality of assets owned or held by the issuer of the stablecoin that may be used to fund any redemption requests from residents.
(C)Any risks related to how the assets described in subparagraph (B) are owned or held by the issuer that may impair the ability of the issuer of the stablecoin to meet any redemption requests from residents.
(D)Any representations made by the issuer of the stablecoin related to the potential uses of the stablecoin.
(E)Any representations made by the issuer of the stablecoin related to the risks of using the stablecoin as payment for goods or services or as a store of value.
(F)Any other factors the commissioner deems material to making their determination.
(c)(1)As a condition of providing an approval pursuant to subdivision (b), the commissioner may require the stablecoin issuer to obtain a license under Section 3203 and may impose additional requirements, restrictions, or prohibitions on the activities of the issuer of the stablecoin in order to protect the interests of residents who may use the stablecoin as payment for goods or services or as a store of value.
(2)The commissioner may impose additional requirements, restrictions, or prohibitions on the activities of a covered person exchanging, transferring, or storing an approved stablecoin or engaging in digital financial asset administration of an approved stablecoin, whether directly or through an agreement with a digital financial asset control services vendor, in order to protect the interests of residents who may use the stablecoin as a payment for goods or services or as a store of value.
(d)(1)The commissioner shall revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner determines that the issuer of the stablecoin markets the stablecoin in a manner that may create a reasonable expectation or belief among the general public that the stablecoin poses no more risk to a holder or user of the stablecoin than the risks posed to the holder or user of bank credit or a stored value product issued by a person licensed pursuant to Division 1.2.
(2)The commissioner may revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner makes any of the following determinations:
(A)Changes in the activities of the covered person or the issuer of the stablecoin relative to the commissioners understanding of those activities when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(B)Changes in market conditions within the financial system or within markets for digital financial assets relative to the commissioners understanding of the financial system or the markets when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(C)The covered person or the issuer violates any requirement, restriction, or prohibition imposed by the commissioner pursuant to subdivision (c) or any other provision, requirement, rule, or regulation under this chapter.
(e)If the commissioner approves a stablecoin pursuant to this section, the commissioner shall make available on the departments internet website the approval.
3605.The requirements imposed by this chapter shall be operative on July 1, 2025.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
SEC. 2.This act shall become operative only if Senate Bill 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policymaking or policy implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(A)A person who is domiciled in this state.
(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(C)A person who has a place of business in this state.
(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)SAFE Act means the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Public Law 110-289).
(u)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(v)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(w)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(x)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(y)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(14)Any entity or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) to the extent those activities are conducted under authority of that act, are actually regulated by the Commodity Futures Trading Commission, and are entitled to preemption.
(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(17)A merchant that accepts a digital financial asset as payment for the purchase or sale of goods or services, which does not include digital financial assets.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after July 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before July 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, both of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and for the two-year period next preceding the submission of the application, if available.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)The number of residents with whom, or on behalf of, the applicant engaged in digital financial asset business activity in the month preceding the month in which the applicant submits an application for a license under this division to the department.
(W)An estimate of the anticipated number of residents with whom, or on behalf of, the applicant will engage in digital financial asset business activity by October 1 of the year following the year in which the applicant submits an application for a license under this division to the department.
(X)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of application review.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)The commissioner may issue a conditional license to an applicant pending compliance with the requirements of Section 3219 if all of the following conditions are met:
(1)The applicant has supplied all fingerprints required under Section 3219.
(2)The applicant meets all other requirements for licensure.
(3)Notwithstanding the commissioners reasonable efforts, the commissioner has been unable to complete the criminal history investigations required by Section 3219 with reasonable speed.
(c)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (h), between October 1 and November 1 of each year, a licensee shall submit to the department an annual report under subdivision (b).
(b)The annual report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation of the licensee, where permitted by applicable law.
(D)(i)Any data security breach or cybersecurity event of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (h), the later of the date the license was issued or the date the last annual report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (h), the end of the last month that ends not later than 30 days before the date of the annual report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee engages in its digital financial asset business activity.
(10)The number of residents with whom, or on behalf of, the licensee engaged in digital financial asset business activity between September 30 of the preceding year and October 1 of the year in which the licensee is submitting the annual report.
(11)Any other information the department requires by rule.
(c)(1)On or before February 28 of each year, a licensee and an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 shall pay its pro rata cost share of all costs and expenses reasonably incurred in the administration of this division, as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in both the year in which the assessment is made and the preceding year.
(2)The pro rata cost share described in paragraph (1) shall be the proportion of residents with whom, or on behalf of, a licensee or an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 engages in digital financial asset business activity bears to the aggregate residents with whom, or on behalf of, all licensees and applicants operating under this division without a license pursuant to subdivision (b) of Section 3201 engage in digital financial asset business activity, as determined by the commissioner, for the costs and expenses reasonably incurred in the administration of this division, not including any costs covered by the fees or cost recoveries under Section 3203 or cost recoveries under Section 3301.
(3)On or before January 31 of each year, the commissioner shall notify each licensee and applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 of the amount assessed and levied against it.
(4)The commissioner may use funds obtained by the commissioner through the enforcement of this division, including, but not limited to, moneys received through fines, penalties, settlements, or judgements, for the administration of this division, which shall offset amounts assessed and levied against pursuant to this subdivision.
(5)The department may adopt rules that change the calculation of the pro rata cost share and the dates on which assessment notifications and payments are due pursuant to this subdivision, except that the amount of the pro rata cost share shall not exceed the costs and expenses reasonably incurred in the administration of this division.
(d)(1)Following at least five business days notice to the licensee, the commissioner may by order summarily suspend or revoke the license of any licensee that fails to comply with subdivisions (a) to (c), inclusive, by March 31 of the year in which an assessment is made pursuant to subdivision (c).
(2)The licensee may request a hearing on the order within 30 days of receipt of the notice.
(3)If the licensee timely requests a hearing on the order and a hearing is not held within 60 days of that request, the order shall be deemed rescinded as of the effective date of the order.
(e)If the department suspends or revokes a license under this division for noncompliance with subdivisions (a) to (c), inclusive, the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (h), not later than 20 days after the license was suspended or revoked, the licensee files an annual report required by subdivision (a), a pro rata cost share required by subdivision (c), and pays any penalty assessed under Section 3407.
(f)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (e).
(g)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(h)The department may extend a period under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)Notwithstanding any other provision of law, the commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent between the United States Department of Justice and the commissioner for requesting information from, and distributing information to, the Department of Justice and the United States Department of Justice, including the Federal Bureau of Investigation pursuant to Section 5110 of the SAFE Act, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)(1)The commissioner shall require the submission of fingerprints for each applicant if the applicant is a natural person, and of each executive officer and responsible individual associated with the applicant, for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(2)The commissioner shall require the submission of fingerprints for any natural person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(3)If a person that has control of the applicant is not a natural person, the commissioner shall require a Federal Bureau of Investigation criminal history record check, including the submission of fingerprints, for each executive officer and responsible person associated with that person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(b)Section 461 of the Business and Professions Code shall not be applicable to the Department of Financial Protection and Innovation when using a national uniform application adopted or approved for use by the Nationwide Mortgage Licensing System and Registry in connection with this division.
(c)Notwithstanding any other provision of law, in connection with an application for a license under this division, the commissioner may require every applicant, at a minimum, to furnish to the Nationwide Mortgage Licensing System and Registry information described under subdivision (a) of this section.
(d)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain Federal Bureau of Investigation criminal history record check on individuals described in subdivision (a), pursuant to Section 5110 of the SAFE Act. For the purposes of this section, a Federal Bureau of Investigation criminal history record check shall include forwarding the individuals fingerprints to the Federal Bureau of Investigation.
(e)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain state criminal history background check information on applicants described in subdivision (a) using the procedures set forth in subdivisions (f) and (h).
(f)If the Nationwide Mortgage Licensing System and Registry electronically submits fingerprint images and related information, as required by the Department of Justice, for an applicant under this division for the purposes of obtaining information as to the existence and content of a record of state convictions and state arrests and to the existence and content of a record of state arrests for which the Department of Justice establishes that the person is free on bail or on their recognizance pending trial or appeal, the Department of Justice shall provide an electronic response to the Nationwide Mortgage Licensing System and Registry pursuant to paragraph (1) of subdivision (p) of Section 11105 of the Penal Code, and shall provide the same electronic response to the commissioner.
(g)The Nationwide Mortgage Licensing System and Registry may request from the Department of Justice subsequent arrest notification service, as provided pursuant to Section 11105.2 of the Penal Code, for all individuals described in subdivision (a) of this section. The Department of Justice shall provide the same electronic response to the commissioner.
(h)The Department of Justice shall charge a fee sufficient to cover the reasonable costs of processing the requests described in this section.
3221.(a)An applicant shall not be denied a license on the basis of a criminal conviction, or on the basis of acts underlying a criminal conviction, if the convicted person has obtained a certificate of rehabilitation under Chapter 3.5 (commencing with Section 4852.01) of Title 6 of Part 3 of the Penal Code or has been granted clemency or a pardon by a state or federal executive.
(b)An applicant shall not be denied a license on the basis of a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code. An applicant who has a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code shall provide the commissioner with proof of the dismissal if it is not reflected in the applicants criminal history record report.
(c)An applicant shall not be denied a license on the basis of an arrest that resulted in a disposition other than a conviction, including an arrest that resulted in an infraction, citation, or juvenile adjudication.
(d)If an applicant is denied a license based solely or in part on conviction history, the applicant shall be notified in writing of all of the following:
(1)The denial or disqualification of licensure.
(2)The procedure for the applicant to challenge the decision or to request reconsideration.
(3)That the applicant has the right to appeal the decision.
(4)The processes to request a copy of the applicants complete conviction history and to question the accuracy or completeness of the record.
3223.(a)Except as otherwise provided in Section 5111 of the SAFE Act, the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3225.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent annual report of the licensee under this division.
(2)A change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, is engaging, or is about to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.Whenever the commissioner deems it necessary for the general welfare of the public, the commissioner has continuous authority to exercise the powers set forth in this division whether or not an application for a license has been filed with the commissioner, any license has been issued, or if issued, has been surrendered, suspended, or revoked.
3415.(a)This chapter shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose the terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or California regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)(A)A covered exchange shall use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(i)The character of the market for the digital financial asset, including price and volatility.
(ii)The size and type of transaction.
(iii)The number of markets checked.
(iv)Accessibility of appropriate pricing.
(B)At least once every six months, a covered exchange shall review aggregated trading records of residents against benchmarks to determine execution quality, shall investigate the causes of any variance, and shall promptly take action to remedy issues identified in that review.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A covered person shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
3509.The requirements imposed on a covered person or a covered exchange under this chapter shall be operative on July 1, 2025.
6.Stablecoins3601.(a)Except as provided in Section 3603, a covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, is licensed pursuant to this division, or is a bank, a trust company licensed pursuant to Section 1042, or a national association authorized under federal law to engage in a trust banking business.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold.
(b)For purposes of this chapter:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082 or foreign currency eligible securities described in subdivision (c) of Section 2082 as required by the laws or regulations of other jurisdictions.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is pegged to the United States dollar or another national currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.
3603.(a)A covered person may exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin approved by the commissioner pursuant to subdivision (b), provided that the covered person complies with any requirements, restrictions, or prohibitions established by the commissioner pursuant to subdivision (c).
(b)(1)The commissioner may approve a stablecoin for exchange, transfer, or storage by a covered person, or for issuance pursuant to digital financial asset administration, if the commissioner determines that the stablecoin does not compromise the interests of residents who may use the stablecoin as a payment for goods and services or as a store of value.
(2)In determining whether to make an approval under paragraph (1), the commissioner shall consider all of the following factors:
(A)Any legally enforceable rights provided by the issuer of the stablecoin to holders of the stablecoin, including, but not limited to, rights to redeem the stablecoin for legal tender or bank or credit union credit.
(B)The amount, nature, and quality of assets owned or held by the issuer of the stablecoin that may be used to fund any redemption requests from residents.
(C)Any risks related to how the assets described in subparagraph (B) are owned or held by the issuer that may impair the ability of the issuer of the stablecoin to meet any redemption requests from residents.
(D)Any representations made by the issuer of the stablecoin related to the potential uses of the stablecoin.
(E)Any representations made by the issuer of the stablecoin related to the risks of using the stablecoin as payment for goods or services or as a store of value.
(F)Any other factors the commissioner deems material to making their determination.
(c)(1)As a condition of providing an approval pursuant to subdivision (b), the commissioner may require the stablecoin issuer to obtain a license under Section 3203 and may impose additional requirements, restrictions, or prohibitions on the activities of the issuer of the stablecoin in order to protect the interests of residents who may use the stablecoin as payment for goods or services or as a store of value.
(2)The commissioner may impose additional requirements, restrictions, or prohibitions on the activities of a covered person exchanging, transferring, or storing an approved stablecoin or engaging in digital financial asset administration of an approved stablecoin, whether directly or through an agreement with a digital financial asset control services vendor, in order to protect the interests of residents who may use the stablecoin as a payment for goods or services or as a store of value.
(d)(1)The commissioner shall revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner determines that the issuer of the stablecoin markets the stablecoin in a manner that may create a reasonable expectation or belief among the general public that the stablecoin poses no more risk to a holder or user of the stablecoin than the risks posed to the holder or user of bank credit or a stored value product issued by a person licensed pursuant to Division 1.2.
(2)The commissioner may revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner makes any of the following determinations:
(A)Changes in the activities of the covered person or the issuer of the stablecoin relative to the commissioners understanding of those activities when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(B)Changes in market conditions within the financial system or within markets for digital financial assets relative to the commissioners understanding of the financial system or the markets when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(C)The covered person or the issuer violates any requirement, restriction, or prohibition imposed by the commissioner pursuant to subdivision (c) or any other provision, requirement, rule, or regulation under this chapter.
(e)If the commissioner approves a stablecoin pursuant to this section, the commissioner shall make available on the departments internet website the approval.
3605.The requirements imposed by this chapter shall be operative on July 1, 2025.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
SEC. 2.This act shall become operative only if Senate Bill 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policymaking or policy implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(A)A person who is domiciled in this state.
(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(C)A person who has a place of business in this state.
(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)SAFE Act means the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Public Law 110-289).
(u)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(v)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(w)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(x)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(y)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(14)Any entity or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) to the extent those activities are conducted under authority of that act, are actually regulated by the Commodity Futures Trading Commission, and are entitled to preemption.
(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(17)A merchant that accepts a digital financial asset as payment for the purchase or sale of goods or services, which does not include digital financial assets.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after January July 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January July 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, both of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and for the two-year period next preceding the submission of the application, if available.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)The number of residents with whom, or on behalf of, the applicant engaged in digital financial asset business activity in the month preceding the month in which the applicant submits an application for a license under this division to the department.
(W)An estimate of the anticipated number of residents with whom, or on behalf of, the applicant will engage in digital financial asset business activity by October 1 of the year following the year in which the applicant submits an application for a license under this division to the department.
(X)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of application review.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)The commissioner may issue a conditional license to an applicant pending compliance with the requirements of Section 3219 if all of the following conditions are met:
(1)The applicant has supplied all fingerprints required under Section 3219.
(2)The applicant meets all other requirements for licensure.
(3)Notwithstanding the commissioners reasonable efforts, the commissioner has been unable to complete the criminal history investigations required by Section 3219 with reasonable speed.
(c)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (h), between October 1 and November 1 of each year, a licensee shall submit to the department an annual report under subdivision (b).
(b)The annual report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation of the licensee, where permitted by applicable law.
(D)(i)Any data security breach or cybersecurity event of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (h), the later of the date the license was issued or the date the last annual report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (h), the end of the last month that ends not later than 30 days before the date of the annual report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee engages in its digital financial asset business activity.
(10)The number of residents with whom, or on behalf of, the licensee engaged in digital financial asset business activity between September 30 of the preceding year and October 1 of the year in which the licensee is submitting the annual report.
(11)Any other information the department requires by rule.
(c)(1)On or before February 28 of each year, a licensee and an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 shall pay its pro rata cost share of all costs and expenses reasonably incurred in the administration of this division, as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in both the year in which the assessment is made and the preceding year.
(2)The pro rata cost share described in paragraph (1) shall be the proportion of residents with whom, or on behalf of, a licensee or an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 engages in digital financial asset business activity bears to the aggregate residents with whom, or on behalf of, all licensees and applicants operating under this division without a license pursuant to subdivision (b) of Section 3201 engage in digital financial asset business activity, as determined by the commissioner, for the costs and expenses reasonably incurred in the administration of this division, not including any costs covered by the fees or cost recoveries under Section 3203 or cost recoveries under Section 3301.
(3)On or before January 31 of each year, the commissioner shall notify each licensee and applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 of the amount assessed and levied against it.
(4)The commissioner may use funds obtained by the commissioner through the enforcement of this division, including, but not limited to, moneys received through fines, penalties, settlements, or judgements, for the administration of this division, which shall offset amounts assessed and levied against pursuant to this subdivision.
(5)The department may adopt rules that change the calculation of the pro rata cost share and the dates on which assessment notifications and payments are due pursuant to this subdivision, except that the amount of the pro rata cost share shall not exceed the costs and expenses reasonably incurred in the administration of this division.
(d)(1)Following at least five business days notice to the licensee, the commissioner may by order summarily suspend or revoke the license of any licensee that fails to comply with subdivisions (a) to (c), inclusive, by March 31 of the year in which an assessment is made pursuant to subdivision (c).
(2)The licensee may request a hearing on the order within 30 days of receipt of the notice.
(3)If the licensee timely requests a hearing on the order and a hearing is not held within 60 days of that request, the order shall be deemed rescinded as of the effective date of the order.
(e)If the department suspends or revokes a license under this division for noncompliance with subdivisions (a) to (c), inclusive, the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (h), not later than 20 days after the license was suspended or revoked, the licensee files an annual report required by subdivision (a), a pro rata cost share required by subdivision (c), and pays any penalty assessed under Section 3407.
(f)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (e).
(g)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(h)The department may extend a period under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)Notwithstanding any other provision of law, the commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent between the United States Department of Justice and the commissioner for requesting information from, and distributing information to, the Department of Justice and the United States Department of Justice, including the Federal Bureau of Investigation pursuant to Section 5110 of the SAFE Act, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)(1)The commissioner shall require the submission of fingerprints for each applicant if the applicant is a natural person, and of each executive officer and responsible individual associated with the applicant, for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(2)The commissioner shall require the submission of fingerprints for any natural person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(3)If a person that has control of the applicant is not a natural person, the commissioner shall require a Federal Bureau of Investigation criminal history record check, including the submission of fingerprints, for each executive officer and responsible person associated with that person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(b)Section 461 of the Business and Professions Code shall not be applicable to the Department of Financial Protection and Innovation when using a national uniform application adopted or approved for use by the Nationwide Mortgage Licensing System and Registry in connection with this division.
(c)Notwithstanding any other provision of law, in connection with an application for a license under this division, the commissioner may require every applicant, at a minimum, to furnish to the Nationwide Mortgage Licensing System and Registry information described under subdivision (a) of this section.
(d)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain Federal Bureau of Investigation criminal history record check on individuals described in subdivision (a), pursuant to Section 5110 of the SAFE Act. For the purposes of this section, a Federal Bureau of Investigation criminal history record check shall include forwarding the individuals fingerprints to the Federal Bureau of Investigation.
(e)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain state criminal history background check information on applicants described in subdivision (a) using the procedures set forth in subdivisions (f) and (h).
(f)If the Nationwide Mortgage Licensing System and Registry electronically submits fingerprint images and related information, as required by the Department of Justice, for an applicant under this division for the purposes of obtaining information as to the existence and content of a record of state convictions and state arrests and to the existence and content of a record of state arrests for which the Department of Justice establishes that the person is free on bail or on their recognizance pending trial or appeal, the Department of Justice shall provide an electronic response to the Nationwide Mortgage Licensing System and Registry pursuant to paragraph (1) of subdivision (p) of Section 11105 of the Penal Code, and shall provide the same electronic response to the commissioner.
(g)The Nationwide Mortgage Licensing System and Registry may request from the Department of Justice subsequent arrest notification service, as provided pursuant to Section 11105.2 of the Penal Code, for all individuals described in subdivision (a) of this section. The Department of Justice shall provide the same electronic response to the commissioner.
(h)The Department of Justice shall charge a fee sufficient to cover the reasonable costs of processing the requests described in this section.
3221.(a)An applicant shall not be denied a license on the basis of a criminal conviction, or on the basis of acts underlying a criminal conviction, if the convicted person has obtained a certificate of rehabilitation under Chapter 3.5 (commencing with Section 4852.01) of Title 6 of Part 3 of the Penal Code or has been granted clemency or a pardon by a state or federal executive.
(b)An applicant shall not be denied a license on the basis of a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code. An applicant who has a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code shall provide the commissioner with proof of the dismissal if it is not reflected in the applicants criminal history record report.
(c)An applicant shall not be denied a license on the basis of an arrest that resulted in a disposition other than a conviction, including an arrest that resulted in an infraction, citation, or juvenile adjudication.
(d)If an applicant is denied a license based solely or in part on conviction history, the applicant shall be notified in writing of all of the following:
(1)The denial or disqualification of licensure.
(2)The procedure for the applicant to challenge the decision or to request reconsideration.
(3)That the applicant has the right to appeal the decision.
(4)The processes to request a copy of the applicants complete conviction history and to question the accuracy or completeness of the record.
3223.(a)Except as otherwise provided in Section 5111 of the SAFE Act, the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3225.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent annual report of the licensee under this division.
(2)A change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, is engaging, or is about to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.Whenever the commissioner deems it necessary for the general welfare of the public, the commissioner has continuous authority to exercise the powers set forth in this division whether or not an application for a license has been filed with the commissioner, any license has been issued, or if issued, has been surrendered, suspended, or revoked.
3415.(a)This chapter shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose the terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state California regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)(A)A covered exchange shall use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(i)The character of the market for the digital financial asset, including price and volatility.
(ii)The size and type of transaction.
(iii)The number of markets checked.
(iv)Accessibility of appropriate pricing.
(B)At least once every six months, a covered exchange shall review aggregated trading records of residents against benchmarks to determine execution quality, shall investigate the causes of any variance, and shall promptly take action to remedy issues identified in that review.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee covered person shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
3509.The requirements imposed on a covered person or a covered exchange under this chapter shall be operative on July 1, 2025.
6.Stablecoins3601.(a)On or after January 1, 2025, Except as provided in Section 3603, a covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, is licensed pursuant to this division, or is a bank, a trust company licensed pursuant to Section 1042, or a national association authorized under federal law to engage in a trust banking business.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold.
(b)For purposes of this section: chapter:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082 or foreign currency eligible securities described in subdivision (c) of Section 2082 as required by the laws or regulations of other jurisdictions.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is pegged to the United States dollar or another national currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.
3603.(a)A covered person may exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin approved by the commissioner pursuant to subdivision (b), provided that the covered person complies with any requirements, restrictions, or prohibitions established by the commissioner pursuant to subdivision (c).
(b)(1)The commissioner may approve a stablecoin for exchange, transfer, or storage by a covered person, or for issuance pursuant to digital financial asset administration, if the commissioner determines that the stablecoin does not compromise the interests of residents who may use the stablecoin as a payment for goods and services or as a store of value.
(2)In determining whether to make an approval under paragraph (1), the commissioner shall consider all of the following factors:
(A)Any legally enforceable rights provided by the issuer of the stablecoin to holders of the stablecoin, including, but not limited to, rights to redeem the stablecoin for legal tender or bank or credit union credit.
(B)The amount, nature, and quality of assets owned or held by the issuer of the stablecoin that may be used to fund any redemption requests from residents.
(C)Any risks related to how the assets described in subparagraph (B) are owned or held by the issuer that may impair the ability of the issuer of the stablecoin to meet any redemption requests from residents.
(D)Any representations made by the issuer of the stablecoin related to the potential uses of the stablecoin.
(E)Any representations made by the issuer of the stablecoin related to the risks of using the stablecoin as payment for goods or services or as a store of value.
(F)Any other factors the commissioner deems material to making their determination.
(c)(1)As a condition of providing an approval pursuant to subdivision (b), the commissioner may require the stablecoin issuer to obtain a license under Section 3203 and may impose additional requirements, restrictions, or prohibitions on the activities of the issuer of the stablecoin in order to protect the interests of residents who may use the stablecoin as payment for goods or services or as a store of value.
(2)The commissioner may impose additional requirements, restrictions, or prohibitions on the activities of a covered person exchanging, transferring, or storing an approved stablecoin or engaging in digital financial asset administration of an approved stablecoin, whether directly or through an agreement with a digital financial asset control services vendor, in order to protect the interests of residents who may use the stablecoin as a payment for goods or services or as a store of value.
(d)(1)The commissioner shall revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner determines that the issuer of the stablecoin markets the stablecoin in a manner that may create a reasonable expectation or belief among the general public that the stablecoin poses no more risk to a holder or user of the stablecoin than the risks posed to the holder or user of bank credit or a stored value product issued by a person licensed pursuant to Division 1.2.
(2)The commissioner may revoke an approval under subdivision (b) if, after notice and reasonable opportunity to be heard, the commissioner makes any of the following determinations:
(A)Changes in the activities of the covered person or the issuer of the stablecoin relative to the commissioners understanding of those activities when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(B)Changes in market conditions within the financial system or within markets for digital financial assets relative to the commissioners understanding of the financial system or the markets when the commissioner made the approval may compromise the interests of residents who use or hold the stablecoin.
(C)The covered person or the issuer violates any requirement, restriction, or prohibition imposed by the commissioner pursuant to subdivision (c) or any other provision, requirement, rule, or regulation under this chapter.
(e)If the commissioner approves a stablecoin pursuant to this section, the commissioner shall make available on the departments internet website the approval.
3605.The requirements imposed by this chapter shall be operative on July 1, 2025.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
SEC. 2.This act shall become operative only if Senate Bill 401 of the 202324 Regular Session is enacted and takes effect on or before January 1, 2024.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policymaking or policy-implementation policy implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(A)A person who is domiciled in this state.
(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(C)A person who has a place of business in this state.
(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)SAFE Act means the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Public Law 110-289).
(t)(u)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)(v)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)(w)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)(x)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)(y)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(14)A board of trade designated as a contract market Any entity or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) or a person that, in the ordinary course of business, provides clearance and settlement services for a board of trade to the extent of its operation as or for such a board. to the extent those activities are conducted under authority of that act, are actually regulated by the Commodity Futures Trading Commission, and are entitled to preemption.
(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, all both of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and, if available, and for the two-year period next preceding the submission of the application. application, if available.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(iii)If the applicant is publicly traded, a copy of the most recent report filed with the United States Securities and Exchange Commission under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)The number of residents with whom, or on behalf of, the applicant engaged in digital financial asset business activity in the month preceding the month in which the applicant submits an application for a license under this division to the department.
(W)An estimate of the anticipated number of residents with whom, or on behalf of, the applicant will engage in digital financial asset business activity by October 1 of the year following the year in which the applicant submits an application for a license under this division to the department.
(V)(X)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation. application review.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)The commissioner may issue a conditional license to an applicant pending compliance with the requirements of Section 3219 if all of the following conditions are met:
(1)The applicant has supplied all fingerprints required under Section 3219.
(2)The applicant meets all other requirements for licensure.
(3)Notwithstanding the commissioners reasonable efforts, the commissioner has been unable to complete the criminal history investigations required by Section 3219 with reasonable speed.
(b)(c)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before March 15 (h), between October 1 and November 1 of each year, a licensee may apply for renewal of the license by submitting shall submit to the department a renewal an annual report under subdivision (b) and, on or before September 15 of each year, paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation. (b).
(b)A renewal The annual report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation of the licensee. licensee, where permitted by applicable law.
(D)(i)Any data security breach or cybersecurity event of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), (h), the later of the date the license was issued or the date the last renewal annual report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), (h), the end of the last month that ends not later than 30 days before the date of the renewal annual report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee operates engages in its digital financial asset business activity.
(10)The number of residents with whom, or on behalf of, the licensee engaged in digital financial asset business activity between September 30 of the preceding year and October 1 of the year in which the licensee is submitting the annual report.
(10)(11)Any other information the department requires by rule.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.(c)(1)On or before February 28 of each year, a licensee and an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 shall pay its pro rata cost share of all costs and expenses reasonably incurred in the administration of this division, as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in both the year in which the assessment is made and the preceding year.
(2)The pro rata cost share described in paragraph (1) shall be the proportion of residents with whom, or on behalf of, a licensee or an applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 engages in digital financial asset business activity bears to the aggregate residents with whom, or on behalf of, all licensees and applicants operating under this division without a license pursuant to subdivision (b) of Section 3201 engage in digital financial asset business activity, as determined by the commissioner, for the costs and expenses reasonably incurred in the administration of this division, not including any costs covered by the fees or cost recoveries under Section 3203 or cost recoveries under Section 3301.
(3)On or before January 31 of each year, the commissioner shall notify each licensee and applicant operating under this division without a license pursuant to subdivision (b) of Section 3201 of the amount assessed and levied against it.
(4)The commissioner may use funds obtained by the commissioner through the enforcement of this division, including, but not limited to, moneys received through fines, penalties, settlements, or judgements, for the administration of this division, which shall offset amounts assessed and levied against pursuant to this subdivision.
(5)The department may adopt rules that change the calculation of the pro rata cost share and the dates on which assessment notifications and payments are due pursuant to this subdivision, except that the amount of the pro rata cost share shall not exceed the costs and expenses reasonably incurred in the administration of this division.
(d)(1)Following at least five business days notice to the licensee, the commissioner may by order summarily suspend or revoke the license of any licensee that fails to comply with subdivisions (a) to (c), inclusive, by March 31 of the year in which an assessment is made pursuant to subdivision (c).
(2)The licensee may request a hearing on the order within 30 days of receipt of the notice.
(3)If the licensee timely requests a hearing on the order and a hearing is not held within 60 days of that request, the order shall be deemed rescinded as of the effective date of the order.
(d)(e)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), subdivisions (a) to (c), inclusive, the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), (h), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee an annual report required by subdivision (a), a pro rata cost share required by subdivision (c), and pays any penalty assessed under Section 3407.
(e)(f)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d). (e).
(f)(g)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)(h)The department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The Notwithstanding any other provision of law, the commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent between the United States Department of Justice and the commissioner for requesting information from, and distributing information to, the Department of Justice and the United States Department of Justice, including the Federal Bureau of Investigation pursuant to Section 5110 of the SAFE Act, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)(1)The commissioner shall require the submission of fingerprints for each applicant if the applicant is a natural person, and of each executive officer and responsible individual associated with the applicant, for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(2)The commissioner shall require the submission of fingerprints for any natural person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(3)If a person that has control of the applicant is not a natural person, the commissioner shall require a Federal Bureau of Investigation criminal history record check, including the submission of fingerprints, for each executive officer and responsible person associated with that person that has control of the applicant for the purpose of conducting a criminal history search by means of a Federal Bureau of Investigation criminal history record check.
(b)Section 461 of the Business and Professions Code shall not be applicable to the Department of Financial Protection and Innovation when using a national uniform application adopted or approved for use by the Nationwide Mortgage Licensing System and Registry in connection with this division.
(c)Notwithstanding any other provision of law, in connection with an application for a license under this division, the commissioner may require every applicant, at a minimum, to furnish to the Nationwide Mortgage Licensing System and Registry information described under subdivision (a) of this section.
(d)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain Federal Bureau of Investigation criminal history record check on individuals described in subdivision (a), pursuant to Section 5110 of the SAFE Act. For the purposes of this section, a Federal Bureau of Investigation criminal history record check shall include forwarding the individuals fingerprints to the Federal Bureau of Investigation.
(e)Notwithstanding any other provision of law, the commissioner may ask the Nationwide Mortgage Licensing System and Registry to obtain state criminal history background check information on applicants described in subdivision (a) using the procedures set forth in subdivisions (f) and (h).
(f)If the Nationwide Mortgage Licensing System and Registry electronically submits fingerprint images and related information, as required by the Department of Justice, for an applicant under this division for the purposes of obtaining information as to the existence and content of a record of state convictions and state arrests and to the existence and content of a record of state arrests for which the Department of Justice establishes that the person is free on bail or on their recognizance pending trial or appeal, the Department of Justice shall provide an electronic response to the Nationwide Mortgage Licensing System and Registry pursuant to paragraph (1) of subdivision (p) of Section 11105 of the Penal Code, and shall provide the same electronic response to the commissioner.
(g)The Nationwide Mortgage Licensing System and Registry may request from the Department of Justice subsequent arrest notification service, as provided pursuant to Section 11105.2 of the Penal Code, for all individuals described in subdivision (a) of this section. The Department of Justice shall provide the same electronic response to the commissioner.
(h)The Department of Justice shall charge a fee sufficient to cover the reasonable costs of processing the requests described in this section.
3221.(a)An applicant shall not be denied a license on the basis of a criminal conviction, or on the basis of acts underlying a criminal conviction, if the convicted person has obtained a certificate of rehabilitation under Chapter 3.5 (commencing with Section 4852.01) of Title 6 of Part 3 of the Penal Code or has been granted clemency or a pardon by a state or federal executive.
(b)An applicant shall not be denied a license on the basis of a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code. An applicant who has a conviction that has been dismissed pursuant to Section 1203.4, 1203.4a, 1203.41, or 1203.425 of the Penal Code shall provide the commissioner with proof of the dismissal if it is not reflected in the applicants criminal history record report.
(c)An applicant shall not be denied a license on the basis of an arrest that resulted in a disposition other than a conviction, including an arrest that resulted in an infraction, citation, or juvenile adjudication.
(d)If an applicant is denied a license based solely or in part on conviction history, the applicant shall be notified in writing of all of the following:
(1)The denial or disqualification of licensure.
(2)The procedure for the applicant to challenge the decision or to request reconsideration.
(3)That the applicant has the right to appeal the decision.
(4)The processes to request a copy of the applicants complete conviction history and to question the accuracy or completeness of the record.
3219.3223.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), Section 5111 of the SAFE Act, the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.3225.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal annual report of the licensee under this division.
(2)A change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, is engaging, or is about to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee has engaged, is engaging, or is about to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.Whenever the commissioner deems it necessary for the general welfare of the public, the commissioner has continuous authority to exercise the powers set forth in this division whether or not an application for a license has been filed with the commissioner, any license has been issued, or if issued, has been surrendered, suspended, or revoked.
3413.3415.(a)This chapter shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material the terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)(A)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so ensure that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)(i)The character of the market for the digital financial asset, including price and volatility.
(B)(ii)The size and type of transaction.
(C)(iii)The number of markets checked.
(D)(iv)Accessibility of appropriate pricing.
(B)At least once every six months, a covered exchange shall review aggregated trading records of residents against benchmarks to determine execution quality, shall investigate the causes of any variance, and shall promptly take action to remedy issues identified in that review.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
6.Stablecoins3601.(a)A On or after January 1, 2025, a covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, is licensed pursuant to this division, or is a bank. bank, a trust company licensed pursuant to Section 1042, or a national association authorized under federal law to engage in a trust banking business.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States. sold.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082. 2082 or foreign currency eligible securities described in subdivision (c) of Section 2082 as required by the laws or regulations of other jurisdictions.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policymaking or policy-implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(A)A person who is domiciled in this state.
(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(C)A person who has a place of business in this state.
(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(14)A board of trade designated as a contract market under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) or a person that, in the ordinary course of business, provides clearance and settlement services for a board of trade to the extent of its operation as or for such a board.
(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, all of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and, if available, for the two-year period next preceding the submission of the application.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(iii)If the applicant is publicly traded, a copy of the most recent report filed with the United States Securities and Exchange Commission under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before March 15 of each year, a licensee may apply for renewal of the license by submitting to the department a renewal report under subdivision (b) and, on or before September 15 of each year, paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation.
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation of the licensee.
(D)(i)Any data security breach or cybersecurity event of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee operates its digital financial asset business activity.
(10)Any other information the department requires by rule.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)The department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or proposes is about to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, is engaging, or proposes is about to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee has engaged, is engaging, or proposes is about to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)Bank means a bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding. do either of the following:
(A)Vote 25 percent or more of any class of the voting securities issued by a person.
(B)Direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, other than a commercial contract for goods or nonmanagement services, or otherwise, if no individual is deemed to control a person solely on account of being a director, officer, or employee of such person.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer means includes, but is not limited to, an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual. individual, or any other person who performs similar policymaking or policy-implementation functions.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)(1)Resident means any of the following:
(1)(A)A person who is domiciled in this state.
(2)(B)A person who is physically located in this state for more than 183 days of the previous 365 days.
(3)(C)A person who has a place of business in this state.
(4)(D)A legal representative of a person that is domiciled in this state.
(2)Notwithstanding paragraph (1), resident does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(4)A federally chartered or state chartered state-chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(10)An attorney to the extent of providing escrow services to a resident.
(11)A title insurance company to the extent of providing escrow services to a resident.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A digital financial asset control services vendor.(14)(13)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(15)(14)A board of trade designated as a contract market under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) or a person that, in the ordinary course of business, provides clearance and settlement services for a board of trade to the extent of its operation as or for such a board.
(16)(15)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(17)(16)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
(c)(1)The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction, or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division.
(2)The commissioner shall post on the commissioners internet website a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt.
(3)The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation shall include, but is not limited to, all of the following:
(i)A copy of the applicants audited financial statements for the most recent fiscal year and, if available, for the two-year period next preceding the submission of the application.
(ii)A copy of the applicants unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(iii)If the applicant is publicly traded, a copy of the most recent report filed with the United States Securities and Exchange Commission under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 15 30 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquidity liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets, assets other than digital financial assets over which it has control for a resident entitled to the protections of Section 3503, or high-quality, highly liquid, investment grade assets, liquid assets as defined in subdivision (a) of Section 249.20 of Title 12 of the Code of Federal Regulations in proportions determined by the department.
(d)(1)A licensee may include in its calculation of capital and liquidity the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.(2)For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.(e)(d)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 15 30 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before March 15 of each year, a licensee may apply for renewal of the license by submitting to the department a renewal report under subdivision (b) and, on or before September 15 of each year, paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation.
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation involving of the licensee.
(D)(i)Any data security breach or cybersecurity event involving of the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee operates its digital financial asset business activity.
(10)Any other information the department requires by rule.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)The department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A material change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident. resident that meets one of the following criteria:
(A)The change may raise a legal or regulatory issue about the permissibility of the licensees digital financial business activity.
(B)The proposed change may raise safety and soundness or operational concerns.
(C)The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(1)(2)A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(2)(3)A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 25 10 percent of the total voting power of the licensee.
(3)(4)A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in controls control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactory satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but is engaging has engaged, is engaging, or proposes to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, engages has engaged, is engaging, or proposes to engage in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee engages has engaged, is engaging, or proposes to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter does not shall not be construed to provide a private right of action to a resident.
(b)The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under any other law, and shall not be construed to relieve any party from any duties or obligations imposed under any other law.
(b)(c)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
(d)Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e)A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value with the intent of establishing marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee shall file with the department a copy of a report it makes to a federal authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.(a)This division applies to digital financial asset business activity with, or on behalf of, a resident on and after January 1, 2025.(b)A person is deemed to be conducting unlicensed digital financial asset business activity with, or on behalf of, a resident in violation of this division if the person engages in digital financial asset business activity on or after January 1, 2025, and the person does not hold a license issued or recognized under this division, is not exempt from this division, and has not applied for a license.3802.3801.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)(1)Bank means a federally chartered or state-chartered depository institution or holder of a charter granted by the Office of the Comptroller of the Currency to a person engaged in the business of banking other than deposit-taking. bank, savings bank, savings and loan association, savings association, or industrial loan company chartered under the laws of this state or any other state or under the laws of the United States.
(2)Bank does not include either of the following:(A)An industrial loan company, state-chartered trust company, or a limited purpose trust company, unless incorporated as a bank or the department has authorized the company to engage in digital financial asset business activity.(B)A trust company or limited purpose trust company chartered by a state with which this state does not have a reciprocity agreement governing trust company activities.(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include either any of the following:
(A)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.
(B)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.
(C)A security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer means an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)Resident means any of the following:
(1)A person who is domiciled in this state.
(2)A person who is physically located in this state for more than 183 days of the previous 365 days.
(3)A person who has a place of business in this state.
(4)A legal representative of a person that is domiciled in this state.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b) or (c), (b), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)(1)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a et seq.) or the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) govern the activity.(2)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the application of this division conflicts with the Electronic Fund Transfer Act of 1978 (15 U.S.C. Sec. 1693 et seq.). (c)(b)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank, including a trust company that is incorporated as a bank. bank that is one of the following:
(A)A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(B)A foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state.
(C)An association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor.
(3)A trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business.
(3)(4)A credit union. federally chartered or state chartered credit union, with an office in California, the member accounts of which are insured or guaranteed as provided in Section 14858.
(4)(5)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(5)(6)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(6)(7)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(7)(8)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(8)(9)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(9)(10)An attorney to the extent of providing escrow services to a resident.
(10)(11)A title insurance company to the extent of providing escrow services to a resident.
(11)A securities intermediary, as defined in Section 8102 of the Commercial Code, or a commodity intermediary, as defined in Section 9102 of Commercial Code, that meets both of the following criteria: (A)The securities intermediary or commodity intermediary does not engage in the ordinary course of business in digital financial asset business activity with, or on behalf of, a resident, in addition to maintaining securities accounts or commodities accounts and is regulated as a securities intermediary or commodity intermediary under federal law, state law other than this division, or the law of another state.(B)The securities intermediary or commodity intermediary affords a resident protections comparable to those set forth in Section 3503.(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A digital financial asset control services vendor.
(14)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
(15)A board of trade designated as a contract market under the federal Commodity Exchange Act (7 U.S.C. Sec. 1, et seq.) or a person that, in the ordinary course of business, provides clearance and settlement services for a board of trade to the extent of its operation as or for such a board.
(16)A person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as a broker-dealer.
(17)A person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from registration granted under the federal securities laws to the extent of its operation as such a provider.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207.
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition, competence, and responsibility to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness.
(C)Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness.
(D)The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, national bank, savings bank, savings and loan association, federal savings association, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 15 days after the licensee receives notice in a record of the required increase.
(5)The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold liquidity required to be maintained in accordance with this section in the form of cash, digital financial assets, or high-quality, highly liquid, investment grade assets, in proportions determined by the department.
(d)(1)A licensee may include in its calculation of net worth capital and liquidity the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.
(2)For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.
(e)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 15 days after the licensee receives notice in a record of the required increase.
3209.(a)The department shall issue a license to an applicant if all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before March 15 of each year, a licensee may apply for renewal of the license by submitting to the department a renewal report under subdivision (b) and, on or before September 15 of each year, paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation.
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any international, federal, state, or local investigation involving the licensee.
(D)(i)Any data security breach or cybersecurity event involving the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of all locations where the licensee operates its digital financial asset business activity.
(10)Any other information the department requires by rule.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)The department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum net worth, capital and liquidity, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A material change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if the persons A person has control over a licensee if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(2)There is a rebuttable presumption of control if the persons A person has control over a licensee if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 25 percent of the total voting power of the licensee.
(3)There is no presumption of control solely because an individual A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)At least 30 days before Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)The department shall not approve an application unless the commissioner finds all of the following:
(1)The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)The proposed person to be in controls plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(d)(e)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(e)(f)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(f)(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(g)(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)At least 30 days before Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactory based on the factors listed in subdivision (b) of Section 3207.
(4)That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(c)(d)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(d)(e)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(e)(f)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(f)(g)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(g)(h)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)(i)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3203 3207 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, engages in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter does not provide a private right of action to a resident.
(b)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value with the intent of establishing a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws that are relevant applicable to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee is not required to shall file with the department a copy of a report it makes to a federal authority unless the department specifically requires filing. authority.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created and approved by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.(a)This division applies to digital financial asset business activity with, or on behalf of, a resident on and after January 1, 2025.
(b)A person is deemed to be conducting unlicensed digital financial asset business activity with, or on behalf of, a resident in violation of this division if the person engages in digital financial asset business activity on or after January 1, 2025, and the person does not hold a license issued or recognized under this division, is not exempt from this division, and has not applied for a license.
3802.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)(1)Bank means a federally chartered or state-chartered depository institution or holder of a charter granted by the Office of the Comptroller of the Currency to a person engaged in the business of banking other than deposit-taking.
(2)Bank does not include either of the following:
(A)An industrial loan company, state-chartered trust company, or a limited purpose trust company, unless incorporated as a bank or the department has authorized the company to engage in digital financial asset business activity.
(B)A trust company or limited purpose trust company chartered by a state with which this state does not have a reciprocity agreement governing trust company activities.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include either of the following:
(A)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.
(B)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.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer means an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a public corporation, government-sponsored enterprise, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)Resident means any of the following:
(1)A person who is domiciled in this state.
(2)A person who is physically located in this state for more than 183 days of the previous 365 days.
(3)A person who has a place of business in this state.
(4)A legal representative of a person that is domiciled in this state.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b) or (c), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)(1)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a et seq.) or the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) govern the activity.
(2)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the application of this division conflicts with the Electronic Fund Transfer Act of 1978 (15 U.S.C. Sec. 1693 et seq.).
(c)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank, including a trust company that is incorporated as a bank.
(3)A credit union.
(4)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(5)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(6)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(7)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(8)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(9)An attorney to the extent of providing escrow services to a resident.
(10)A title insurance company to the extent of providing escrow services to a resident.
(11)A securities intermediary, as defined in Section 8102 of the Commercial Code, or a commodity intermediary, as defined in Section 9102 of Commercial Code, that meets both of the following criteria:
(A)The securities intermediary or commodity intermediary does not engage in the ordinary course of business in digital financial asset business activity with, or on behalf of, a resident, in addition to maintaining securities accounts or commodities accounts and is regulated as a securities intermediary or commodity intermediary under federal law, state law other than this division, or the law of another state.
(B)The securities intermediary or commodity intermediary affords a resident protections comparable to those set forth in Section 3503.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A digital financial asset control services vendor.
(14)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service mailing address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service mailing address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any money service or money transmitter financial regulatory license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service mailing address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the net worth and reserves capital and liquidity required by Section 3207.
(K)The United States Postal Service mailing address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service mailing address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service mailing addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate all of the following: whether each of the following criterion is satisfied:
(A)The applicant has the sound financial condition condition, competence, and responsibility of the applicant. to engage in digital financial business activity.
(B)The applicant has relevant financial and business experience, good character, and general fitness of the applicant. fitness.
(C)The Each executive officer, responsible individual, and person that has control of the applicant has competence, experience, good character, and general fitness of each executive officer, each responsible individual, and any person that has control of the applicant. fitness.
(D)Compliance The applicant has complied with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(E)The applicant has a reasonable promise of success in engaging in digital financial business activity.
(F)It is reasonable to believe that the applicant, if licensed, will engage in digital financial business activity in compliance with all applicable provisions of this division and any regulation or order issued pursuant to this division.
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive written notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, or if the applicant does not request a hearing on the conditions specified by the department within 31 days after the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by subdivision (a) of Section 7929.000 of the Government Code.
(g)For purposes of this section, completed application means an application that contains the nonrefundable fee required by paragraph (3) of subdivision (a), the information specified in paragraph (2) of subdivision (a), and any additional information required by any regulations of the commissioner.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, national bank, savings bank, savings and loan association, federal savings association, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for the period the department specifies by rule and a period determined by the department for the protection of residents with whom a licensee engages in digital financial business activity, including for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)For good cause, the The department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 15 days after the licensee receives notice in a record of the required increase.
(5)For good cause, the The department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital and liquidity in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital and liquidity that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, quality, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold capital liquidity required to be maintained in accordance with this section in the form of cash, digital financial assets, or high-quality, highly liquid, investment grade assets, in proportions determined by the department.
(d)(1)A licensee may include in its calculation of net worth the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.
(2)For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.
(e)(1)For good cause, the department may require a licensee to increase the net worth or reserves required under this section.(2)A licensee shall submit to the department evidence that it has additional net worth or reserves required pursuant to this subdivision not later than 15 days after the licensee receives notice in a record of the required increase.(e)The department may require a licensee to increase the capital or liquidity required under this section. A licensee shall submit evidence satisfactory to the department that the licensee has additional capital or liquidity required pursuant to this subdivision not later than 15 days after the licensee receives notice in a record of the required increase.
3209.(a)Absent good cause, the The department shall issue a license to an applicant if the applicant complies with this chapter and pays the costs of the investigation under subdivision (e) of Section 3203 and the initial licensee fee under paragraph (3) of subdivision (a) of Section 3203 in an amount specified by the department. all of the following conditions are satisfied:
(1)The commissioner finds that all of the criteria described in paragraph (1) of subdivision (b) of Section 3203 are satisfied.
(2)The applicant has complied with this chapter.
(3)The applicant has paid the costs of the investigation under subdivision (e) of Section 3203.
(4)The applicant has paid the initial license fee under paragraph (3) of subdivision (a) of Section 3203.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application at an address specified under subparagraph (K) of paragraph (2) of subdivision (a) of Section 3203 has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before September March 15 of each year, a licensee may apply for renewal of the license by paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation, and submitting to the department a renewal report under subdivision (b). (b) and, on or before September 15 of each year, paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation.
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any federal or state international, federal, state, or local investigation involving the licensee.
(D)(i)Any data security breach or cybersecurity event involving the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of any location all locations where the licensee operates its digital financial asset business activity.
(10)Any other information the department requires by rule.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)For good cause, the The department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum net worth, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination of good cause by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with the appropriate regulatory agency of another state, a self-regulatory organization, a federal or state regulator of banking or nondepository providers, agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A material change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)Absent good cause, a A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(2)There is a rebuttable presumption of control if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 25 percent of the total voting power of the licensee.
(3)There is no presumption of control solely because an individual is an executive officer of the licensee.
(c)At least 30 days before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record all both of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(3)A license application under Section 3203 by the proposed person to be in control.(d)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(e)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(f)Submission in good faith of records required by subdivision (c) relieves the proposed person to be in control from any obligation imposed by this section other than subdivisions (d), (e), and (h) until the department has acted on the application.(g)(f)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)(g)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)At least 30 days before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(d)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(e)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(f)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
(i)Submission in good faith of the records required by subdivision (e) relieves the proposed surviving entity from any obligation imposed by this section, other than subdivisions (c), (f), and (g), until the department has acted on the application.4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3203 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, engages in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter does not provide a private right of action to a resident.
(b)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value with the intent of establishing a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws that are relevant to the digital financial asset business activity contemplated by the licensee with, or on behalf of, residents and to assist the licensee in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee is not required to file with the department a copy of a report it makes to a federal authority unless the department specifically requires filing.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created and approved by the department and the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)(1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee and approved by the department, licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.(a)This division applies to digital financial asset business activity with, or on behalf of, a resident on and after January 1, 2025.
(b)A person is deemed to be conducting unlicensed digital financial asset business activity with, or on behalf of, a resident in violation of this division if the person engages in digital financial asset business activity on or after January 1, 2025, and the person does not hold a license issued or recognized under this division, is not exempt from this division, and has not applied for a license.
3802.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)(1)Bank means a federally chartered or state-chartered depository institution or holder of a charter granted by the Office of the Comptroller of the Currency to a person engaged in the business of banking other than deposit-taking.
(2)Bank does not include either of the following:
(A)An industrial loan company, state-chartered trust company, or a limited purpose trust company, unless incorporated as a bank or the department has authorized the company to engage in digital financial asset business activity.
(B)A trust company or limited purpose trust company chartered by a state with which this state does not have a reciprocity agreement governing trust company activities.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include either of the following:
(A)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.
(B)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.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer means an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a public corporation, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)Resident means any of the following:
(1)A person who is domiciled in this state.
(2)A person who is physically located in this state for more than 183 days of the previous 365 days.
(3)A person who has a place of business in this state.
(4)A legal representative of a person that is domiciled in this state.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b) or (c), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)(1)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a et seq.) or the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) govern the activity.
(2)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the application of this division conflicts with the Electronic Fund Transfer Act of 1978 (15 U.S.C. Sec. 1693 et seq.).
(c)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank, including a trust company that is incorporated as a bank.
(3)A credit union.
(4)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(5)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(6)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(7)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(8)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(9)An attorney to the extent of providing escrow services to a resident.
(10)A title insurance company to the extent of providing escrow services to a resident.
(11)A securities intermediary, as defined in Section 8102 of the Commercial Code, or a commodity intermediary, as defined in Section 9102 of Commercial Code, that meets both of the following criteria:
(A)The securities intermediary or commodity intermediary does not engage in the ordinary course of business in digital financial asset business activity with, or on behalf of, a resident, in addition to maintaining securities accounts or commodities accounts and is regulated as a securities intermediary or commodity intermediary under federal law, state law other than this division, or the law of another state.
(B)The securities intermediary or commodity intermediary affords a resident protections comparable to those set forth in Section 3503.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A digital financial asset control services vendor.
(14)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any money service or money transmitter license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the net worth and reserves required by Section 3209. 3207.
(K)The United States Postal Service address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate all of the following:
(A)The financial condition and responsibility of the applicant.
(B)The relevant financial and business experience, character, and general fitness of the applicant.
(C)The competence, experience, character, and general fitness of each executive officer, each responsible individual, and any person that has control of the applicant.
(D)Compliance with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3209. 3207.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by paragraph (1) of subdivision (d) (a) of Section 6254 7929.000 of the Government Code.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations, Regulations or a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law, provided the license was issued or approved no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations. Regulations or disapproval or revocation of a charter as a New York State limited purpose trust company with approval to conduct a virtual currency business under New York law.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, national bank, savings bank, savings and loan association, federal savings association, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for the period the department specifies by rule and for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)For good cause, the department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 15 days after the licensee receives notice in a record of the required increase.
(5)For good cause, the department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the department under the Money Transmission Act (Division 1.2 (commencing with Section 2000)). commissioner.
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold capital required to be maintained in accordance with this section in the form of cash, digital financial assets, or high-quality, highly liquid, investment grade assets, in proportions determined by the department.
(d)(1)A licensee may include in its calculation of net worth the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.
(2)For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.
(e)(1)For good cause, the department may require a licensee to increase the net worth or reserves required under this section.
(2)A licensee shall submit to the department evidence that it has additional net worth or reserves required pursuant to this subdivision not later than 15 days after the licensee receives notice in a record of the required increase.
3209.(a)Absent good cause, the department shall issue a license to an applicant if the applicant complies with this chapter and pays the costs of the investigation under subdivision (e) of Section 3203 and the initial licensee fee under paragraph (3) of subdivision (a) of Section 3203 in an amount specified by the department.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before September 15 of each year, a licensee may apply for renewal of the license by paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation, and submitting to the department a renewal report under subdivision (b).
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any federal or state investigation involving the licensee.
(D)(i)Any data security breach involving the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of any location where the licensee operates its digital financial asset business activity.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)For good cause, the department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum net worth, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3217.(a)The commissioner may establish relationships or contracts with the Nationwide Multistate Licensing System and Registry or other entities designated by the Nationwide Multistate Licensing System and Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b)For the purpose of participating in the Nationwide Multistate Licensing System and Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and establish new requirements as reasonably necessary to participate in the Nationwide Multistate Licensing System and Registry.
(c)The commissioner may use the Nationwide Multistate Licensing System and Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d)The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing System and Registry by the commissioner.
3219.(a)Except as otherwise provided in Section 1512 of the SAFE Act (12 U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System and Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System and Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act of 1977.
(b)Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to either of the following:
(1)Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2)Subpoena or discovery, or admission into evidence, in any private civil action or administrative process, unless with respect to any privilege held by the Nationwide Multistate Licensing System and Registry with respect to the information or material, the person to whom the information or material pertains waives, in whole or in part, in the discretion of that person, that privilege.
(c)This section shall not apply with respect to the information or material relating to the employment history of, and publicly adjudicated disciplinary and enforcement actions included in, the Nationwide Multistate Licensing System and Registry for access by the public.
3221.The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System and Registry, but only to the extent that the information is publicly available.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination of good cause by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with the appropriate regulatory agency of another state, a self-regulatory organization, federal or state regulator of banking or nondepository providers, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A material change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)Absent good cause, a report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(2)There is a rebuttable presumption of control if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 25 percent of the total voting power of the licensee.
(3)There is no presumption of control solely because an individual is an executive officer of the licensee.
(c)At least 30 days before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record all of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(3)A license application under Section 3203 by the proposed person to be in control.
(d)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(e)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(f)Submission in good faith of records required by subdivision (c) relieves the proposed person to be in control from any obligation imposed by this section other than subdivisions (d), (e), and (h) until the department has acted on the application.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)At least 30 days before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(d)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(e)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(f)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
(i)Submission in good faith of the records required by subdivision (e) relieves the proposed surviving entity from any obligation imposed by this section, other than subdivisions (c), (f), and (g), until the department has acted on the application.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3203 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, engages in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter does not provide a private right of action to a resident.
(b)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the coin, digital financial asset, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to $20,000 twenty thousand dollars ($20,000) per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 24 10 hours per day, Monday through Sunday, Friday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value with the intent of establishing a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws that are relevant to the digital financial asset business activity contemplated by the licensee or registrant with, or on behalf of, residents and to assist the licensee or registrant in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee is not required to file with the department a copy of a report it makes to a federal authority unless the department specifically requires filing.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created and approved by the department and the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section. section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)Policies (1)Except as provided in paragraph (2), policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
(2)This subdivision does not apply to either of the following:
(A)An adopted information security program or an operational security program described in subdivision (a).
(B)Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee and approved by the department, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.(a)This division applies to digital financial asset business activity with, or on behalf of, a resident on and after January 1, 2025.
(b)A person is deemed to be conducting unlicensed digital financial asset business activity with, or on behalf of, a resident in violation of this division if the person engages in digital financial asset business activity on or after January 1, 2025, and the person does not hold a license issued or recognized under this division, is not exempt from this division, and has not applied for a license.
3802.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
This division shall be known as the Digital Financial Assets Law.
3102.For purposes of this division:
(a)Applicant means a person that applies for a license under this division.
(b)(1)Bank means a federally chartered or state-chartered depository institution or holder of a charter granted by the Office of the Comptroller of the Currency to a person engaged in the business of banking other than deposit-taking.
(2)Bank does not include either of the following:
(A)An industrial loan company, state-chartered trust company, or a limited purpose trust company, unless incorporated as a bank or the department has authorized the company to engage in digital financial asset business activity.
(B)A trust company or limited purpose trust company chartered by a state with which this state does not have a reciprocity agreement governing trust company activities.
(c)Control means both of the following:
(1)When used in reference to a transaction or relationship involving a digital financial asset, power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
(2)When used in reference to a person, the direct or indirect power to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding.
(d)Covered person means a person required to obtain a license pursuant to this division.
(e)Credit union means a credit union licensed under the laws of this state, or any other state, or a federal credit union chartered under the laws of the United States.
(f)Department means the Department of Financial Protection and Innovation.
(g)(1)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.
(2)Digital financial asset does not include either of the following:
(A)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.
(B)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.
(h)Digital financial asset administration means issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset.
(i)Digital financial asset business activity means any of the following:
(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.
(3)Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A)A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B)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 from which the original digital representation of value was received.
(j)Digital financial asset control services vendor means a person that has control of a digital financial asset solely under an agreement with a person that, on behalf of another person, assumes control of the digital financial asset.
(k)Exchange, when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
(1)A digital financial asset for legal tender, bank or credit union credit, or one or more forms of digital financial assets.
(2)Legal tender or bank or credit union credit for one or more forms of digital financial assets.
(l)Executive officer means an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual.
(m)Insolvent means any of the following:
(1)Having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute.
(2)Being unable to pay debts as they become due.
(3)Being insolvent within the meaning of federal bankruptcy law.
(n)Legal tender means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
(o)Licensee means a person licensed or conditionally licensed under this division.
(p)(1)Person means an individual, partnership, estate, business or nonprofit entity, or other legal entity.
(2)Person does not include a public corporation, government, or governmental subdivision, agency, or instrumentality.
(q)Record means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r)Resident means any of the following:
(1)A person who is domiciled in this state.
(2)A person who is physically located in this state for more than 183 days of the previous 365 days.
(3)A person who has a place of business in this state.
(4)A legal representative of a person that is domiciled in this state.
(s)Responsible individual means an individual who has direct control over, or significant management policy and decisionmaking authority with respect to, a licensees digital financial asset business activity in this state.
(t)Sign means, with present intent to authenticate or adopt a record, either of the following:
(1)To execute or adopt a tangible symbol.
(2)To attach to, or logically associate with, the record an electronic symbol, sound, or process.
(u)State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(v)Store, except in the phrase store of value, means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident. Storage and storing have corresponding meanings.
(w)Transfer means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
(1)Credit the digital financial asset to the account of another person.
(2)Move the digital financial asset from one account of a resident to another account of the same resident.
(3)Relinquish control of a digital financial asset to another person.
(x)United States dollar equivalent of digital financial assets means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified in this division.
3103.(a)Except as otherwise provided in subdivision (b) or (c), this division governs the digital financial asset business activity of a person doing business in this state or, wherever located, who engages in or holds itself out as engaging in the activity with, or on behalf of, a resident.
(b)(1)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a et seq.) or the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) govern the activity.
(2)This division does not apply to the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the application of this division conflicts with the Electronic Fund Transfer Act of 1978 (15 U.S.C. Sec. 1693 et seq.).
(c)This division does not apply to activity by any of the following:
(1)The United States, a state, political subdivision of a state, agency, or instrumentality of federal, state, or local government, or a foreign government or a subdivision, department, agency, or instrumentality of a foreign government.
(2)A bank, including a trust company that is incorporated as a bank.
(3)A credit union.
(4)A person whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.
(5)A person engaged in the business of dealing in foreign exchange to the extent the persons activity meets the definition in Section 1010.605(f)(1)(iv) of Title 31 of the Code of Federal Regulations.
(6)A person that is any of the following:
(A)A person that contributes only connectivity software or computing power to securing a network that records digital financial asset transactions or to a protocol governing transfer of the digital representation of value.
(B)A person that provides only data storage or security services for a business engaged in digital financial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person.
(C)A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.
(7)A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the persons own behalf for personal, family, or household purposes or for academic purposes.
(8)A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual basis at fifty thousand dollars ($50,000) or less, measured by the United States dollar equivalent of digital financial assets.
(9)An attorney to the extent of providing escrow services to a resident.
(10)A title insurance company to the extent of providing escrow services to a resident.
(11)A securities intermediary, as defined in Section 8102 of the Commercial Code, or a commodity intermediary, as defined in Section 9102 of Commercial Code, that meets both of the following criteria:
(A)The securities intermediary or commodity intermediary does not engage in the ordinary course of business in digital financial asset business activity with, or on behalf of, a resident, in addition to maintaining securities accounts or commodities accounts and is regulated as a securities intermediary or commodity intermediary under federal law, state law other than this division, or the law of another state.
(B)The securities intermediary or commodity intermediary affords a resident protections comparable to those set forth in Section 3503.
(12)A secured creditor under Division 9 (commencing with Section 9101) of the Commercial Code or a creditor with a judicial lien, or lien arising by operation of law, on collateral that is a digital financial asset, if the digital financial asset business activity of the creditor is limited to enforcement of the security interest in compliance with Division 9 (commencing with Section 9101) of the Commercial Code or lien in compliance with the law applicable to the lien.
(13)A digital financial asset control services vendor.
(14)A person that does not receive compensation, either directly or indirectly, for providing digital financial asset products or services or for conducting digital financial asset business activity or that is engaged in testing products or services with the persons own funds.
2.Licensure3201.On or after January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident unless any of the following is true:
(a)The person is licensed in this state by the department under Section 3203.
(b)The person submits an application on or before January 1, 2025, and is awaiting approval or denial of that application.
(c)The person is exempt from licensure under this division pursuant to Section 3103.
3203.(a)An application for a license under this division shall meet all of the following requirements:
(1)The application shall be in a form and medium prescribed by the department.
(2)Except as otherwise provided in subdivision (b), the application shall provide all of the following information relevant to the applicants proposed digital financial asset business activity:
(A)The legal name of the applicant, any current or proposed business United States Postal Service address of the applicant, and any fictitious or trade name the applicant uses or plans to use in conducting the applicants digital financial asset business activity with or on behalf of a resident.
(B)The legal name, any former or fictitious name, and the residential and business United States Postal Service address of any executive officer and responsible individual of the applicant and any person that has control of the applicant.
(C)A description of the current and former business of the applicant for the five years before the application is submitted, or, if the business has operated for less than five years, for the time the business has operated, including its products and services, associated internet website addresses and social media pages, principal place of business, projected user base, and specific marketing targets.
(D)A list of all of the following:
(i)Any money service or money transmitter license the applicant holds in another state.
(ii)The date the license described in clause (i) expires.
(iii)Any license revocation, license suspension, or other disciplinary action taken against the licensee in any state and any license applications rejected by any state.
(E)A list of any criminal conviction, deferred prosecution agreement, and pending criminal proceeding in any jurisdiction against all of the following:
(i)The applicant.
(ii)Any executive officer of the applicant.
(iii)Any responsible individual of the applicant.
(iv)Any person that has control over the applicant.
(v)Any person over which the applicant has control.
(F)A list of any litigation, arbitration, or administrative proceeding in any jurisdiction in which the applicant or an executive officer or a responsible individual of the applicant has been a party for the 10 years before the application is submitted determined to be material in accordance with generally accepted accounting principles and, to the extent the applicant would be required to disclose the litigation, arbitration, or administrative proceeding in the applicants audited financial statements, reports to equity owners and similar statements or reports.
(G)A list of any bankruptcy or receivership proceeding in any jurisdiction for the 10 years before the application is submitted in which any of the following was a debtor:
(i)The applicant.
(ii)An executive officer of the applicant.
(iii)A responsible individual of the applicant.
(iv)A person that has control over the applicant.
(v)A person over which the applicant has control.
(H)The name and United States Postal Service address of any bank in which the applicant plans to deposit funds obtained by its digital financial asset business activity.
(I)The source of funds and credit to be used by the applicant to conduct digital financial asset business activity with, or on behalf of, a resident.
(J)Documentation demonstrating that the applicant has the net worth and reserves required by Section 3209.
(K)The United States Postal Service address and email address to which communications from the department can be sent.
(L)The name, United States Postal Service address, and email address of the registered agent of the applicant in this state.
(M)A copy of the certificate, or a detailed summary acceptable to the department, of coverage for any liability, casualty, business interruption, or cybersecurity insurance policy maintained by the applicant for itself, an executive officer, a responsible individual, or the applicants users.
(N)If applicable, the date on which and the state in which the applicant is formed and a copy of a current certificate of good standing issued by that state.
(O)If a person has control of the applicant and the persons equity interests are publicly traded in the United States, a copy of the audited financial statement of the person for the most recent fiscal year or most recent report of the person filed under Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(P)If a person has control of the applicant and the persons equity interests are publicly traded outside the United States, a copy of the audited financial statement of the person for the most recent fiscal year of the person or a copy of the most recent documentation similar to that required in subparagraph (N) filed with the foreign regulator in the domicile of the person.
(Q)If the applicant is a partnership or a member-managed limited liability company, the names and United States Postal Service addresses of any general partner or member.
(R)If the applicant is required to register with the Financial Crimes Enforcement Network of the United States Department of the Treasury as a money service business, evidence of the registration.
(S)A set of fingerprints for each executive officer and responsible individual of the applicant.
(T)If available, for any executive officer and responsible individual of the applicant, for the 10 years before the application is submitted, employment history and history of any investigation of the individual or legal proceeding to which the individual was a party.
(U)The plans through which the applicant will meet its obligations under Chapter 7 (commencing with Section 3701).
(V)Any other information the department reasonably requires by rule.
(3)The application shall be accompanied by a nonrefundable fee in the amount determined by the department to cover the reasonable costs of regulation.
(b)(1)On receipt of a completed application, the department shall investigate all of the following:
(A)The financial condition and responsibility of the applicant.
(B)The relevant financial and business experience, character, and general fitness of the applicant.
(C)The competence, experience, character, and general fitness of each executive officer, each responsible individual, and any person that has control of the applicant.
(D)Compliance with Chapter 5 (commencing with Section 3501) and Chapter 6 (commencing with Section 3601).
(2)On receipt of a completed application, the department may investigate the business premises of an applicant.
(c)After completing the investigation required by subdivision (b), the department shall send the applicant notice of its decision to approve, conditionally approve, or deny the application. If the department does not receive notice from the applicant that the applicant accepts conditions specified by the department within 31 days following the departments notice of the conditions, the application shall be deemed withdrawn.
(d)A license issued pursuant to this division shall take effect on the later of the following:
(1)The date the department issues the license.
(2)The date the licensee provides the security required by Section 3209.
(e)In addition to the fee required by paragraph (3) of subdivision (a), an applicant shall pay the reasonable costs of the departments investigation under subdivision (b).
(f)Information provided pursuant to this section is covered by paragraph (1) of subdivision (d) of Section 6254 of the Government Code.
3205.(a)The commissioner may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations, provided the license was issued no later than January 1, 2023, and the applicant pays all appropriate fees and complies with the requirements of this division.
(b)A conditional license issued pursuant to this section shall expire at the earliest of the following:
(1)Upon issuance of an unconditional license.
(2)Upon denial of a license application.
(3)Upon revocation of a license issued pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
3207.(a)(1)(A)A licensee shall maintain a surety bond or trust account in United States dollars in a form and amount as determined by the department for the protection of residents that engage in digital financial asset business activity with the licensee.
(B)If a licensee maintains a trust account pursuant to this section, that trust account shall be maintained with a bank, trust company, national bank, savings bank, savings and loan association, federal savings association, credit union, or federal credit union in the state, subject to the prior approval of the department.
(2)Security deposited under this section shall be payable to this state for the benefit of a claim against the licensee on account of the licensees digital financial asset business activity with, or on behalf of, a resident.
(3)Security deposited under this section shall cover claims for the period the department specifies by rule and for an additional period the department specifies after the licensee ceases to engage in digital financial asset business activity with or on behalf of a resident.
(4)For good cause, the department may require the licensee to increase the amount of security deposited under this section, and the licensee shall deposit the additional security not later than 15 days after the licensee receives notice in a record of the required increase.
(5)For good cause, the department may permit a licensee to substitute or deposit an alternate form of security satisfactory to the department if the licensee at all times complies with this section.
(6)A claimant does not have a direct right to recover against security deposited under this section.
(7)Only the department may recover against the security, and the department may retain the recovery for no longer than five years and may process claims and distribute recoveries to claimants in accordance with rules adopted by the department under the Money Transmission Act (Division 1.2 (commencing with Section 2000)).
(b)In addition to the security required under subdivision (a), a licensee shall maintain at all times capital in an amount and form as the department determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to the licensee. In determining the minimum amount of capital that shall be maintained by a licensee, the department may consider factors, including, but not limited to, all of the following:
(1)The composition of the licensees total assets, including the position, size, liquidity, risk exposure, and price volatility of each type of asset.
(2)The composition of the licensees total liabilities, including the size and repayment timing of each type of liability.
(3)The actual and expected volume of the licensees digital financial asset business activity.
(4)The amount of leverage employed by the licensee.
(5)The liquidity position of the licensee.
(6)The financial protection that the licensee provides pursuant to subdivision (a).
(7)The types of entities to be serviced by the licensee.
(8)The types of products or services to be offered by the licensee.
(9)Arrangements adopted by the licensee for the protection of its customers in the event of the licensees insolvency.
(c)A licensee shall hold capital required to be maintained in accordance with this section in the form of cash, digital financial assets, or high-quality, highly liquid, investment grade assets, in proportions determined by the department.
(d)(1)A licensee may include in its calculation of net worth the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.
(2)For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.
(e)(1)For good cause, the department may require a licensee to increase the net worth or reserves required under this section.
(2)A licensee shall submit to the department evidence that it has additional net worth or reserves required pursuant to this subdivision not later than 15 days after the licensee receives notice in a record of the required increase.
3209.(a)Absent good cause, the department shall issue a license to an applicant if the applicant complies with this chapter and pays the costs of the investigation under subdivision (e) of Section 3203 and the initial licensee fee under paragraph (3) of subdivision (a) of Section 3203 in an amount specified by the department.
(b)An applicant may appeal a denial of its application under Section 3203 pursuant to the Administrative Procedure Act, as described in Section 11370 of the Government Code, not later than 30 days after the department notifies the applicant that the application has been denied or deemed denied.
3211.(a)Subject to subdivision (g), on or before September 15 of each year, a licensee may apply for renewal of the license by paying a renewal fee determined by the department, not to exceed the reasonable costs of regulation, and submitting to the department a renewal report under subdivision (b).
(b)A renewal report required by subdivision (a) shall be submitted in a form and medium prescribed by the department. The report shall contain all of the following:
(1)Either a copy of the licensees most recent reviewed annual financial statement, if the gross revenue generated by the licensees digital financial asset business activity in this state was not more than two million dollars ($2,000,000) for the fiscal year ending before the anniversary date of issuance of its license under this division, or a copy of the licensees most recent audited annual financial statement, if the licensees digital financial asset business activity in this state amounted to more than two million dollars ($2,000,000), for the fiscal year ending before the anniversary date.
(2)If a person other than an individual has control of the licensee, a copy of either of the following:
(A)The persons most recent reviewed annual financial statement, if the persons gross revenue was not more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(B)The persons most recent audited consolidated annual financial statement, if the persons gross revenue was more than two million dollars ($2,000,000) in the previous fiscal year measured as of the anniversary date of issuance of its license under this division.
(3)A description of any of the following:
(A)Any material change in the financial condition of the licensee.
(B)Any material litigation related to the licensees digital financial asset business activity and involving the licensee or an executive officer or responsible individual of the licensee.
(C)Any federal or state investigation involving the licensee.
(D)(i)Any data security breach involving the licensee.
(ii)A description of a data security breach pursuant to this subparagraph does not constitute disclosure or notification of a security breach for purposes of Section 1798.82 of the Civil Code.
(4)Information or records required by Section 3307 that the licensee has not reported to the department.
(5)The number of digital financial asset business activity transactions with, or on behalf of, residents for the period since, subject to subdivision (g), the later of the date the license was issued or the date the last renewal report was submitted.
(6)(A)The amount of United States dollar equivalent of digital financial asset in the control of the licensee at, subject to subdivision (g), the end of the last month that ends not later than 30 days before the date of the renewal report.
(B)The total number of residents for whom the licensee had control of United States dollar equivalent of digital financial assets on that date.
(7)Evidence that the licensee is in compliance with Section 3503.
(8)Evidence that the licensee is in compliance with Section 3205.
(9)A list of any location where the licensee operates its digital financial asset business activity.
(c)If a licensee does not timely comply with subdivision (a), the department may use enforcement measures provided under Chapter 4 (commencing with Section 3401). Notice or hearing is not required for a suspension or revocation of a license under this division for failure to pay a renewal fee or file a renewal report.
(d)If the department suspends or revokes a license under this division for noncompliance with subdivision (a), the department may end the suspension or rescind the revocation and notify the licensee of the action if, subject to subdivision (g), not later than 20 days after the license was suspended or revoked, the licensee files a renewal report and a renewal fee and pays any penalty assessed under Section 3407.
(e)The department shall give prompt notice to a licensee of the lifting of a suspension or rescission of a revocation after the licensee complies with subdivision (d).
(f)Suspension or revocation of a license under this section does not invalidate a transfer or exchange of digital financial assets for, or on behalf of, a resident made during the suspension or revocation and does not insulate the licensee from liability under this division.
(g)For good cause, the department may extend a period under this section.
(h)A licensee that does not comply with this section shall cease operations with, or on behalf of, a resident on or before the anniversary date of issuance of its license under this division.
(i)A licensee shall pay the reasonable and necessary costs of the departments investigation under this section.
3213.A license under this division is not transferable or assignable.
3215.(a)The department may adopt rules necessary to implement this division and may offer informal guidance to any prospective applicant for a license under this division regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum net worth, and other licensing requirements, that will be required of that applicant, based on the information provided by the applicant concerning the applicants plan to conduct business under this division, and the factors used to make that determination as described in Section 3203.
(b)(1)The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(2)The commissioner shall make public on the commissioners internet website all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at their discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
3.Examination3301.(a)(1)(A)The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensees accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
3303.(a)A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)Any transaction of the licensee with, or on behalf of, the resident or for the licensees account in this state, including all of the following:
(A)The identity of the resident.
(B)The form of the transaction.
(C)The amount, date, and payment instructions given by the resident.
(D)The account number, name, and United States Postal Service address of the resident, and, to the extent feasible, other parties to the transaction.
(2)The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensees account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)A general ledger posted at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)Any business call report the licensee is required to create or provide to the department.
(6)Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)A report of any dispute with the resident.
(b)A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination of good cause by the department, at a later time.
(d)All records maintained by a licensee are subject to inspection by the department.
3305.The department may cooperate, coordinate, jointly examine, consult, and share records and other information with the appropriate regulatory agency of another state, a self-regulatory organization, federal or state regulator of banking or nondepository providers, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
3307.(a)A licensee shall file with the department a report of the following, as may be applicable:
(1)A material change in information in the application for a license under this division or the most recent renewal report of the licensee under this division.
(2)A material change in the licensees business for the conduct of its digital financial asset business activity with, or on behalf of, a resident.
(3)A change of an executive officer, responsible individual, or person in control of the licensee.
(b)Absent good cause, a report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
3309.(a)For purposes of this section, proposed person to be in control means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)The following rules apply in determining whether a person has control over a licensee:
(1)There is a rebuttable presumption of control if the persons voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(2)There is a rebuttable presumption of control if the persons voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other persons voting power in the licensee constitutes at least 25 percent of the total voting power of the licensee.
(3)There is no presumption of control solely because an individual is an executive officer of the licensee.
(c)At least 30 days before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record all of the following:
(1)An application in a form and medium prescribed by the department.
(2)The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(3)A license application under Section 3203 by the proposed person to be in control.
(d)The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(e)If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicants acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(f)Submission in good faith of records required by subdivision (c) relieves the proposed person to be in control from any obligation imposed by this section other than subdivisions (d), (e), and (h) until the department has acted on the application.
(g)The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
3311.(a)At least 30 days before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)An application in a form and medium prescribed by the department.
(2)The plan of merger or consolidation in accordance with subdivision (e).
(3)In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(d)The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(e)A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)Describe the effect of the proposed transaction on the licensees conduct of digital financial asset business activity with, or on behalf of, residents.
(2)Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(f)If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(g)The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the departments condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)If a licensee acquires substantially all of the assets of a person, whether or not the persons license was approved by the department, the transaction is subject to this section.
(i)Submission in good faith of the records required by subdivision (e) relieves the proposed surviving entity from any obligation imposed by this section, other than subdivisions (c), (f), and (g), until the department has acted on the application.
4.Enforcement3401.For the purpose of this chapter, enforcement measure means an action that includes, but is not limited to, all of the following:
(a)Suspend or revoke a license under this division.
(b)Order a person to cease and desist from doing digital financial asset business activity with, or on behalf of, a resident.
(c)Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity with, or on behalf of, a resident.
(d)Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity with, or on behalf of, a resident.
(e)Assess a penalty under Section 3407.
(f)Recover on the security under Section 3203 and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of this division, or law of this state other than this division that applies to digital financial asset business activity with, or on behalf of, a resident.
(g)Impose necessary or appropriate conditions on the conduct of digital financial asset business activity with, or on behalf of, a resident.
(h)Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
3403.(a)The department may take an enforcement measure against a licensee or person that is not a licensee but is engaging in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1)The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2)The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3)The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, engages in any of the following:
(A)An unsafe or unsound act or practice.
(B)An unfair or deceptive act or practice.
(C)Fraud or intentional misrepresentation.
(D)Misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
(4)An agency of the United States or another state takes an action against the licensee or person, which would constitute an enforcement measure if the department had taken the action.
(5)The licensee or person is convicted of a crime related to its digital financial asset business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by the department, makes the licensee or person unsuitable to engage in digital financial asset business activity.
(6)Any of the following occurs:
(A)The licensee or person becomes insolvent.
(B)The licensee or person makes a general assignment for the benefit of its creditors.
(C)The licensee or person becomes the debtor, alleged debtor, respondent, or person in a similar capacity in a case or other proceeding under any bankruptcy, reorganization, arrangement, readjustment, insolvency, receivership, dissolution, liquidation, or similar law, and does not obtain from the court, within a reasonable time, confirmation of a plan or dismissal of the case or proceeding.
(D)The licensee or person applies for, or permits the appointment of, a receiver, trustee, or other agent of a court for itself or for a substantial part of its assets.
(7)The licensee or person makes a material misrepresentation to the department.
(b)On application and for good cause, the department may do either of the following:
(1)Extend the due date for filing a document or report under paragraph (2) of subdivision (a).
(2)Waive, to the extent warranted by circumstances, including a bona fide error notwithstanding reasonable procedures designed to prevent error, an enforcement measure issued for a violation described by paragraph (2) of subdivision (a) if the department determines that the waiver will not adversely affect the likelihood of compliance with this division.
(c)In an enforcement action related to operating without a license under this division, it is a defense to the action that the person has in effect a customer identification program reasonably designed to identify whether a customer is a resident that failed to identify the particular customer as a resident.
(d)A proceeding under this division is subject to the Administrative Procedure Act, as described in Section 11370 of the Government Code.
3405.(a)Except as provided in subdivision (b), the department may take an enforcement measure only after notice and opportunity for a hearing as appropriate in the circumstances.
(b)(1)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, without notice if the circumstances require action before notice can be given.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(2)(A)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a prior hearing if the circumstances require action before a hearing can be held.
(B)A person subject to an enforcement measure pursuant to this paragraph shall have the right to an expedited postaction hearing by the department unless the person has waived the hearing.
(3)The department may take an enforcement measure, other than the imposition of a civil penalty under Section 3407, after notice and without a hearing if the person conducting digital financial asset business activity with, or on behalf of, a resident does not timely request a hearing.
3407.(a)If a person other than a licensee engages in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
(b)If a licensee or covered person materially violates a provision of this division, the department may assess a civil penalty in an amount not to exceed twenty thousand dollars ($20,000) for each day of violation or for each act or omission in violation.
(c)A civil penalty under this section continues to accrue until the date the violation ceases.
3409.(a)Revocation of a license under this division is effective against a licensee one day after the department sends notice in a record of the revocation to the licensee by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department.
(b)Suspension of a license under this division or an order to cease and desist is effective against a licensee or other person one day after the department sends notice in a record of the suspension or order to the licensee or other person by a means reasonably selected for the notice to be received by the recipient in one day to the address provided for receiving communications from the department or, if no address is provided, to the recipients last known address. A suspension or order to cease and desist remains in effect until the earliest of the following:
(1)Entry of an order by the department under the Administrative Procedure Act, as described in Section 11370 of the Government Code.
(2)Entry of a court order setting aside or limiting the suspension or order to cease and desist.
(3)A date specified by the department.
(c)If, without reason to know of the departments notice sent under this section, a licensee or other person does not comply in accordance with the notice until the notice is actually received at the address provided, the department may consider the delay in compliance in imposing a sanction for the failure.
3411.The department may enter into a consent order with a person regarding an enforcement measure. The order may provide that it does not constitute an admission of fact by a party.
3413.(a)This chapter does not provide a private right of action to a resident.
(b)This section does not preclude an action by a resident to enforce rights under Section 3503.
5.Disclosures and Protections3501.(a)When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the departments approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.
(b)Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:
(1)A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.
(2)Whether the product or service provided by the covered person is covered by either of the following:
(A)A form of insurance or other guarantee against loss by an agency of the United States as follows:
(i)Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation or otherwise available from the Securities Investor Protection Corporation.
(ii)If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.
(B)(i)Private insurance against theft or loss, including cybertheft or theft by other means.
(ii)Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose all material terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks and any maximum coverage amounts that may result in partial coverage of the residents assets.
(3)The irrevocability of a transfer or exchange and any exception to irrevocability.
(4)A description of all of the following:
(A)The covered persons liability for an unauthorized, mistaken, or accidental transfer or exchange.
(B)The residents responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.
(C)The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.
(D)General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.
(E)The method for the resident to update the residents contact information with the covered person.
(5)That the date or time when the transfer or exchange is made and the residents account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.
(6)Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.
(7)The residents right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.
(8)The residents right to at least 14 days prior notice of a change in the covered persons fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the residents account.
(9)That no digital financial asset is currently recognized as legal tender by California or the United States.
(10)(A)A list of instances in the past 12 months when the covered persons service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.
(B)As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.
(c)Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:
(1)The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.
(2)The type, value, date, precise time, and amount of the transaction.
(3)The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.
(d)If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.
3503.(a)(1)A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
(2)If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
(b)A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:
(1)The digital financial asset shall be held for the persons entitled to the digital financial asset.
(2)The digital financial asset shall not be property of the covered person.
(3)The digital financial asset shall not be subject to the claims of creditors of the covered person.
(c)A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:
(1)That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.
(2)That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.
(3)That the residents account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.
3505.(a)(1)Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:
(A)Identified the likelihood that the digital financial asset would be deemed a security by federal or state regulators.
(B)Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.
(C)Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.
(D)Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.
(E)Established policies and procedures to cease listing or offering the coin, including notification to affected consumers and counterparties.
(2)Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.
(3)The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to $20,000 per day the violation has occurred.
(b)(1)A covered exchange shall make every effort to execute a residents request to exchange a digital financial asset that the covered exchange receives fully and promptly.
(2)A covered exchange shall use reasonable diligence to ascertain the best market for a digital financial asset and exchange it in that market so that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:
(A)The character of the market for the digital financial asset, including price and volatility.
(B)The size and type of transaction.
(C)The number of markets checked.
(D)Accessibility of appropriate pricing.
(3)In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.
(4)If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.
(c)For purposes of this section:
(1)Conflict of interest means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.
(2)Covered exchange means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
(d)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
3507.A licensee shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 24 hours per day, Monday through Sunday, excluding federal holidays.
6.Stablecoins3601.(a)A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
(1)The issuer of the stablecoin is an applicant, licensed pursuant to this division, or is a bank.
(2)The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b)For purposes of this section:
(1)Eligible securities means the United States currency eligible securities described in subdivision (b) of Section 2082.
(2)Nominal redemption value means the value at which a digital financial asset can be readily converted, on demand at the time of issuance, into United States dollars or any other national or state currency or a monetary equivalent or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any national or state currency.
(3)Stablecoin means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value with the intent of establishing a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption effectively fixed.
7.Policies and Procedures3701.(a)An applicant, before submitting an application, shall create and, during licensure, maintain in a record policies and procedures for all of the following:
(1)An information security program and an operational security program.
(2)A business continuity program.
(3)A disaster recovery program.
(4)An antifraud program.
(5)A program to prevent money laundering.
(6)A program to prevent funding of terrorist activity.
(7)(A)A program designed to ensure compliance with this division and other laws of this state or federal laws that are relevant to the digital financial asset business activity contemplated by the licensee or registrant with, or on behalf of, residents and to assist the licensee or registrant in achieving the purposes of other state laws and federal laws if violation of those laws has a remedy under this division.
(B)The program described by this paragraph shall specify detailed policies and procedures that the licensee undertakes to minimize the probability that the licensee facilitates the exchange of unregistered securities.
(b)A policy required by subdivision (a) shall be in a record and designed to be adequate for a licensees contemplated digital financial asset business activity with, or on behalf of, residents, considering the circumstances of all participants and the safe operation of the activity. Any policy and implementing procedure shall be compatible with other policies and the procedures implementing them and not conflict with policies or procedures applicable to the licensee under other state law. A policy and implementing procedure may be one in existence in the licensees digital financial asset business activity with, or on behalf of, residents.
(c)A licensees policy for detecting fraud shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to fraud, which shall include any form of market manipulation and insider trading by the licensee, its employees, or its customers.
(2)Protection against any material risk related to fraud identified by the department or the licensee.
(3)Periodic evaluation and revision of the antifraud procedure.
(d)A licensees policy for preventing money laundering and financing of terrorist activity shall include all of the following:
(1)Identification and assessment of the material risks of its digital financial asset business activity related to money laundering and financing of terrorist activity.
(2)Procedures, in accordance with federal law or guidance published by federal agencies responsible for enforcing federal law, pertaining to money laundering and financing of terrorist activity.
(3)Filing reports under the Bank Secrecy Act (31 U.S.C. Sec. 5311 et seq.) or Chapter X of Title 31 of the Code of Federal Regulations and other federal or state law pertaining to the prevention or detection of money laundering or financing of terrorist activity.
(e)A licensees information security and operational security policy shall include reasonable and appropriate administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of any nonpublic personal information or digital financial asset it receives, maintains, or transmits.
(f)A licensee is not required to file with the department a copy of a report it makes to a federal authority unless the department specifically requires filing.
(g)A licensees protection policy under subdivision (e) for residents shall include all of the following:
(1)Any action or system of records required to comply with this division and other state law applicable to the licensee with respect to digital financial asset business activity with, or on behalf of, a resident.
(2)A procedure for resolving disputes between the licensee and a resident.
(3)A procedure for a resident to report an unauthorized, mistaken, or accidental digital financial asset business activity transaction.
(4)A procedure for a resident to file a complaint with the licensee and for the resolution of the complaint in a fair and timely manner with notice to the resident as soon as reasonably practical of the resolution and the reasons for the resolution.
(h)After the policies and procedures required under this section are created and approved by the department and the licensee, the licensee shall engage a responsible individual with adequate authority and experience to monitor each policy and procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(i)A licensee may request advice from the department as to compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(j)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
(k)Policies and procedures adopted under this section shall be disclosed separately from other disclosures made available to a resident, in a clear and conspicuous manner and in the medium through which the resident contacted the licensee.
3702.(a)An applicant, before submitting its application, shall establish and maintain in a record a policy or procedure designed to ensure compliance with this division, and law of this state other than this division, if the other law is relevant to the digital financial asset business activity contemplated by the licensee or the scope of this division or this division could assist in the purpose of the other law because violation of the other law has a remedy under this division.
(b)A policy or procedure under subdivision (a) shall be compatible, and not conflict, with requirements applicable to a licensee under other state law or under federal law and may be a policy or procedure in existence for the licensees digital financial asset business activity with, or on behalf of, a resident.
(c)After the policies and procedures required under this section are created by the licensee and approved by the department, the licensee shall engage a responsible individual with adequate authority and experience to monitor any policy or procedure, publicize it as appropriate, recommend changes as desirable, and enforce it.
(d)A licensee may request advice from the department regarding compliance with this section and, with the departments approval, outsource functions, other than compliance, required under this section.
(e)Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.
8.Miscellaneous Provisions3801.(a)This division applies to digital financial asset business activity with, or on behalf of, a resident on and after January 1, 2025.
(b)A person is deemed to be conducting unlicensed digital financial asset business activity with, or on behalf of, a resident in violation of this division if the person engages in digital financial asset business activity on or after January 1, 2025, and the person does not hold a license issued or recognized under this division, is not exempt from this division, and has not applied for a license.
3802.The provisions of this division are severable. If any provision of this division or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
SECTION 1.Division 1.25 (commencing with Section 3101) is added to the Financial Code, to read:1.25.Digital Financial Assets1.General Provisions3101.The Legislature finds and declares all of the following:(a)Over the past decade, blockchain technology has laid the foundation for a new generation of financial innovation, spurring a rise in new digital financial assets.(b)The explosion of new digital financial assets on the market has also led to fraud, abuse, and other predatory practices that have caused significant harm to California consumers and investors.(c)Robust state oversight instills confidence and helps protect consumers and investors, thereby fostering a healthy and sustainable digital financial asset market.The Legislature finds and declares all of the following:
(a)Over the past decade, blockchain technology has laid the foundation for a new generation of financial innovation, spurring a rise in new digital financial assets.
(b)The explosion of new digital financial assets on the market has also led to fraud, abuse, and other predatory practices that have caused significant harm to California consumers and investors.
(c)Robust state oversight instills confidence and helps protect consumers and investors, thereby fostering a healthy and sustainable digital financial asset market.
|
Date
|
Status
|
|---|---|
| Oct 13, 2023 | Chaptered by Secretary of State - Chapter 792, Statutes of 2023. |
| Oct 13, 2023 | Approved by the Governor. |
| Sep 21, 2023 | Enrolled and presented to the Governor at 3:30 p.m. |
| Sep 14, 2023 | Senate amendments concurred in. To Engrossing and Enrolling. (Ayes 75. Noes 0. Page 3528.). |
| Sep 12, 2023 | In Assembly. Concurrence in Senate amendments pending. |
| Sep 12, 2023 | Read third time. Passed. Ordered to the Assembly. (Ayes 33. Noes 2. Page 2650.). |
| Sep 11, 2023 | Read second time. Ordered to third reading. |
| Sep 8, 2023 | Read third time and amended. Ordered to second reading. |
| Sep 5, 2023 | Read second time. Ordered to third reading. |
| Sep 1, 2023 | Read second time and amended. Ordered returned to second reading. |
| Sep 1, 2023 | From committee: Amend, and do pass as amended. (Ayes 5. Noes 2.) (September 1). |
| Aug 21, 2023 | In committee: Referred to APPR suspense file. |
| Jul 13, 2023 | Read second time and amended. Re-referred to Com. on APPR. |
| Jul 12, 2023 | From committee: Amend, and do pass as amended and re-refer to Com. on APPR. (Ayes 10. Noes 0.) (July 11). |
| Jul 6, 2023 | From committee: Do pass and re-refer to Com. on JUD. (Ayes 6. Noes 0.) (July 5). Re-referred to Com. on JUD. |
| Jul 6, 2023 | From committee chair, with author's amendments: Amend, and re-refer to committee. Read second time, amended, and re-referred to Com. on JUD. |
| Jun 15, 2023 | In committee: Set, first hearing. Hearing canceled at the request of author. |
| Jun 12, 2023 | From committee chair, with author's amendments: Amend, and re-refer to committee. Read second time, amended, and re-referred to Com. on B. & F.I. |
| Jun 7, 2023 | Referred to Coms. on B. & F.I. and JUD. |
| May 26, 2023 | In Senate. Read first time. To Com. on RLS. for assignment. |
| May 25, 2023 | Read third time. Passed. Ordered to the Senate. (Ayes 70. Noes 1. Page 1789.) |
| May 22, 2023 | Read second time. Ordered to third reading. |
| May 18, 2023 | Read second time and amended. Ordered returned to second reading. |
| May 18, 2023 | From committee: Amend, and do pass as amended. (Ayes 11. Noes 0.) (May 18). |
| May 10, 2023 | In committee: Set, first hearing. Referred to APPR. suspense file. |
| Apr 27, 2023 | Re-referred to Com. on APPR. |
| Apr 26, 2023 | Read second time and amended. |
| Apr 25, 2023 | From committee: Amend, and do pass as amended and re-refer to Com. on APPR. (Ayes 11. Noes 0.) (April 24). |
| Jan 31, 2023 | Re-referred to Com. on B. & F. |
| Jan 30, 2023 | From committee chair, with author's amendments: Amend, and re-refer to Com. on B. & F. Read second time and amended. |
| Jan 26, 2023 | Referred to Com. on B. & F. |
| Dec 6, 2022 | From printer. May be heard in committee January 5. |
| Dec 5, 2022 | Read first time. To print. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Sep 14, 2023 | AB 39 Grayson Concurrence in Senate Amendments | Assembly Floor |
Passed |
|
| Sep 12, 2023 | Assembly 3rd Reading AB39 Grayson et al. By Limón | Senate Floor |
Passed |
|
| Sep 1, 2023 | Do pass as amended | Senate Standing Committee on Appropriations |
Passed |
|
| Aug 21, 2023 | Placed on suspense file | Senate Standing Committee on Appropriations |
Passed |
|
| Jul 11, 2023 | Do pass as amended, but first amend, and re-refer to the Committee on [Appropriations] | Senate Standing Committee on Judiciary |
Passed |
|
| Jul 5, 2023 | Do pass, but first be re-referred to the Committee on [Judiciary] | Senate Standing Committee on Banking and Financial Institutions |
Passed |
|
| May 25, 2023 | AB 39 Grayson Assembly Third Reading | Assembly Floor |
Passed |
|
| May 18, 2023 | Do pass as amended. | Assembly Standing Committee on Appropriations |
Passed |
|
| Apr 24, 2023 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Banking and Finance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| ASTM International | * Against Unless Amend | Jul 11, 2023 |
| Blockchain Advocacy Coalition | * For If Amend | Jul 11, 2023 |
| California Bankers Association | ** Support | |
| California Credit Union League | ** Support | |
| California Democratic Party | ** Support | |
| California Low-Income Consumer Coalition | ** Support | |
| Cameo - California Association for Micro Enterprise Opportunity | ** Support | |
| Chamber Of Progress | ** Support | |
| Coinbase | ** Against | |
| Consumer Federation Of California | ** Support | |
| Consumer Protection Policy Center | * Support | Jul 11, 2023 |
| Consumer Reports | ** Support | |
| Consumers For Auto Reliability & Safety | ** Support | |
| Crypto Council For Innovation | ** Against | |
| Dapper Labs | * For If Amend | Jul 11, 2023 |
| Defendingconstitutionalrights.com | ** Against | |
| Digital Currency Traders Alliance | ** Support | |
| East Bay Community Law Center | * Support | Apr 24, 2023 |
| Los Angeles County Democratic Party | ** Support | |
| Oakland Privacy | ** Support | |
| Sorare | ** Support | |
| Sorare | * For If Amend | Apr 24, 2023 |
CONCURRENCE IN SENATE AMENDMENTS
CSA1 Bill Id:AB 39
Author:(Grayson)
As Amended Ver:September 8, 2023
Majority vote
SUMMARY
Establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI) for digital financial asset business activity, as specified.
Senate Amendments
- Delay the operative date of the licensure requirement and other specified requirements to July 1, 2025.
- Authorize the commissioner to approve stablecoins that do not comply with specified rules.
- Authorize the commissioner to exempt, by regulation or order, any person or transaction if the commissioner finds such action to be in the public interest and that the regulation of such persons is not necessary.
- Clarify an exemption for entities or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act.
- Replace the license renewal reapplication process with an annual report and fee based on a licensee's or conditional licensee's pro rata cost share, as specified.
- Clarify the fingerprinting submission process.
- Specify in "best execution" requirements that a covered exchange must, at least once every six months, review aggregated trading records or residents against benchmarks to determine execution quality, investigate the causes of any variance, and promptly take action to remedy any issued identified.
- Add contingent enactment language providing that this bill will become operative only if SB 401 (Limón) of the current legislative session is also enacted.
- Make other clarifying and technical changes.
COMMENTS
A digital financial asset (also known as cryptocurrency, crypto asset, or virtual currency) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Bitcoin, the most well-known virtual currency, and many other virtual currencies are created and tracked via a decentralized protocol, rather than the centralized issuance model that prevails in the world of fiat money.
Cryptocurrency and decentralized finance proponents believe that these products and systems are viable alternatives to those found in the traditional financial system. They argue that cryptocurrency is beneficial because it is decentralized, allows peer-to-peer transactions, makes transactions easy and fast, diversifies portfolios, acts as an inflation hedge, encourages cross-border payments, and provides transactional freedom.
Despite its name, there is doubt that cryptocurrency could work well as money. First, as a matter of definition, cryptocurrency is not issued by a central government, and there is no obligation for the government to accept it. And, unlike most fiat currencies, cryptocurrency also appears to be highly vulnerable to confidence shocks, fraud, and price instability, and consumers must navigate a host of technological and practical obstacles when using it.
Moreover, many holders of cryptocurrencies use these digital assets to engage in speculative investment activities or other types of financial services activities rather than facilitating payments and conducting everyday transactions. Most cryptocurrency trading happening today treats it as an asset class – a group of investments with particular characteristics – owned for purposes other than payments for goods and services.
In recent years, market turmoil has exposed a host of consumer and investor risks in the crypto market. Those risks include fraud, hacks, scam products, extreme volatility, insider trading, and information asymmetry, and a lack of clear federal and state legal protections. These risks expose everyday investors and consumers to financial losses outside of their control. More recently, the well-known company FTX collapsed and the head of the company, Sam Bankman-Fried, was arrested.
This bill establishes a licensing framework for a business engaging in digital financial asset business activity, which is the most common regulatory approach to financial services at the state level. DFPI administers licensing laws for a range of companies, including banks, credit unions, money transmitters, lenders and brokers, mortgage loan originators, student loan servicers, and debt collectors. Like those licensing programs, this bill establishes an upfront process, requires companies to maintain adequate financial security to provide assurance that the business can meet its obligations to its customers, and authorizes DFPI to routinely examine businesses for compliance and to take enforcement actions, if needed.
According to the Author
"AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road."
Arguments in Support
AB 39 is sponsored by the Consumer Federation of California and is supported by a coalition of consumer advocacy organizations, organizations representing banks and credit unions, and organizations representing retail crypto traders. The Consumer Federation of California argues:
"AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational "rules of the road" are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX's bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers."
Arguments in Opposition
Crypto Council for Innovation (CCI), an association whose members include Andreessen Horowitz, Block, Coinbase, Electric Capital, Fidelity Digital Assets, Gemini, OpenSea, Paradigm, and Ribbit Capital, writes in an "oppose unless amended" position:
"CCI is grateful for the progress the Committee has made in addressing industry concerns following Governor Newsom's veto of AB 2269, including the expedited licensing pathway for businesses operating in compliance with New York's virtual currency business activity regulations and the exemption for smaller digital asset businesses…
CCI continues with requests for various amendments, some of which have been incorporated by the author in the current version of the bill and some of which are reflected in proposed amendments in the subsequent comment. Outstanding items of concern for CCI include, but are not limited to, the requirement that stablecoins are fully backed by high-quality assets, a desire for an entities-based exemption for entities registered with the Commodities Futures Trading Commission, an increase in the exemption threshold for small companies to $2 million of business activity, and a desire for more concrete application and review timelines."
FISCAL COMMENTS
According to the Senate Appropriations Committee, DFPI reports costs of approximately $14.0 million in year one, $17.0 million in year two, and $21.2 million in year three and ongoing for a multi-year build-up of the program and for continued administration and enforcement workload (Financial Protection Fund). Costs to establish the program would include equipment, software, other IT operating expenses, and workload related to promulgating regulations and training for DFPI staff. Ongoing costs would include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities.
Generally, when DFPI establishes a new regulatory program it will cover those start-up costs through the Financial Protection Fund. Once the program is fully operational, the DFPI will recoup those costs through that program's licensing fees, fines, penalties, settlements, or judgements. DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program's operations.
VOTES:
ASM BANKING AND FINANCE: 11-0-1
YES: Grayson, Bauer-Kahan, Cervantes, Dixon, Mike Fong, Gabriel, Petrie-Norris, Soria, Waldron, Wicks, Wilson
ABS, ABST OR NV: Chen
ASM APPROPRIATIONS: 11-0-5
YES: Holden, Bryan, Calderon, Wendy Carrillo, Mike Fong, Hart, Lowenthal, Papan, Pellerin, Weber, Ortega
ABS, ABST OR NV: Megan Dahle, Dixon, Mathis, Robert Rivas, Sanchez
ASSEMBLY FLOOR: 70-1-9
YES: Addis, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Mike Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon
NO: Dixon
ABS, ABST OR NV: Aguiar-Curry, Megan Dahle, Essayli, Flora, Vince Fong, Hoover, Mathis, Papan, Joe Patterson
UPDATED
VERSION: September 8, 2023
CONSULTANT: Luke Reidenbach / B. & F. / (916) 319-3081 FN: 0002419
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | AB 39 |
THIRD READING
Bill No: AB 39
Author: Grayson (D), et al.
Amended: 9/8/23 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 6-0, 7/5/23
AYES: Limón, Bradford, Caballero, Min, Nguyen, Portantino
NO VOTE RECORDED: Niello
SENATE JUDICIARY COMMITTEE: 10-0, 7/11/23
AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Stern, Wiener
NO VOTE RECORDED: Niello
SENATE APPROPRIATIONS COMMITTEE: 5-2, 9/1/23
AYES: Portantino, Ashby, Bradford, Wahab, Wiener
NOES: Jones, Seyarto
ASSEMBLY FLOOR: 70-1, 5/25/23 - See last page for vote
SUBJECT: Digital financial asset businesses: regulatory oversight
SOURCE: Author
DIGEST:
This bill establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset business activity. The bill intends to provide regulatory clarity to businesses and legal protections for consumers and retail investors in this emerging industry.
Senate Floor Amendments of 9/8/23 clarify the bill’s applicability to merchants, delay the operative date of the licensure requirement and other specified requirements, authorize the commissioner to approve stablecoins that do not comply with specified rules, and add contingent enactment language providing that this bill will become operative only if SB 401 (Limón) of this legislative session is also enacted.
ANALYSIS:
Existing law:
- Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
- Provides the Corporate Securities Law of 1968, administered by DFPI, which governs the issuance and sale of securities in California. (Corporations Code Sections 25000 et seq.)
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such sale has been qualified by DFPI, as specified, or the sale is covered by an express exemption from qualification. (Corporations Code Section 25110)
- Provides the Money Transmission Act, administered by DFPI, which requires licensure of persons engaged in the business of money transmission, unless the person is exempt. (Financial Code Section 2000 et seq.)
- Defines money transmission as selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission. (Financial Code Section 2003(q))
This bill:
- Establishes the Digital Financial Assets Law to be administered by DFPI.
- Defines the following terms, among others:
- “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. Specifies that “digital financial asset” does not include:
- Value issued by a merchant as part of an affinity or awards program that cannot be exchanged for legal tender, bank credit, or a digital financial asset.
- A digital representation of value issued by a publisher and used solely within an online game, as specified.
- A security registered with the Securities and Exchange Commission, qualified with DFPI, or exempt from such registration or qualification.
- “Legal tender” means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
- “Digital financial asset business activity” means exchanging, transferring, or storing a digital financial asset; issuing a digital financial asset with the authority to redeem the currency for legal tender, bank credit, or another digital financial asset; or other specified activities related to electronic precious metals and digital representations of value used in online games.
- When used in reference to a transaction or relationship involving a digital financial asset, “control” means the power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
- “Exchange” when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
- A digital financial asset for legal tender, bank credit, or one or more forms of digital financial assets.
- Legal tender or bank credit for one or more forms of digital financial assets.
- “Store” except in the phrase “store of value,” means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident.
- “Transfer” means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
- Credit the digital financial asset to the account of another person.
- Move the digital financial asset from one account of a resident to another account of the same resident.
- Relinquish control of a digital financial asset to another person.
- “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. Specifies that “digital financial asset” does not include:
- Exempts from the new division banks, as specified; persons providing only specified computing, network, or data storage or security services; persons using a digital financial asset solely on the person’s own behalf; and persons registered as a securities broker-dealer to the extent of its operation as such, among other specified exemptions.
- Authorizes DFPI to exempt, in whole or in part, transactions or persons from the Digital Financial Assets law, as specified.
- Prohibits, on or after July 1, 2025, a person from engaging in digital financial asset business activity without a license from DFPI, as specified.
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application.
- Authorizes DFPI to issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in New York, as specified.
- Requires a licensee to maintain a surety bond or trust account in a form and amount as determined by DFPI for the protection of residents with whom a licensee engages in digital financial asset business activity, as specified.
- Requires a licensee to maintain capital and liquidity in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of specific risks applicable to the licensee, as specified.
- Requires a licensee to report annually to DFPI and to pay the licensee’s pro rata share of costs incurred by DFPI to administer the licensing program.
- Authorizes DFPI to adopt rules necessary to implement the division and issue guidance as appropriate.
- Authorizes DFPI to conduct an examination of a licensee for compliance with the division and requires a licensee to maintain business records, as specified.
- Requires a licensee to file with DFPI a report related to a material change in information provided in the application for licensure, a material change in the licensee’s digital financial asset business activity, or a change of an executive officer, responsible individual, or person in control of the licensee.
- Provides specified applicable rules in determining whether a person has control over a licensee; requires that, before a proposed change in control of a licensee, the proposed person to be in control submit an application with information required by this division for an application for licensure, as applicable; and prohibits DFPI from approving the application unless the department determines specified suitability conditions have been met.
- Provides a process similar to an application related to a proposed change in control for an application of a proposed merger or consolidation of a licensee with another person.
- Defines “enforcement measure” as an action to do any of the following:
- Suspend or revoke a license.
- Order a person to cease and desist from doing digital financial asset business activity.
- Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity.
- Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity.
- Assess a penalty of up to $100,000 for each day that a person engages in digital financial asset business activity without a license.
- If a person required to obtain a license materially violates a provision of the division, assess a penalty of up to $20,000 for each day of violation or for each act or omission in violation.
- Recover on the security described in #7 of this section and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of the law.
- Impose necessary or appropriate conditions on the conduct of digital financial asset business activity.
- Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
- Authorizes DFPI to take an enforcement measure against a person in any of the following instances:
- The person materially violates a state law applicable to digital financial asset business activity.
- The person does not cooperate with an examination or investigation, fails to pay a fee, or fails to submit a report or documentation.
- The person, in the conduct of its digital financial asset business activity, has engaged, is engaging, or is about to engage in an unsafe or unsound act or practice; an unfair or deceptive act or practice; fraud, intentional misrepresentation, or other dishonest act; or misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
- A federal agency or another state takes an action against the person, which would constitute an enforcement measure if the department had taken the action.
- The person is convicted of a crime related to its digital financial asset business activity or involving fraud or felonious activity, as specified.
- The person becomes insolvent or takes specified actions indicating financial weaknesses.
- The person makes a material misrepresentation to the department.
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when a revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes DFPI to enter into a consent order with a person regarding an enforcement measure and permits the order to provide that it does not constitute an admission of fact.
- States that the chapter of the bill related to enforcement shall not be construed to provide a private right of action, but does not preclude an action by a person to enforce rights related to property interests described in #24 of this section.
- Defines “covered person” as a person required to obtain a license related to digital financial asset business activity. This term is intended to be more expansive than the term “licensee” which applies only to those persons who already have a license.
- Requires a covered person to provide disclosures, as specified, to its customers. Information required to be disclosed includes, but is not limited to, the following, as specified:
- A schedule of fees and charges.
- Whether the product or service provided is covered by insurance or other guarantee from loss.
- A description of specified terms related to their customers’ rights and responsibilities and processes associated with transfers or exchanges.
- That no digital financial asset is currently recognized as legal tender by California or the United States.
- A list of instances over the past 12 months when the person’s service was unavailable to 10,000 or more customers due to a service outage, as specified.
- Requires a covered person to provide a transaction confirmation record, as specified.
- Requires a covered person that has control of a digital financial asset for one or more persons to maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
- Provides that, in the event of a violation of this requirement, the property interest of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
- Requires that digital financial assets maintained for compliance with the provision to meet all of the following criteria: be held for the persons entitled to the digital financial asset, shall not be property of the covered person, and shall not be subject to the claims of creditors of the covered person.
- Provides that a covered person shall at all times own eligible securities, as specified, having an aggregate market value of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
- Defines a “covered exchange” as a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
- Requires a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, to certify that the covered exchanged has conducted specified due diligence related to the digital financial asset, including the likelihood the asset would be deemed a security by federal or state regulators, provided a full disclosure relating to conflicts of interests, and conducted a comprehensive risk assessment of the asset, among other things. Exempts a covered exchange from these obligations for any digital financial assets that were approved by New York regulators on or before January 1, 2023.
- Requires a covered exchange to make every effort to execute a resident’s request to exchange a digital financial asset fully and promptly and to use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions, as specified.
- Requires a licensee to prominently display on its internet website a toll-free telephone number through which a customer can contact the seller for customer service issues and receive live customer assistance, 10 hours per day, Monday through Friday, excluding federal holidays.
- On or after July 1, 2025, prohibits a covered person from exchanging, transferring, or storing a stablecoin or engaging in digital financial asset administration unless the issuer of the stablecoin is a licensee, a person that applies for a license, a bank, or a California or federal trust, and the issuer of the stablecoin at all times owns eligible securities that fully back the stablecoin, as specified. Provides a process whereby a stablecoin that does not meet specified requirements may be issued and made available for exchange, transfer, or storing, subject to approval by the commissioner.
- Requires a prospective licensee, prior to seeking approval from DFPI, to create and, during licensure, maintain policies and procedures related to information security, operational security, business continuity, disaster recovery, antifraud, money laundering prevention, terrorist financing prevention, and compliance with applicable laws, as specified.
COMMENTS
- Purpose. According to the author:
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
- Overview
This bill uses the term “digital financial assets” to describe a range of money-like, digital representations of value that are not considered legal tender and are not issued by a central bank of a sovereign nation. Similar terms used to describe this concept are cryptocurrencies, digital currencies, virtual currencies, crypto assets, and digital assets, among others. Prominent examples of digital financial assets include bitcoin, ether, dogecoin, tether, and USD Coin. Under existing state law, business activity related to digital financial assets does not fall under any licensure requirements nor does state law provide rules, restrictions, or prohibitions specific to this emerging industry.[1]
This bill is similar to AB 2269 (Grayson, 2022), which proposed a licensing law for digital financial asset businesses to be administered by the Department of Financial Protection and Innovation (DFPI). AB 2269 was approved by the Senate on a 31-6 vote and by the Assembly on a 71-0 vote. Governor Newsom, however, vetoed the bill, citing concerns that the measure was “premature,” due in part to potential regulatory actions at the federal level. The veto message also raised fiscal concerns related to a loan from the General Fund that would have been required to stand-up the licensing program.
Less than two months after the governor’s veto, one of the largest crypto exchanges, FTX, imploded in a high-profile scandal that led to dozens of criminal charges against the firm’s founder and chief executive, Sam Bankman-Fried. The FTX scandal and numerous other business failures within the crypto industry was followed by a crackdown by federal regulators and law enforcement agencies against a variety of businesses in the crypto industry. As of the writing of this analysis, there are no known bills or proposed regulations at the federal level that are expected to provide broad regulatory clarity or enforceable legal protections for users of digital financial assets.[2]
The author has made targeted changes to his proposal from last year to address various industry concerns and to ease the implementation burden on DFPI. The structure and major provisions of this bill adhere closely to those found in AB 2269, and the focus of the bill remains on providing a clear regulatory framework that prioritizes consumer protections within the digital financial asset industry. Furthermore, according to the Senate Appropriations Committee analysis dated September 1, 2024, “DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program’s operations,” thus addressing one of the concerns cited in the governor’s veto of AB 2269 last year.
- Recent Amendments
This bill was amended on September 1, 2023, and September 8, 2023, with various technical and substantive changes. Substantive changes include, but are not limited to, the following:
- Delayed implementation date. The requirements in the bill will be operative on July 1, 2025, providing ample time for industry participants to prepare to comply with the law and for DFPI to implement and administer the proposed licensing program.
- Cost recovery mechanism. The bill specifies procedures for recovering costs from licensees related to the licensing program. Similar to other licensing laws administered by DFPI, program costs will be recovered through a combination of application fees, cost recoveries for examinations of specific licensees, and a pro rata assessment to cover other outstanding program costs. The pro rata assessment is based on the number of a licensee’s California customers, relative to the total number of California customers served by all licensees.
- Contingent enactment language with SB 401 (Limón). The bill provides that it will go into effect only if SB 401 (Limón), related to digital financial asset transaction kiosks, of this legislative session is also enacted.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No
According to the Senate Appropriations Committee, DFPI reports costs of approximately $14.0 million in year one, $17.0 million in year two, and $21.2 million in year three and ongoing for a multi-year build-up of the program and for continued administration and enforcement workload (Financial Protection Fund). Costs to establish the program would include equipment, software, other IT operating expenses, and workload related to promulgating regulations and training for DFPI staff. Ongoing costs would include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities.
Generally, when DFPI establishes a new regulatory program it will cover those start-up costs through the Financial Protection Fund. Once the program is fully operational, the DFPI will recoup those costs through that program’s licensing fees, fines, penalties, settlements, or judgements. DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program’s operations.
SUPPORT: (Verified 9/11/23)
Consumer Federation of California (source)
California Bankers Association
California Credit Union League
California Democratic Party
California Low-Income Consumer Coalition
Cameo - California Association for Micro Enterprise Opportunity
Consumer Reports
Consumers for Auto Reliability & Safety
Digital Currency Traders Alliance
Los Angeles County Democratic Party
Oakland Privacy
OPPOSITION: (Verified 9/11/23)
Coinbase
Crypto Council for Innovation
Defendingconstitutionalrights.com
ARGUMENTS IN SUPPORT: The Consumer Federation of California writes in support, as sponsor:
AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational “rules of the road” are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers.
ARGUMENTS IN OPPOSITION: Crypto Council for Innovation (CCI), an association whose members include Andreessen Horowitz, Block, Coinbase, Electric Capital, Fidelity Digital Assets, Gemini, OpenSea, Paradigm, and Ribbit Capital, writes in an “oppose unless amended” position:
CCI is grateful for the progress the Committee has made in addressing industry concerns following Governor Newsom’s veto of AB 2269, including the expedited licensing pathway for businesses operating in compliance with New York’s virtual currency business activity regulations and the exemption for smaller digital asset businesses…
CCI continues with requests for various amendments, some of which have been incorporated by the author in the current version of the bill and some of which are reflected in proposed amendments in the subsequent comment. Outstanding items of concern for CCI include, but are not limited to, the requirement that stablecoins are fully backed by high-quality assets, a desire for an entities-based exemption for entities registered with the Commodities Futures Trading Commission, an increase in the exemption threshold for small companies to $2 million of business activity, and a desire for more concrete application and review timelines.
ASSEMBLY FLOOR: 70-1, 5/25/23
AYES: Addis, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Mike Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon
NOES: Dixon
NO VOTE RECORDED: Aguiar-Curry, Megan Dahle, Essayli, Flora, Vince Fong, Hoover, Mathis, Papan, Joe Patterson
Prepared by: Michael Burdick / B. & F.I. /
9/11/23 18:44:33
**** END ****
The Senate Banking and Financial Institutions Committee analysis of AB 2269 (Grayson, 2022) provides a more detailed background of the digital financial assets industry, the legal context within which it operates, and why additional regulation is necessary to better protect consumers. That analysis is incorporated herein by reference. See Senate Banking and Financial Institutions analysis dated 6/20/2022 at the following link: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202120220AB2269# ↑
For more extensive discussion of the industry struggles and federal regulatory response, see the Senate Banking and Financial Institutions Committee analysis of this bill, dated July 3, 2023, located here: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240AB39. ↑
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | AB 39 |
THIRD READING
Bill No: AB 39
Author: Grayson (D), et al.
Amended: 9/1/23 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 6-0, 7/5/23
AYES: Limón, Bradford, Caballero, Min, Nguyen, Portantino
NO VOTE RECORDED: Niello
SENATE JUDICIARY COMMITTEE: 10-0, 7/11/23
AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Stern, Wiener
NO VOTE RECORDED: Niello
SENATE APPROPRIATIONS COMMITTEE: 5-2, 9/1/23
AYES: Portantino, Ashby, Bradford, Wahab, Wiener
NOES: Jones, Seyarto
ASSEMBLY FLOOR: 70-1, 5/25/23 - See last page for vote
SUBJECT: Digital financial asset businesses: regulatory oversight
SOURCE: Consumer Federation of California
DIGEST:
This bill establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset business activity. The bill intends to provide regulatory clarity to businesses and legal protections for consumers and retail investors in this emerging industry.
ANALYSIS:
Existing law:
- Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
- Provides the Corporate Securities Law of 1968, administered by DFPI, which governs the issuance and sale of securities in California. (Corporations Code Sections 25000 et seq.)
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such sale has been qualified by DFPI, as specified, or the sale is covered by an express exemption from qualification. (Corporations Code Section 25110)
- Provides the Money Transmission Act, administered by DFPI, which requires licensure of persons engaged in the business of money transmission, unless the person is exempt. (Financial Code Section 2000 et seq.)
- Defines money transmission as selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission. (Financial Code Section 2003(q))
This bill:
- Establishes the Digital Financial Assets Law to be administered by DFPI.
- Defines the following terms, among others:
- “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. Specifies that “digital financial asset” does not include:
- Value issued by a merchant as part of an affinity or awards program that cannot be exchanged for legal tender, bank credit, or a digital financial asset.
- A digital representation of value issued by a publisher and used solely within an online game, as specified.
- A security registered with the Securities and Exchange Commission, qualified with DFPI, or exempt from such registration or qualification.
- “Legal tender” means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
- “Digital financial asset business activity” means exchanging, transferring, or storing a digital financial asset; issuing a digital financial asset with the authority to redeem the currency for legal tender, bank credit, or another digital financial asset; or other specified activities related to electronic precious metals and digital representations of value used in online games.
- When used in reference to a transaction or relationship involving a digital financial asset, “control” means the power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
- “Exchange” when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
- A digital financial asset for legal tender, bank credit, or one or more forms of digital financial assets.
- Legal tender or bank credit for one or more forms of digital financial assets.
- “Store” except in the phrase “store of value,” means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident.
- “Transfer” means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
- Credit the digital financial asset to the account of another person.
- Move the digital financial asset from one account of a resident to another account of the same resident.
- Relinquish control of a digital financial asset to another person.
- “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. Specifies that “digital financial asset” does not include:
- Exempts from the new division banks, as specified; persons providing only specified computing, network, or data storage or security services; persons using a digital financial asset solely on the person’s own behalf; and persons registered as a securities broker-dealer to the extent of its operation as such, among other specified exemptions.
- Authorizes DFPI to exempt, in whole or in part, transactions or persons from the Digital Financial Assets law, as specified.
- On or after January 1, 2025, prohibits a person from engaging in digital financial asset business activity without a license from DFPI, as specified.
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application.
- Authorizes DFPI to issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in New York, as specified.
- Requires a licensee to maintain a surety bond or trust account in a form and amount as determined by DFPI for the protection of residents with whom a licensee engages in digital financial asset business activity, as specified.
- Requires a licensee to maintain capital and liquidity in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of specific risks applicable to the licensee, as specified.
- Requires a licensee to report annually to DFPI and to pay the licensee’s pro rata share of costs incurred by DFPI to administer the licensing program.
- Authorizes DFPI to adopt rules necessary to implement the division and issue guidance as appropriate.
- Authorizes DFPI to conduct an examination of a licensee for compliance with the division and requires a licensee to maintain business records, as specified.
- Requires a licensee to file with DFPI a report related to a material change in information provided in the application for licensure, a material change in the licensee’s digital financial asset business activity, or a change of an executive officer, responsible individual, or person in control of the licensee.
- Provides specified applicable rules in determining whether a person has control over a licensee; requires that, before a proposed change in control of a licensee, the proposed person to be in control submit an application with information required by this division for an application for licensure, as applicable; and prohibits DFPI from approving the application unless the department determines specified suitability conditions have been met.
- Provides a process similar to an application related to a proposed change in control for an application of a proposed merger or consolidation of a licensee with another person.
- Defines “enforcement measure” as an action to do any of the following:
- Suspend or revoke a license.
- Order a person to cease and desist from doing digital financial asset business activity.
- Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity.
- Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity.
- Assess a penalty of up to $100,000 for each day that a person engages in digital financial asset business activity without a license.
- If a person required to obtain a license materially violates a provision of the division, assess a penalty of up to $20,000 for each day of violation or for each act or omission in violation.
- Recover on the security described in #7 of this section and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of the law.
- Impose necessary or appropriate conditions on the conduct of digital financial asset business activity.
- Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
- Authorizes DFPI to take an enforcement measure against a person in any of the following instances:
- The person materially violates a state law applicable to digital financial asset business activity.
- The person does not cooperate with an examination or investigation, fails to pay a fee, or fails to submit a report or documentation.
- The person, in the conduct of its digital financial asset business activity, has engaged, is engaging, or is about to engage in an unsafe or unsound act or practice; an unfair or deceptive act or practice; fraud, intentional misrepresentation, or other dishonest act; or misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
- A federal agency or another state takes an action against the person, which would constitute an enforcement measure if the department had taken the action.
- The person is convicted of a crime related to its digital financial asset business activity or involving fraud or felonious activity, as specified.
- The person becomes insolvent or takes specified actions indicating financial weaknesses.
- The person makes a material misrepresentation to the department.
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when a revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes DFPI to enter into a consent order with a person regarding an enforcement measure and permits the order to provide that it does not constitute an admission of fact.
- States that the chapter of the bill related to enforcement shall not be construed to provide a private right of action, but does not preclude an action by a person to enforce rights related to property interests described in #24 of this section.
- Defines “covered person” as a person required to obtain a license related to digital financial asset business activity. This term is intended to be more expansive than the term “licensee” which applies only to those persons who already have a license.
- Requires a covered person to provide disclosures, as specified, to its customers. Information required to be disclosed includes, but is not limited to, the following, as specified:
- A schedule of fees and charges.
- Whether the product or service provided is covered by insurance or other guarantee from loss.
- A description of specified terms related to their customers’ rights and responsibilities and processes associated with transfers or exchanges.
- That no digital financial asset is currently recognized as legal tender by California or the United States.
- A list of instances over the past 12 months when the person’s service was unavailable to 10,000 or more customers due to a service outage, as specified.
- Requires a covered person to provide a transaction confirmation record, as specified.
- Requires a covered person that has control of a digital financial asset for one or more persons to maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
- Provides that, in the event of a violation of this requirement, the property interest of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
- Requires that digital financial assets maintained for compliance with the provision to meet all of the following criteria: be held for the persons entitled to the digital financial asset, shall not be property of the covered person, and shall not be subject to the claims of creditors of the covered person.
- Provides that a covered person shall at all times own eligible securities, as specified, having an aggregate market value of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
- Defines a “covered exchange” as a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
- Requires a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, to certify that the covered exchanged has conducted specified due diligence related to the digital financial asset, including the likelihood the asset would be deemed a security by federal or state regulators, provided a full disclosure relating to conflicts of interests, and conducted a comprehensive risk assessment of the asset, among other things. Exempts a covered exchange from these obligations for any digital financial assets that were approved by New York regulators on or before January 1, 2023.
- Requires a covered exchange to make every effort to execute a resident’s request to exchange a digital financial asset fully and promptly and to use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions, as specified.
- Requires a licensee to prominently display on its internet website a toll-free telephone number through which a customer can contact the seller for customer service issues and receive live customer assistance, 10 hours per day, Monday through Friday, excluding federal holidays.
- On or after January 1, 2025, prohibits a covered person from exchanging, transferring, or storing a stablecoin or engaging in digital financial asset administration unless the issuer of the stablecoin is a licensee, a person that applies for a license, a bank, or a California or federal trust, and the issuer of the stablecoin at all times owns eligible securities that fully back the stablecoin, as specified.
- Requires a prospective licensee, prior to seeking approval from DFPI, to create and, during licensure, maintain policies and procedures related to information security, operational security, business continuity, disaster recovery, antifraud, money laundering prevention, terrorist financing prevention, and compliance with applicable laws, as specified.
Background
This bill uses the term “digital financial assets” to describe a range of money-like, digital representations of value that are not considered legal tender and are not issued by a central bank of a sovereign nation. Similar terms used to describe this concept are cryptocurrencies, digital currencies, virtual currencies, crypto assets, and digital assets, among others. Prominent examples of digital financial assets include bitcoin, ether, dogecoin, tether, and USD Coin. Under existing state law, business activity related to digital financial assets does not fall under any licensure requirements nor does state law provide rules, restrictions, or prohibitions specific to this emerging industry.[1]
This bill is similar to AB 2269 (Grayson, 2022), which proposed a licensing law for digital financial asset businesses to be administered by the Department of Financial Protection and Innovation (DFPI). AB 2269 was approved by the Senate on a 31-6 vote and by the Assembly on a 71-0 vote. Governor Newsom, however, vetoed the bill, citing concerns that the measure was “premature,” due in part to potential regulatory actions at the federal level. The veto message also raised fiscal concerns related to a loan from the General Fund that would have been required to stand-up the licensing program.
Less than two months after the governor’s veto, one of the largest crypto exchanges, FTX, imploded in a high-profile scandal that led to dozens of criminal charges against the firm’s founder and chief executive, Sam Bankman-Fried. The FTX scandal and numerous other business failures within the crypto industry was followed by a crackdown by federal regulators and law enforcement agencies against a variety of businesses in the crypto industry. As of the writing of this analysis, there are no known bills or proposed regulations at the federal level that are expected to provide broad regulatory clarity or enforceable legal protections for users of digital financial assets.[2]
The author has made targeted changes to his proposal from last year to address various industry concerns and to ease the implementation burden on DFPI. The structure and major provisions of this bill adhere closely to those found in AB 2269, and the focus of the bill remains on providing a clear regulatory framework that prioritizes consumer protections within the digital financial asset industry. Furthermore, according to the Senate Appropriations Committee analysis dated September 1, 2024, “DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program’s operations,” thus addressing one of the concerns cited in the governor’s veto of AB 2269 last year.
Comments
According to the author:
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No
According to the Senate Appropriations Committee, DFPI reports costs of approximately $14.0 million in year one, $17.0 million in year two, and $21.2 million in year three and ongoing for a multi-year build-up of the program and for continued administration and enforcement workload (Financial Protection Fund). Costs to establish the program would include equipment, software, other IT operating expenses, and workload related to promulgating regulations and training for DFPI staff. Ongoing costs would include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities.
Generally, when DFPI establishes a new regulatory program it will cover those start-up costs through the Financial Protection Fund. Once the program is fully operational, the DFPI will recoup those costs through that program’s licensing fees, fines, penalties, settlements, or judgements. DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program’s operations.
SUPPORT: (Verified 9/2/23)
Consumer Federation of California (source)
California Bankers Association
California Credit Union League
California Democratic Party
California Low-income Consumer Coalition
Cameo - California Association for Micro Enterprise Opportunity
Consumer Reports
Consumers for Auto Reliability & Safety
Digital Currency Traders Alliance
Los Angeles County Democratic Party
Oakland Privacy
OPPOSITION: (Verified 9/2/23)
Crypto Council for Innovation
Defendingconstitutionalrights.com
ARGUMENTS IN SUPPORT: The Consumer Federation of California writes in support, as sponsor:
AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational “rules of the road” are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers.
ARGUMENTS IN OPPOSITION: Crypto Council for Innovation (CCI), an association whose members include Andreessen Horowitz, Block, Coinbase, Electric Capital, Fidelity Digital Assets, Gemini, OpenSea, Paradigm, and Ribbit Capital, writes in an “oppose unless amended” position:
CCI is grateful for the progress the Committee has made in addressing industry concerns following Governor Newsom’s veto of AB 2269, including the expedited licensing pathway for businesses operating in compliance with New York’s virtual currency business activity regulations and the exemption for smaller digital asset businesses…
CCI continues with requests for various amendments, some of which have been incorporated by the author in the current version of the bill and some of which are reflected in proposed amendments in the subsequent comment. Outstanding items of concern for CCI include, but are not limited to, the requirement that stablecoins are fully backed by high-quality assets, a desire for an entities-based exemption for entities registered with the Commodities Futures Trading Commission, an increase in the exemption threshold for small companies to $2 million of business activity, and a desire for more concrete application and review timelines.
ASSEMBLY FLOOR: 70-1, 5/25/23
AYES: Addis, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Mike Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon
NOES: Dixon
NO VOTE RECORDED: Aguiar-Curry, Megan Dahle, Essayli, Flora, Vince Fong, Hoover, Mathis, Papan, Joe Patterson
Prepared by: Michael Burdick / B. & F.I. /
9/4/23 8:53:01
**** END ****
The Senate Banking and Financial Institutions Committee analysis of AB 2269 (Grayson, 2022) provides a more detailed background of the digital financial assets industry, the legal context within which it operates, and why additional regulation is necessary to better protect consumers. That analysis is incorporated herein by reference. See Senate Banking and Financial Institutions analysis dated 6/20/2022 at the following link: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202120220AB2269# ↑
For more extensive discussion of the industry struggles and federal regulatory response, see the Senate Banking and Financial Institutions Committee analysis of this bill, dated July 3, 2023, located here: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240AB39. ↑
SENATE COMMITTEE ON
Senator Anthony Portantino, Chair
2023 - 2024 Regular Session
AB 39 (Grayson) - Digital financial asset businesses: regulatory oversight
Version: | Policy Vote: |
Urgency: | Mandate: |
Hearing Date: | Consultant: |
Bill Summary:
AB 39 establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI), for digital financial asset business activity, as specified.
*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********
The following information is revised to reflect amendments
adopted by the committee on September 1, 2023
Fiscal Impact:
DFPI reports costs of approximately $14.0 million in year one, $17.0 million in year two, and $21.2 million in year three and ongoing for a multi-year build-up of the program and for continued administration and enforcement workload (Financial Protection Fund). Costs to establish the program would include equipment, software, other IT operating expenses, and workload related to promulgating regulations and training for DFPI staff. Ongoing costs would include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities.
Generally, when DFPI establishes a new regulatory program it will cover those start-up costs through the Financial Protection Fund. Once the program is fully operational, the DFPI will recoup those costs through that program’s licensing fees, fines, penalties, settlements, or judgements. DFPI does not anticipate the need for additional General Fund support, and will likely be able to cover its administrative costs through the Financial Protection Fund until the program is able to collect adequate fee revenue to support this program’s operations.
Author Amendments:
- Clarify an exemption for entities or futures commission merchant, swap dealer, or introducing broker registered under the federal Commodity Exchange Act.
- Revise the information an applicant for licensure is required to provide to DFPI relevant to the applicant’s proposed digital financial asset business activity, including documentation related to capital and liquidity and the number of residents the applicant engaged in activity with.
- Authorize the commissioner to issue a conditional license to an applicant pending compliance with licensure requirements if specified conditions are met.
- Replace the license renewal reapplication process with an annual report and fee based on a licensee’s or conditional licensee’s pro rata cost share, as specified.
- Before January 31 of each year, requires the commissioner to notify each licensee and conditional licensee of the amount assessed and levied against it.
- Authorizes the commissioner to use funds obtained pursuant to the above as well as through fines, penalties, settlements, or judgement for the DFPI’s administrative and enforcement costs.
- Authorizes DFPI to adopt rules that change the pro rata cost share calculation and the dates on which assessment notification and payments are due.
- Establishes a process to suspend or revoke a license and a hearing process to contest a suspension or revocation.
- Clarify the fingerprinting submission process.
- Specify in “best execution” requirements, that a covered exchange must, at least once every six months, review aggregated trading records or residents against benchmarks to determine execution quality, investigate the causes of any variance, and promptly take action to remedy any issued identified.
- Revise provisions related to stablecoin, including making these provisions go into effect January 1, 2025 and clarifying that specified trust companies may be issuers and that issuers may include foreign currency eligible securities as part of the reserve requirement if those securities are required in other jurisdictions.
- Make other technical, clarifying, and conforming changes.
-- END --
SENATE COMMITTEE ON
Senator Anthony Portantino, Chair
2023 - 2024 Regular Session
AB 39 (Grayson) - Digital financial asset businesses: regulatory oversight
Version: | Policy Vote: |
Urgency: | Mandate: |
Hearing Date: | Consultant: |
Bill Summary:
AB 39 establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI), for digital financial asset business activity, as specified.
Fiscal Impact:
Unknown, significant one-time and ongoing costs likely in the tens of millions of dollars for DFPI to stand-up and maintain the new licensing program for digital financial asset business activity. Costs to establish program would include equipment, software, other IT operating expenses, and workload related to promulgating regulations and training for DFPI staff. Ongoing costs would include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities. Given the size and complexity of the proposed program, DFPI will likely need specialized staff with technical expertise to support its operations.
Generally, when DFPI establishes a new regulatory program it will cover those start-up costs through the Financial Protection Fund. Once the program is fully operational, the DFPI will recoup those costs through that program’s licensing fees. However, given the scope of the program proposed in this bill, DFPI will likely require General Fund support until the program is able to collect adequate fee revenue to support its administrative and enforcement operations.
Background:
This bill is similar to AB 2269 (Grayson, 2022) which proposed a licensing law for digital financial asset businesses that would be administered by DFPI. Governor Newsome vetoed AB 2269, stating in his veto message:
AB 2269 would establish a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset activity. Digital assets are becoming increasingly popular in our financial ecosystem, with more consumers buying and selling cryptocurrencies each year. I share the author's intent to protect Californians from potential financial harm while providing clear rules for crypto-businesses operating in this state.
On May 4, 2022, I issued Executive Order N-9-22 to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation, and protects consumers who use digital asset financial services and products - all within the context of a rapidly evolving federal regulatory picture. Over the last several months, my Administration has conducted extensive research and outreach to gather input on approaches that balance the benefits and risk to consumers, harmonize with federal rules, and incorporate California values such as equity, inclusivity, and environmental protection.
It is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm. Additionally, standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the general fund in the tens of millions of dollars for the first several years. Such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.
I am committed to working collaboratively with the Legislature to achieve the appropriate regulatory clarity once federal regulations come into sharper focus for digital financial assets, while ensuring California remains a competitive place for companies to invest and innovate.
While similar to AB 2269, the bills are not identical. The author has made several changes in response to stakeholder comments and the changing cryptocurrency landscape, such as eliminating the sunset on the requirement that so-called “stablecoins” back their value with reserve assets.
Proposed Law:
- Establishes the Digital Financial Assets Law (DFAL).
- Defines relevant terms for the DFAL, including the following:
- “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; it does not include:
- A transaction in which a market 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 platform.
- 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 DFPO.
- “Digital financial asset business activity” 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.
- Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either (1) a digital financial asset offered by or on behalf of the same publisher from which the original representation of value was received, or (2) legal tender or bank credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.
- “Digital financial asset services vendor” means a person that has control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to trade, sell, or convert either (1) a digital financial asset for legal tender, bank or credit union creditor, or one or more forms of digital financial assets; or (2) legal tender or bank or credit union credit for one or more forms of digital financial assets.
- “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; it does not include:
- Provides that the DFAL, subject to enumerated exemptions, governs the digital financial asset business activity of a person doing business in this State or, wherever located, who engages or holds itself out as engaging in the activity with, or on behalf of, a resident. The exempted entities include:
- Various governmental entities.
- Banks and financial institutions regulated federally, internationally, or under other State laws.
- Persons providing connectivity software or similar assistance to a business engaged in digital financial asset business activity.
- A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued at $50,000 annually or less.
- Entities and persons governed by specified federal commodities and securities laws.
- Permits the DFPI, by regulation or order, either unconditionally or under specified terms and conditions or for specific periods, to exempt from all or part of the DFAL any person or transaction or class of persons or transactions, if the Commissioner of the DFPI determines that such action is in the public interest and that regulation of such persons or transactions is not necessary for the purpose of the DFAL; the DFPI must post on its website all persons, transactions, or classes or transactions or persons so exempted, and may, by regulation or order, rescind any such exemption.
- Provides that, beginning January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident, unless any of the following is true:
- The person is licensed under the DFAL.
- The person has submitted an application for a license under the DFAL and is awaiting approval or denial of the application.
- The person is otherwise exempt from licensure under the DFAL.
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application. Information provided pursuant to an application is protected under the California Public Records Act (CPRA).
- Authorizes the DFPI to approve, conditionally approve, or deny an application, as specified.
- Requires a licensee to maintain a surety bond or trust account in a form and amount as determined by DFPI for the protection of residents with whom a licensee engages in digital financial asset business activity, as specified.
- Additionally requires a licensee to maintain at all times capital and liquidity in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations, in light of an assessment of the specific risks applicable to the licensee, as specified. The liquidity may be maintained in the form of cash, digital financial assets other than the digital financial assets over which it has control for a resident, or high-quality liquid assets, as defined, in proportions determined by the DFPI.
- Requires the DFPI to issue a licensee to an applicant if specified conditions are met; an applicant may appeal a denial under procedures set forth under the Administrative Procedure Act.
- Provides procedures by which a licensee may apply for renewal of a license on an annual basis.
- Provides that a DFAL license is not transferable or assignable.
- Authorizes the DFPI to adopt rules necessary to implement the DFAL and prepare formal written guidance to be issued to persons seeking clarification; all formal written guidance shall be made public on the DFPI’s website, with redactions for certain proprietary or confidential information.
- Authorizes the DFPI to examine the business and any office, within or outside the State, of any licensee, to ascertain whether the business is being conducted in a lawful manner; the examination may be conducted without prior notice to the licensee, and shall be paid for by the licensee.
- Requires a licensee to maintain specified information relating to all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity. The records are subject to inspection by the DFPI and must be maintained in a form that enables the DFPI to determine whether the licensee is in compliance with applicable requirements.
- Authorizes the DFPI to coordinate or share information with other regulatory organizations, including federal and state agencies and law enforcement.
- Requires a licensee to inform the DPFI of certain material changes in the licensee’s business that give rise to regulatory or operational concerns, as specified, including a proposed change in control or a proposed merger or consolidation of the licensee with another person. Authorizes DPFI to approve, approve with conditions, or deny the application for change of control or merger or consolidation, as specified.
- Authorizes the DFPI to make an enforcement measure, as defined, against a licensee or a person who has engaged in, is engaging in, or is about to engage in unlicensed digital financial business activity with, or on behalf of, a resident, in specified circumstances, including unsafe, unfair, or deceptive acts or practices, fraud, misappropriation of legal tender or digital financial assets, and, in the case of a licensee, becomes insolvent or makes a material misrepresentation to the DFPI.
- Generally requires the DFPI to take an enforcement measure only after providing notice and an opportunity to be heard; however, if the circumstances require action before notice can be given, DFPI may take action other than assessing a civil penalty and the subject of the action must be provided an expedited postaction hearing.
- Provides that DFPI may assess civil penalties as follows:
- For a person who engages in unlicensed digital financial asset business activity with a resident in violation of the DFLA, the DFPI may assess a civil penalty of up to $100,000 per day of the violation.
- For a licensee or covered person who materially violates the DFAL, the DFPI may assess a civil penalty of up to $20,000 per day of the violation.
- The civil penalties accrue until the violation ceases.
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when a revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes the DPFI to enter into a consent order with a person regarding an enforcement measure, which may provide that it does not constitute an admission of fact by a party.
- Provides that the enforcement mechanisms in the DFAL shall not be construed to provide a private right of action to a resident, except that a resident may bring an action to enforce their rights to recover assets from a licensee who falls into financial trouble while holding the resident’s property; and that the duties and obligations in the DFAL are cumulative and do not relieve any party from any duties or obligations imposed under other law.
- Requires a licensee, before engaging in digital financial asset business activity with a resident, to make certain disclosures, as specified, and pursuant to any additional disclosure requirements that the DFPI adopts, and to provide a transaction confirmation, as specified.
- Requires a covered person that has control of a digital financial asset for one or more persons to maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset, and provides criteria for how such digital financial assets must be maintained and how a covered person may comply with this requirement.
- Provides that a covered person who has control of a digital financial asset for another person, those digital financial assets are deemed to be held in trust for the benefit of the other person, even if the assets are comingled with other assets of the covered person, and requires a covered person to at all times own eligible securities, as defined, with an aggregate market value of not less than the aggregate amount of all its outstanding U.S dollar-denominated liabilities owed to its customers.
- Requires a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, to certify that the covered exchanged has conducted specified due diligence related to the digital financial asset, including the likelihood the asset would be deemed a security by federal or state regulators, provided a full disclosure relating to conflicts of interests, and conducted a comprehensive risk assessment of the asset, among other things, unless the covered exchange has been approved for listing, on or before January 1, 2023, by the New York Department of Financial Services, as specified.
- Requires a covered exchange to make every effort to execute a resident’s request to exchange a digital financial asset in a manner so that the outcome to the resident is as favorable as possible under prevailing market conditions, as specified.
- Prohibits a covered person from exchanging, transferring, or storing a stablecoin unless the issuer of the stablecoin is a licensee, a person that applies for a license, or a bank and the issuer of the stablecoin at all times owns eligible securities that fully back the stablecoin, as specified.
- Defines a “stablecoin” as a digital financial asset that is denominated in U.S. dollars or denominated in or pegged to another national or state currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a redemption value that is so stable as to render the value effectively fixed.
- Requires a prospective licensee, prior to seeking approval from DFPI, to create and, during licensure, maintain policies and procedures related to information security, operational security, business continuity, disaster recovery, antifraud, money laundering prevention, terrorist financing prevention, and compliance with applicable laws, as specified.
- Includes a severability clause.
-- END --
Senator Thomas Umberg, Chair
2023-2024 Regular Session
Bill No: AB 39 (Author:Grayson)
Version: July 6, 2023
Hearing Date: July 11, 2023
Fiscal: Yes
Urgency: No
Consultant: AWM
SUBJECT
Digital financial asset businesses: regulatory oversight
DIGEST
This bill establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI) for digital financial asset business activity, as specified.
EXECUTIVE SUMMARY
It’s been a rough year and a half for digital financial assets, the most famous of which are cryptocurrencies. At the beginning of 2022, crypto exchanges were purchasing Super Bowl ads and riding an overall market capitalization of close to $3 trillion. By the end of 2022, multiple digital financial assets and crypto exchanges had collapsed, trillions of dollars in value were lost, and many consumers discovered that their assets were simply gone due to bankruptcies, unscrupulous comingling of funds, or outright fraud. The bad news has continued into 2023; among other things, the Securities Exchange Commission (SEC) has declared at least 55 crypto assets to be unregistered securities and the top two exchanges to be unlicensed securities exchanges.
In 2022, the Legislature passed AB 2269 (Grayson, 2022), which would have established a licensing and regulatory framework for digital financial asset businesses being conducted with California residents. Governor Newsom vetoed the bill, stating he believed it was premature to regulate the digital financial asset industry.
This bill is similar to AB 2269: it establishes a licensing and regulatory framework, administered by the DFPI, for digital financial asset business activity and is intended to provide regulatory clarity to businesses and legal protections for consumers and retail investors in this emerging industry. The bills are not identical, however; the author has made several changes in response to stakeholder comments and the changing cryptocurrency landscape, such as eliminating the sunset on the requirement that so-called “stablecoins” back their value with reserve assets. The author has agreed to a minor amendment to clarify DFPI’s enforcement authority with respect to imminent violations or other imminent fraudulent or unsound digital financial asset business activity.
This bill is sponsored by the Consumer Federation of California and is supported by the California Bankers Association, the California Credit Union League, the California Low-Income Consumer Coalition, CAMEO, Consumer Reports, Consumers for Auto Reliability, the Digital Currency Traders Alliance, the Los Angeles Democratic Party, and Oakland Privacy. This bill is opposed by Crypto Council for Innovation. The Senate Banking and Financial Institutions Committee passed this bill with a vote of 6-0.
PROPOSED CHANGES TO THE LAW
Existing law:
- Establishes the Securities Exchange Act of 1934, which regulates the secondary trading of interstate securities and is administered by the SEC. (15 U.S.C. §§ 78a et seq.)
- Establishes DFPI as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Fin. Code, div. 1, ch. 3, §§ 300 et seq.)
- Establishes the Corporate Securities Law of 1968, which governs the issuance and sale of securities in California, except for securities covered by specified federal securities laws. (Corp. Code, tit. 4, div. 1, §§ 25000 et seq.)
- Establishes the Money Transmission Act, which generally prohibits a person from engaging in money transmission without a license from the Commissioner of the DPFI. (Fin. Code, div. 1.2, §§ 2000 et seq.)
- Establishes the California Consumer Financial Protection Law, which prohibits providers of financial products or services in the state from engaging in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products of services and authorizes the DFPI to regulate the offering and provision of consumer financial products or services under California financial laws, to the extent the bill is not preempted by federal law. (Fin. Code, div. 24, §§ 90000 et seq.)
This bill:
- Establishes the Digital Financial Assets Law (DFAL).
- Defines relevant terms for the DFAL, including:
- “Bank” means a bank, savings bank, savings and loan association, or industrial loan company chartered under the laws of this State or any other state or the United States.
- “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; it does not include:
- A transaction in which a market 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 platform.
- 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 DFPO.
- “Digital financial asset business activity” 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.
- Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either (1) a digital financial asset offered by or on behalf of the same publisher from which the original representation of value was received, or (2) legal tender or bank credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.
- “Digital financial asset services vendor” means a person that has control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to trade, sell, or convert either (1) a digital financial asset for legal tender, bank or credit union creditor, or one or more forms of digital financial assets; or (2) legal tender or bank or credit union credit for one or more forms of digital financial assets.
- “Resident” means any of the following, but excludes a licensee or an affiliate of a licensee:
- A person who is domiciled in this State.
- A person who is physically located in this State for more than 183 days of the previous 365 days.
- A person who has a place of business in this State.
- A legal representative of a person that is domiciled in this State.
- “Store,” except in the phrase “store of value,” means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident.
- “Transfer” means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
- Credit the digital financial asset to the account of another person.
- Move the digital financial asset from one account of a resident to another account of the same resident.
- Relinquish control of a digital financial asset to another person.
- “United States dollar equivalent of digital financial assets” means the equivalent value of a particular digital financial asset in United States dollars shown on a digital financial asset exchange based in the United States for a particular date or period specified.
- Provides that the DFAL, subject to enumerated exemptions, governs the digital financial asset business activity of a person doing business in this State or, wherever located, who engages or holds itself out as engaging in the activity with, or on behalf of, a resident. The exempted entities include:
- Various governmental entities.
- Banks and financial institutions regulated federally, internationally, or under other State laws.
- Persons providing connectivity software or similar assistance to a business engaged in digital financial asset business activity.
- A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued at $50,000 annually or less.
- Entities and persons governed by specified federal commodities and securities laws.
- Permits the DFPI, by regulation or order, either unconditionally or under specified terms and conditions or for specific periods, to exempt from all or part of the DFAL any person or transaction or class of persons or transactions, if the Commissioner of the DFPI determines that such action is in the public interest and that regulation of such persons or transactions is not necessary for the purpose of the DFAL; the DFPI must post on its website all persons, transactions, or classes or transactions or persons so exempted, and may, by regulation or order, rescind any such exemption.
- Provides that, beginning January 1, 2025, a person shall not engage in digital financial asset business activity, or hold itself out as being able to engage in digital financial asset business activity, with or on behalf of a resident, unless any of the following is true:
- The person is licensed under the DFAL.
- The person has submitted an application for a license under the DFAL and is awaiting approval or denial of the application.
- The person is exempt from licensure under 3-4).
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application. Information provided pursuant to an application is protected under the California Public Records Act (CPRA).
- Authorizes the DFPI to approve, conditionally approve, or deny an application; a license shall take effect on the later of the following of (1) the date the DFPI issues the license, or (2) the date the licensee provides the security required in 8).
- The DFPI may issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in the state of New York, provided the license was issued or approved no later than January 1, 2023. A conditional license expires on the earlier of (1) issuance of an unconditional license, (2) denial of a license, or (3) upon revocation of the New York license.
- Requires a licensee to maintain a surety bond or trust account in a form and amount as determined by DFPI for the protection of residents with whom a licensee engages in digital financial asset business activity, as specified.
- Requires, in addition to the security required in 8), a licensee to maintain at all times capital and liquidity in an amount an form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations, in light of an assessment of the specific risks applicable to the licensee, as specified. The liquidity may be maintained in the form of cash, digital financial assets other than the digital financial assets over which it has control for a resident, or high-quality liquid assets, as defined, in proportions determined by the DFPI.
- Requires the DFPI to issue a licensee to an applicant if specified conditions are met; an applicant may appeal a denial under procedures set forth under the Administrative Procedure Act, Government Code section 11370.
- Provides procedures by which a licensee may apply for renewal of a license on an annual basis.
- Provides that a DFAL license is not transferable or assignable.
- Authorizes the DFPI to adopt rules necessary to implement the DFAL and prepare formal written guidance to be issued to persons seeking clarification; all formal written guidance shall be made public on the DFPI’s website, with redactions for certain proprietary or confidential information.
- Authorizes the DFPI to examine the business and any office, within or outside the State, of any licensee, to ascertain whether the business is being conducted in a lawful manner; the examination may be conducted without prior notice to the licensee, and shall be paid for by the licensee.
- Requires a licensee to maintain specified information relating to all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity. The records are subject to inspection by the DFPI and must be maintained in a form that enables the DFPI to determine whether the licensee is in compliance with applicable requirements.
- Authorizes the DFPI to coordinate or share information with other regulatory organizations, including federal and state agencies and law enforcement.
- Requires a licensee to inform the DPFI of certain material changes in the licensee’s business that give rise to regulatory or operational concerns, as specified, including a proposed change in control or a proposed merger or consolidation of the licensee with another person.
- For a proposed change in control or proposed merger or consolidation, the licensee must provide specified information about the proposed control person or the merger plan.
- The DPFI may approve, approve with conditions, or deny the application for change of control or merger or consolidation, as specified.
- Defines “enforcement measures” under the DFAL to include any of the following:
- License suspension or revocation.
- A cease and desist order.
- Requesting a court to appoint a receiver for the assets of a person doing digital financial asset business activity.
- Requesting injunctive relief against a person doing digital financial asset business activity.
- Assessing a penalty, as specified in 21).
- Recovering on the security set forth in x) and initiating a plan to distribute the proceeds for the benefit of a resident injured by a licensee’s violation.
- Imposing necessary or appropriate conditions on the conduct of digital financial asset business activity.
- Seeking restitution on behalf of a resident if the DFPI shows economic injury due to a violation of the DFAL.
- Authorizes the DFPI to make an enforcement measure against a licensee or a person who has engaged in, is engaging in, or proposes to engage in unlicensed digital financial business activity with, or on behalf of, a resident, in specified circumstances, including unsafe, unfair, or deceptive acts or practices, fraud, misappropriation of legal tender or digital financial assets, and, in the case of a licensee, becomes insolvent or makes a material misrepresentation to the DFPI.
- Generally requires the DFPI to take an enforcement measure only after providing notice and an opportunity to be heard; however, if the circumstances require action before notice can be given, DFPI may take action other than assessing a civil penalty and the subject of the action must be provided an expedited postaction hearing.
- Provides that DFPI may assess civil penalties as follows:
- For a person who engages in unlicensed digital financial asset business activity with a resident in violation of the DFLA, the DFPI may assess a civil penalty of up to $100,000 per day of the violation.
- For a licensee or covered person who materially violates the DFAL, the DFPI may assess a civil penalty of up to $20,000 per day of the violation.
- The civil penalties accrue until the violation ceases.
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when a revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes the DPFI to enter into a consent order with a person regarding an enforcement measure, which may provide that it does not constitute an admission of fact by a party.
- Provides that the enforcement mechanisms in the DFAL shall not be construed to provide a private right of action to a resident, except that a resident may bring an action to enforce their rights to recover assets from a licensee who falls into financial trouble while holding the resident’s property; and that the duties and obligations in the DFAL are cumulative and do not relieve any party from any duties or obligations imposed under other law.
- Requires a licensee, before engaging in digital financial asset business activity with a resident, to make certain disclosures, as specified, and pursuant to any additional disclosure requirements that the DFPI adopts, and to provide a transaction confirmation, as specified.
- Requires a covered person that has control of a digital financial asset for one or more persons to maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset, and provides criteria for how such digital financial assets must be maintained and how a covered person may comply with this requirement.
- Provides that a covered person who has control of a digital financial asset for another person under 26), those digital financial assets are deemed to be held in trust for the benefit of the other person, even if the assets are comingled with other assets of the covered person, and requires a covered person to at all times own eligible securities, as defined, with an aggregate market value of not less than the aggregate amount of all its outstanding U.S dollar-denominated liabilities owed to its customers.
- Requires a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, to certify that the covered exchanged has conducted specified due diligence related to the digital financial asset, including the likelihood the asset would be deemed a security by federal or state regulators, provided a full disclosure relating to conflicts of interests, and conducted a comprehensive risk assessment of the asset, among other things, unless the covered exchange has been approved for listing, on or before January 1, 2023, by the New York Department of Financial Services, as specified.
- Requires a covered exchange to make every effort to execute a resident’s request to exchange a digital financial asset in a manner so that the outcome to the resident is as favorable as possible under prevailing market conditions, as specified.
- Prohibits a covered person from exchanging, transferring, or storing a stablecoin unless the issuer of the stablecoin is a licensee, a person that applies for a license, or a bank and the issuer of the stablecoin at all times owns eligible securities that fully back the stablecoin, as specified.
- Defines a “stablecoin” as a digital financial asset that is denominated in U.S. dollars or denominated in or pegged to another national or state currency and is marketed in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a redemption value that is so stable as to render the value effectively fixed.
- Requires a prospective licensee, prior to seeking approval from DFPI, to create and, during licensure, maintain policies and procedures related to information security, operational security, business continuity, disaster recovery, antifraud, money laundering prevention, terrorist financing prevention, and compliance with applicable laws, as specified.
- Provides that 25)-32) will be effective on January 1, 2024.
- Includes a severability clause.
COMMENTS
- Author’s comment
According to the author:
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
2. What are digital financial assets?
A digital financial asset is, broadly speaking, a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Also unlike the dollar, there is no physical manifestation of a digital financial asset that can be possessed in the physical realm; it exists only virtually.
Although there are many types of digital financial assets, there are a few more specific concepts that are often conflated with the broader category. The first is cryptocurrency; while not all digital assets are cryptocurrency, the terms are frequently used interchangeably because cryptocurrencies have received the most widespread attention. Cryptocurrencies are often styles as “coins” (e.g., Bitcoin, Dogecoin) to be used in lieu of fiat currencies for digital transactions. The second general concept is decentralization; “decentralized finance,” or “defi,” refers to the ability to use digital financial assets to conduct transactions without the intermediary of a bank or other third-party firm. The third is distributed ledger technology, the most famous (infamous?) of which is blockchain. Blockchain is a system of recording information on a digital ledger maintained by an online network; the ledger is distributed across the network, making it very difficult to hack or manipulate, and, consistent with the defi principle, prevents gatekeepers from exercising control over transactions.
Although digital financial assets have been marketed as an obvious bet—ads in the 2022 Superbowl portrayed crypto investments as a no-brainer way to make money—a majority of cryptocurrency purchasers have lost money.[1] Moreover, the losses appear to be disproportionately felt by small-dollar investors (derisively referred to as “krill”), who were left holding the bag when the big-money “whales” cashed out when they recognized early signs of trouble.[2] This is partly due to “crypto’s high price volatility and the lack of productive real-world use cases,”[3] which is to say, it remains unclear what crypto is for, other than financial speculation. It is also because the lack of regulation surrounding digital financial assets, coupled with pitches from digital asset companies that make them sound safe, have led to an environment where unsophisticated investors do not appreciate the true that come with purchasing digital financial investments.[4]
3. Take one: AB 2269
There is no consensus on whether, or how, digital financial assets should be regulated. Gary Gensler, the Chair of the SEC, has taken the position that most cryptocurrency products fall within the SEC’s jurisdiction.[5]In March 2022, President Biden signed an executive order requiring various federal agencies to report on the effects of digital financial assets on financial markets and to provide policy recommendations on how to protect U.S. consumers, investors, and businesses.[6] Governor Newsom followed with an executive order issued in May 2022, which instructed DFPI to “engage in a public regulatory approach to crypto assets harmonized with the direction of federal regulations and guidance.”[7]
Shortly after Governor Newsom executed his executive order, two prominent cryptocurrencies collapsed and the crypto market lost approximately $500 billion in value.[8] The month after, in June 2022, the Celsius Network—a prominent cryptocurrency lending company and wallet[9]—declared bankruptcy.[10]
June 2022 is also when the Legislature decided it was time for the State to take action on digital financial assets. AB 2269 (Grayson, 2022) would have implemented a Digital Financial Assets Law similar to the one contained in this bill. The Legislature enacted AB 2269, but Governor Newsom vetoed it. His veto message stated:
AB 2269 would establish a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset activity. Digital assets are becoming increasingly popular in our financial ecosystem, with more consumers buying and selling cryptocurrencies each year. I share the author's intent to protect Californians from potential financial harm while providing clear rules for crypto-businesses operating in this state.
On May 4, 2022, I issued Executive Order N-9-22 to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation, and protects consumers who use digital asset financial services and products - all within the context of a rapidly evolving federal regulatory picture. Over the last several months, my Administration has conducted extensive research and outreach to gather input on approaches that balance the benefits and risk to consumers, harmonize with federal rules, and incorporate California values such as equity, inclusivity, and environmental protection.
It is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm. Additionally, standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the general fund in the tens of millions of dollars for the first several years. Such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.
I am committed to working collaboratively with the Legislature to achieve the appropriate regulatory clarity once federal regulations come into sharper focus for digital financial assets, while ensuring California remains a competitive place for companies to invest and innovate.[11]
4. Developments in the digital financial asset world since the veto of AB 2269[12]
In November 2022, FTX—one of the two largest cryptocurrency exchanges at that point—declared bankruptcy.[13] Federal prosecutors indicted FTX’s founder, Samuel Bankman-Fried (known colloquially as “SBF”) for a range of financial crimes, described as “an alleged wide-ranging scheme by the defendant to misappropriate billions of dollars of customer funds deposited with FTX… and mislead investors and lenders to FTX and to Alameda Research, the cryptocurrency hedge fund also founded by” SBF.[14]
In December 2022, the DFPI and three other agencies released the report requested in Governor Newsom’s May 2022 executive order. The report generally suggests that the DFPI’s existing statutory and rulemaking authority—including the authority to “qualify” crypto assets under the California Securities Law of 1968—would be provide a sufficient regulatory framework for digital financial assets.[15]
In January 2023, the Bankruptcy Court in the Celsius Network case ruled that the $4.2 billion worth of cryptocurrency assets that Celsius Network had been holding on behalf of customers were assets of the bankruptcy estate, not the people who had entrusted Celsius Network with their property.[16] The court determined that, in the absence of any existing regulation protecting customers’ crypto accounts, Celsius Network’s terms of service governed the terms of the contract; Celsius Network’s clickwrap Terms of Use transferred customers’ ownership of cryptocurrency assets held in Celsius, so the customers were out of luck.[17] This is far from the only time consumers lost out when digital financial assets firms collapsed under the weight of their overly ambitious promises.[18]
At the beginning of June 2023, the SEC filed two crypto-related securities fraud lawsuits in two days. The first lawsuit was filed against Binance—the largest cryptocurrency left standing after FTX’s bankruptcy—and alleged that Binance had engaged in a slew of federal law violations, including offering securities market functions without registering with the SEC, impermissibly comingling customer funds with those of companies owned by Binance’s founder, and engaging in an elaborate scheme to avoid U.S. regulators.[19] The following day, the SEC filed a lawsuit against Coinbase, yet another crytptocurrency exchange platform, alleging that it had been operating as an unregistered broker since 2019.[20]
Both SEC complaints highlighted the SEC’s position that many, if not most, digital assets financial assets ought to be categorized as securities. Supreme Court case law establishes that parties have entered into an “investment contract” covered by the Securities Act when the contract, transaction or scheme is one “whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promotor or a third party.”[21] Since so few digital financial assets involve more than consumers buying and selling the assets in hopes that they will become more valuable over time, it seems probable that the SEC could end up with jurisdiction over a significant portion of the digital financial asset market. Or, in the alleged words of Binance’s COO, “we are operating as a fcking [sic] unlicensed securities exchange in the USA bro.”[22]
The analysis of the Senate Banking and Financial Institutions Committee, which is incorporated herein by reference, addresses these events in greater detail and discusses additional examples of crypto businesses found to be insolvent.
5. Take two: AB 39
This bill is similar to AB 2269, except that the author has made targeted changes to improve on AB 2269 in response to feedback from stakeholder and, most recently, the Senate Banking and Financial Institutions Committee. The overall structure and purpose of the bill—to provide a workable licensing and oversight framework for digital financial asset business activity in the State—remain unchanged. As highlighted by the author, key changes include:
- Under AB 39, consumer protections (but not the licensing framework) take effect January 1, 2024; under AB 2269, consumer protections would not have taken effect until 2025.
- AB 39 provides conditional licensing for entities that have already obtained a license under New York’s digital asset licensing regime, which AB 2269 did not do.
- This bill allows exchanges to self-certify that their digital financial assets meet certain standards, whereas AB 2269 imposed a “best interest” standard on exchanges.
- AB 39 requires licensees to have live customer service available 10 hours per day, 5 days a week; AB 2269 required live customer service 24 hours per day, 7 days a week.
- Under AB 39, stablecoins must be fully backed by reserves; AB 2269 imposed the same requirement on stablecoins, but only until January 1, 2028.
The overarching issue of whether, and how, to regulate digital financial asset transactions was covered by the Senate Banking and Financial Institutions Committee.[23] This analysis, therefore, focuses on a few specific issues that fall within this Committee’s jurisdiction.
- Federal preemption
Although digital financial assets have existed for nearly 15 years,[24] there is still no consensus on whether, how, or by whom they should be regulated. This may be partly because there is no consensus on what digital financial assets are for—are they simply a means of storing value online? An investment? A means of evading existing financial regulations? A great tool for crime? It’s still hard to say. At the federal level, both the SEC and Commodities Future Trading Commission have asserted jurisdiction; and states, including this one, have indicated that digital financial assets may be properly regulated by state governments.
To the extent that digital financial assets are covered by existing financial regulations—such as securities laws—the Supremacy Clause would prevent the state from implementing an overlapping or contradictory regulatory scheme.[25] To that end, this bill includes a range of exemptions for digital financial asset activity that is already covered by federal law, for example, exempting from the definition of “digital financial asset” a security registered or exempt from registration with the SEC and exempting broker-dealers registered with the SEC or under state securities laws. Accordingly, this bill gives digital financial assets businesses the option of regulation under state or federal laws, but it does not allow them to evade regulation entirely.
- Consumer protection
As set forth in Parts 2-4 of this analysis, consumers—particularly individuals—have been hit hard by crypto losses, often due to the gap between the hype surrounding cryptocurrencies and the actual degree of risk involved. The regulatory scheme set forth in this bill is intended to give DFPI the power to ensure that players in the digital financial asset space are sufficiently safe and sound before they can offer services to Californians. To be sure, the bill will not protect people from themselves when it comes to risky bets; if a consumer is hell-bent on using their life savings to buy up the latest memecoin, they can still do so. But the bill will prevent fly-by-night exchanges from operating in the state, ensure that digital financial asset businesses retain adequate capital to cover their liabilities, and give the DFPI the ability to prevent bad actors from continuing to operate.
- Enforcement
AB 39 gives DFPI the exclusive right to enforce the Digital Financial Assets Law, and expressly states that there is no private right of action to enforce the bill’s requirements; however, that a resident may enforce their rights if a covered digital financial asset business fails to maintain adequate capital to allow a resident to retrieve their assets stored with the business. The bill also clarifies that AB 39’s duties and obligations are cumulative, so to the extent that a digital financial asset business violates other laws that provide a private right of action, a consumer may still proceed with a lawsuit under those laws. The DFPI’s enforcement tools include licensure suspension or revocation, seeking injunctive relief or a cease-and-desist order from the court, and seeking civil penalties and restitution on behalf of residents. As discussed further below, the author has agreed to a minor amendment to clarify the scope of the DFPI’s authority to seek enforcement action to prevent a violation from occurring.
6. Amendments
As currently in print, AB 39 authorizes the DFPI to take an enforcement action against a licensee or unlicensed person who has engaged, is engaging, or proposed to engage in violations of the bill or engage in other deceptive, unfair, or unsound business practices arising from digital financial asset business activity. In order to clarify that the DFPI’s authority to take action to prevent violations or other actions that have yet to occur is limited to imminent violations or other prohibited conduct, the author has agreed to replace the phrase “proposes to engage” with “is about to engage” in Section 4 of the bill.
7. Arguments in support
According to the Consumer Federation of California, the bill’s sponsor:
Digital financial assets, including cryptocurrencies and crypto exchanges, have exponentially grown over the past few years without proper regulation or consumer protections. This has directly led to massive scams, so-called “rug pulls” where asset prices are manipulated, investment-related frauds, and substantial losses that significantly target low-and-moderate income communities and communities of color. Overall evaluation of the crypto market went from approximately $3 trillion before crashing down to less than $1 trillion in less than a year.
In November of last year, FTX, one of the largest global cryptocurrency trading and exchange companies, filed for bankruptcy with a debt of about $8 billion to clients. FTX’s founder, 30-year-old Sam Bankman-Fried, was arrested and is facing a myriad of federal charges alleging that FTX was a fraudulent endeavor for most of its existence. With other crypto-related companies such as Celsius and Genesis also filing for bankruptcy, tens of thousands of investors have been locked out of their accounts and will be lucky to see pennies on the dollar.
AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational “rules of the road” are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers.
8. Arguments in opposition
According to the Crypto Council for Innovation:
Burdensome and expensive compliance requirements, including complex reporting criteria for covered exchanges and short turnaround times go beyond what is traditionally expected of financial services institutions, including by the NY virtual currency licensing regime…All application, reporting, disclosure, and recordkeeping requirements should be also limited to information pertaining to licensed digital financial asset business activity.
We urge the legislature to preserve the state’s competitive edge by continuing to foster innovation. In this regard, CCI applauds the author for including an exemption for smaller digital financial asset business activity. We encourage the legislature to increase this exemption to $2,000,000 to accommodate early stage digital asset startups. The legislature should also consider expanding its conditional licensing approach to allow reciprocity for entities licensed or chartered under the New York virtual currency licensing regime.
Lastly, the proposed ban on algorithmic stablecoins unnecessarily paints all algorithmic stablecoins with a broad brush and ignores the complexity in this space. Risks posed by these stablecoins are better attributed to the design of their collateralization than their use of algorithms. Transparent standards in this regard could eliminate the risk of systemic harm without hindering innovation. A blanket ban on stablecoins may also result in other unintended consequences, such as disrupting financial markets and
causing significant user losses.
SUPPORT
Consumer Federation of California (sponsor)
California Bankers Association
California Credit Union League
California Low-Income Consumer Coalition
CAMEO
Consumer Reports
Consumers for Auto Reliability
Digital Currency Traders Alliance
Los Angeles Democratic Party
Oakland Privacy
OPPOSITION
Crypto Council for Innovation
RELATED LEGISLATION
Pending legislation:
SB 95 (Roth, 2023) makes changes to the California Uniform Commercial Code, including adopting a division relating to digital financial assets (known as “controllable electronic records” in the bill. SB 95 is pending on the Assembly Floor.
AB 1336 (Low, 2023) requires an NFT marketplace, as defined, to make specified disclosures to users at the time of a transaction. AB 1336 is pending before the Assembly Banking and Finance Committee.
Prior legislation:
AB 2269 (Grayson, 2022) was similar to this bill and would have implemented a regulatory and licensing regime for specified digital financial asset business activities administered by the Department of Financial Protection and Innovation (DFPI), to take effect January 1, 2024. AB 2269 was vetoed by the Governor, who stated in his veto message that it was premature to implement a licensing structure for digital financial asset activity in statute in light of work being conducted by the executive branch and by the federal government.
AB 1489 (Calderon, 2019) would have enacted the Uniform Regulation of Virtual Currency Businesses Act, which would have implemented a cryptocurrency regulation scheme under the then-DBO; the bill included some of the same measures as AB 2269, but there were significant differences between the two bills. AB 1489 died in the Assembly Banking and Finance Committee.
PRIOR VOTES:
Senate Banking and Financial Institutions Committee (Ayes 6, Noes 0)
Assembly Floor (Ayes 70, Noes 1)
Assembly Appropriations Committee (Ayes 11, Noes 0)
Assembly Banking and Finance Committee (Ayes 11, Noes 0)
**************
Bank of International Settlements, BIS Bulletin No. 69, Crypto Shocks and Retail Losses (Feb. 20, 2023), p. 1. ↑
Id. at pp.2-3. ↑
Id. at p. 1. ↑
E.g., Ensign & Au-Yeung, They Thought ‘Crypto Banks’ Were Safe, and Then Came the Crypto Crash, Wall Street Journal (Jul. 23, 2023), https://www.wsj.com/articles/they-thought-crypto-banks-were-safe-and-then-came-the-crash-11658568780. All links in this analysis are current as of July 7, 2023. ↑
Sutton, SEC’s crypto crusade at risk in looming legal battles, Politico (Jan. 29, 2022), https://www.politico.com/news/2022/01/29/crypto-industry-lawsuits-sec-00002580. ↑
Exec. Order No. 14067, 87 Fed.Reg. 14143 (Mar. 9, 2022). ↑
Governor’s Exec. Order No. N-9-22 (May 4, 2022). ↑
Mark, The companies that helped create 2022’s ‘crypto winter’, Washington Post (Dec. 5, 2022; updated Dec. 13, 2022), available at https://www.washingtonpost.com/business/2022/12/05/crypto-ftx-collapse-bankruptcy-companies/. ↑
A crypto “wallet” holds the credentials necessary to access the holder’s digital financial assets. ↑
The companies that helped create 2022’s ‘crypto winter’, supra. ↑
Governor’s veto message to Assem. on Assem. Bill No. 2269 (Sept. 23, 2022) Recess J. No. 10 (2021-2022 Reg. Sess.) p. 6753. ↑
This section presents a non-exhaustive list of events; for additional information, see the Senate Banking and Financial Institutions Committee’s and Assembly Banking and Finance Committee’s analyses for this bill. ↑
E.g., Yaffe-Bellany, Embattled Crypto Exchange FTX Files for Bankryptcy, N.Y. Times (Nov. 11, 2022), available at https://www.nytimes.com/2022/11/11/business/ftx-bankruptcy.html. ↑
United States Attorney’s Office, Southern District of New York, Press Release: United States Attorney Announces Charges Against FTX Founder Samuel Bankman-Fried (Dec. 13, 2022), https://www.justice.gov/usao-sdny/pr/united-states-attorney-announces-charges-against-ftx-founder-samuel-bankman-fried. ↑
See Governor’s Office of Business and Economic Development, et al., Towards Responsible Innovation: An Interagency Web3, Crypto Asset, and Blockchain Progress Report to the Governor of California (Dec. 2022), pp. 19-20. ↑
In re Celsius Network (Bankr. S.D.N.Y. 2023) 647 B.R. 631, 660. ↑
Id. at p. 658. ↑
Voyager Digital Holdings, a cryptocurrency broker, declared bankruptcy in 2022; the liquidation plan approved by the Bankruptcy Court will return to consumers about 36 percent of the value of their claims against the firm. (Randles, Failed Crypto Broker Voyager Digital Cleared to Start Repaying Customers’ Frozen Funds, Bloomberg (May 17, 2023), https://www.bloomberg.com/news/articles/2023-05-17/voyager-cleared-to-liquidate-start-repaying-customers-crypto. ↑
See SEC v. Binance Holdings Limited, et al., Complaint, Case No. 1:2-cv-01599 (S.D.N.Y., Jun. 5. 2023), pp. 2-5. ↑
See SEC v. Coinbase, Inc. and Coinbase Global, Inc., Complaint, Case No. 1:23-cv-04738 (S.D.N.Y., Jun. 6, 2023), p. 2. ↑
SEC v. Howey (1946) 328 U.S. 293, 298-299. ↑
SEC v. Binance Holdings Limited, et al., Complaint, supra, at p. 29. ↑
Certain non-fungible token (NFT) companies have expressed concern that non-financial NFT products, such as digital baseball cards, will fall within the ambit of this bill. This appears unlikely because the bill specifically regulates financial assets, not all financial assets, and the definition of “digital financial asset” is clearly limited to products that are used as a medium of exchange, unit of account, or store of value. The stakeholders also note that Wyoming’s digital assets law has a carve-out for “digital consumer assets,” but the Wyoming’s law applies to all digital assets, not just digital financial assets. (Wy. Stat. § 34-29-101.) Moreover, to the extent that a truly consumer-focused NFT were inadvertently swept into the bill’s scope, the bill grants the DFPI the authority to exempt the NFT from regulation. ↑
Bitcoin, the first cryptocurrency, launched in 2009. (Pinkerton, The History of Bitcoin, the First Cryptocurrency, U.S. News & World Report (May 10, 2023), https://money.usnews.com/investing/articles/the-history-of-bitcoin. ↑
U.S. Const., art. VI, cl. 2. ↑
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Monique Limón, Chair
2023 - 2024 Regular
Bill No: AB 39 Hearing Date: June 21, 2023
Author: | Grayson | ||
Version: | June 12, 2023 Amended | ||
Urgency: | No | Fiscal: | Yes |
Consultant: | Michael Burdick | ||
Subject: Digital financial asset businesses: regulatory oversight
SUMMARY
This bill establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset business activity. The bill intends to provide regulatory clarity to businesses and legal protections for consumers and retail investors in this emerging industry.
EXISTING LAW
- Establishes the Department of Financial Protection and Innovation (DFPI) as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
- Provides the Corporate Securities Law of 1968, administered by DFPI, which governs the issuance and sale of securities in California. (Corporations Code Sections 25000 et seq.)
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such sale has been qualified by DFPI, as specified, or the sale is covered by an express exemption from qualification. (Corporations Code Section 25110)
- Provides the Money Transmission Act, administered by DFPI, which requires licensure of persons engaged in the business of money transmission, unless the person is exempt. (Financial Code Section 2000 et seq.)
- Defines money transmission as selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission. (Financial Code Section 2003(q))
THIS BILL
- Establishes the Digital Financial Assets Law to be administered by DFPI.
- Defines the following terms, among others:
- “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. Specifies that “digital financial asset” does not include:
- Value issued by a merchant as part of an affinity or awards program that cannot be exchanged for legal tender, bank credit, or a digital financial asset.
- A digital representation of value issued by a publisher and used solely within an online game, as specified.
- A security registered with the Securities and Exchange Commission, qualified with DFPI, or exempt from such registration or qualification.
- “Legal tender” means a medium of exchange or unit of value, including the coin or paper money of the United States, issued by the United States or by another government.
- “Digital financial asset business activity” means exchanging, transferring, or storing a digital financial asset; issuing a digital financial asset with the authority to redeem the currency for legal tender, bank credit, or another digital financial asset; or other specified activities related to electronic precious metals and digital representations of value used in online games.
- When used in reference to a transaction or relationship involving a digital financial asset, “control” means the power to execute unilaterally or prevent indefinitely a digital financial asset transaction.
- “Exchange” when used as a verb, means to assume control of a digital financial asset from, or on behalf of, a resident, at least momentarily, to sell, trade, or convert either of the following:
- A digital financial asset for legal tender, bank credit, or one or more forms of digital financial assets.
- Legal tender or bank credit for one or more forms of digital financial assets.
- “Store” except in the phrase “store of value,” means to maintain control of a digital financial asset on behalf of a resident by a person other than the resident.
- “Transfer” means to assume control of a digital financial asset from, or on behalf of, a resident and to subsequently do any of the following:
- Credit the digital financial asset to the account of another person.
- Move the digital financial asset from one account of a resident to another account of the same resident.
- Relinquish control of a digital financial asset to another person.
- “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. Specifies that “digital financial asset” does not include:
- Exempts from the new division banks, as specified; persons providing only specified computing, network, or data storage or security services; persons using a digital financial asset solely on the person’s own behalf; and persons registered as a securities broker-dealer to the extent of its operation as such, among other specified exemptions.
- On or after January 1, 2025, prohibits a person from engaging in digital financial asset business activity without a license from DFPI, as specified.
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application.
- Authorizes DFPI to issue a conditional license to an applicant who holds or maintains a license to conduct virtual currency business activity in New York, as specified.
- Requires a licensee to maintain a surety bond or trust account in a form and amount as determined by DFPI for the protection of residents with whom a licensee engages in digital financial asset business activity, as specified.
- Requires a licensee to maintain capital and liquidity in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of specific risks applicable to the licensee, as specified.
- Establishes a process for a licensee to renew its license on an annual basis.
- Authorizes DFPI to adopt rules necessary to implement the division and issue guidance as appropriate.
- Authorizes DFPI to conduct an examination of a licensee for compliance with the division and requires a licensee to maintain business records, as specified.
- Requires a licensee to file with DFPI a report related to a material change in information provided in the application for licensure, a material change in the licensee’s digital financial asset business activity, or a change of an executive officer, responsible individual, or person in control of the licensee.
- Provides specified applicable rules in determining whether a person has control over a licensee; requires that, before a proposed change in control of a licensee, the proposed person to be in control submit an application with information required by this division for an application for licensure, as applicable; and prohibits DFPI from approving the application unless the department determines specified suitability conditions have been met.
- Provides a process similar to an application related to a proposed change in control for an application of a proposed merger or consolidation of a licensee with another person.
- Defines “enforcement measure” as an action to do any of the following:
- Suspend or revoke a license.
- Order a person to cease and desist from doing digital financial asset business activity.
- Request the court to appoint a receiver for the assets of a person doing digital financial asset business activity.
- Request the court to issue temporary, preliminary, or permanent injunctive relief against a person doing digital financial asset business activity.
- Assess a penalty of up to $100,000 for each day that a person engages in digital financial asset business activity without a license.
- If a person required to obtain a license materially violates a provision of the division, assess a penalty of up to $20,000 for each day of violation or for each act or omission in violation.
- Recover on the security described in #7 of this section and initiate a plan to distribute the proceeds for the benefit of a resident injured by a violation of the law.
- Impose necessary or appropriate conditions on the conduct of digital financial asset business activity.
- Seek restitution on behalf of a resident if the department shows economic injury due to a violation of this division.
- Authorizes DFPI to take an enforcement measure against a person in any of the following instances:
- The person materially violates a state law applicable to digital financial asset business activity.
- The person does not cooperate with an examination or investigation, fails to pay a fee, or fails to submit a report or documentation.
- The person, in the conduct of its digital financial asset business activity, engages in an unsafe or unsound act or practice; an unfair or deceptive act or practice; fraud, intentional misrepresentation, or other dishonest act; or misappropriation of legal tender, a digital financial asset, or other value held by a fiduciary.
- A federal agency or another state takes an action against the person, which would constitute an enforcement measure if the department had taken the action.
- The person is convicted of a crime related to its digital financial asset business activity or involving fraud or felonious activity, as specified.
- The person becomes insolvent or takes specified actions indicating financial weaknesses.
- The person makes a material misrepresentation to the department.
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when a revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes DFPI to enter into a consent order with a person regarding an enforcement measure and permits the order to provide that it does not constitute an admission of fact.
- States that the chapter of the bill related to enforcement does not provide a private right of action, but does not preclude an action by a person to enforce rights related to property interests described in #22 of this section.
- Defines “covered person” as a person required to obtain a license related to digital financial asset business activity. This term is intended to be more expansive than the term “licensee” which applies only to those persons who already have a license. The author intends any provision that refers to the obligations of a “covered person” to be effective starting on January 1, 2024, while the licensure requirement is not effective until January 1, 2025.
- Requires a covered person to provide disclosures, as specified, to its customers. Information required to be disclosed includes, but is not limited to, the following, as specified:
- A schedule of fees and charges.
- Whether the product or service provided is covered by insurance or other guarantee from loss.
- A description of specified terms related to their customers’ rights and responsibilities and processes associated with transfers or exchanges.
- That no digital financial asset is currently recognized as legal tender by California or the United States.
- A list of instances over the past 12 months when the person’s service was unavailable to 10,000 or more customers due to a service outage, as specified.
- Requires a covered person to provide a transaction confirmation record, as specified.
- Requires a covered that has control of a digital financial asset for one or more persons to maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.
- Provides that, in the event of a violation of this requirement, the property interest of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.
- Requires that digital financial assets maintained for compliance with the provision to meet all of the following criteria: be held for the persons entitled to the digital financial asset, shall not be property of the covered person, and shall not be subject to the claims of creditors of the covered person.
- Defines a “covered exchange” as a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.
- Requires a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, to certify that the covered exchanged has conducted specified due diligence related to the digital financial asset, including the likelihood the asset would be deemed a security by federal or state regulators, provided a full disclosure relating to conflicts of interests, and conducted a comprehensive risk assessment of the asset, among other things. Exempts a covered exchange from these obligations for any digital financial assets that were approved by New York regulators on or before January 1, 2023.
- Requires a covered exchange to make every effort to execute a resident’s request to exchange a digital financial asset in a manner so that the outcome to the resident is as favorable as possible under prevailing market conditions, as specified.
- Requires a licensee to prominently display on its internet website a toll-free telephone number through which a customer can contact the seller for customer service issues and receive live customer assistance, 10 hours per day, Monday through Friday, excluding federal holidays.
- Prohibits a covered person from exchanging, transferring, or storing a stablecoin unless the issuer of the stablecoin is a licensee, a person that applies for a license, or a bank and the issuer of the stablecoin at all times owns eligible securities that fully back the stablecoin, as specified.
- Requires a prospective licensee, prior to seeking approval from DFPI, to create and, during licensure, maintain policies and procedures related to information security, operational security, business continuity, disaster recovery, antifraud, money laundering prevention, terrorist financing prevention, and compliance with applicable laws, as specified.
- Provides that the new division applies to digital financial asset business activity conducted on and after January 1, 2025.
COMMENTS
- PURPOSE
According to the author:
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
- BACKGROUND
This bill is similar to AB 2269 (Grayson, 2022), which proposed a licensing law for digital financial asset businesses that would be administered by the Department of Financial Protection and Innovation (DFPI). This committee passed AB 2269 on a 6-0 vote, and the bill was approved by the Senate on a 31-6 vote and by the Assembly on a 71-0 vote. Governor Newsom, however, vetoed the bill. As discussed in a subsequent comment, the author has made targeted changes to his proposal from last year to address various industry concerns and to ease the implementation burden on DFPI. The structure and major provisions of this bill adhere closely to those found in AB 2269, and the focus of the bill remains on providing a clear regulatory framework that prioritizes consumer protections within the digital financial asset industry.
This bill uses the term “digital financial assets” to describe a range of money-like, digital representations of value that are not considered legal tender and are not issued by a central bank of a sovereign nation. Similar terms used to describe this concept are cryptocurrencies, digital currencies, virtual currencies, crypto assets, and digital assets, among others. Prominent examples of digital financial assets include bitcoin, ether, dogecoin, tether, and USD Coin. This committee’s analysis of AB 2269 from last year provides detailed background of the digital financial assets industry, the legal context within which it operates, and why additional regulation is necessary to better protect consumers. That analysis is incorporated herein by reference.[1]
- GOVERNOR’S VETO OF AB 2269
As mentioned in the previous comment, Governor Newsom vetoed AB 2269 last session, a substantively similar bill to AB 39 and by the same author. The governor’s veto message to the legislature reads:
AB 2269 would establish a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation, for digital financial asset activity. Digital assets are becoming increasingly popular in our financial ecosystem, with more consumers buying and selling cryptocurrencies each year. I share the author's intent to protect Californians from potential financial harm while providing clear rules for crypto-businesses operating in this state.
On May 4, 2022, I issued Executive Order N-9-22 to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation, and protects consumers who use digital asset financial services and products - all within the context of a rapidly evolving federal regulatory picture. Over the last several months, my Administration has conducted extensive research and outreach to gather input on approaches that balance the benefits and risk to consumers, harmonize with federal rules, and incorporate California values such as equity, inclusivity, and environmental protection.
It is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm. Additionally, standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the general fund in the tens of millions of dollars for the first several years. Such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.
I am committed to working collaboratively with the Legislature to achieve the appropriate regulatory clarity once federal regulations come into sharper focus for digital financial assets, while ensuring California remains a competitive place for companies to invest and innovate.
Since the Governor’s veto, the digital financial asset industry has continued to struggle as major companies have filed for bankruptcy and federal and state agencies have initiated dozens of enforcement actions and lawsuits alleging illegal activities. Additionally, the current Congress appears to be gridlocked on any crypto-related legislation, with no apparent resolution between the policy positions of pro-industry House Republicans and crypto-skeptic Democrats in the US Senate. From the executive branch, the Biden Administration has generally taken a more skeptical view on the industry than it communicated in 2021, with US Treasury and the Council of Economic Advisers emphasizing the risks and problems of crypto and downplaying industry claims of purported benefits of crypto.
Within California, there has been little progress under the Governor’s executive order towards achieving a transparent regulatory environment that protects consumers with no proposals for new regulations or legislation or requests for additional budget resources. DFPI has brought numerous enforcement actions against crypto companies and individual fraudsters for violating state securities laws, but there remains a lack of state supervision over the activities of crypto businesses. Compared to businesses in the traditional financial system – such as, banks, securities brokers and dealers, and payments providers – crypto businesses continue to operate with far less oversight and outside of existing regulatory frameworks. This lack of oversight likely contributes to a higher rate and intensity of harm to consumers than would exist if the industry were properly regulated.
- INDUSTRY STRUGGLES OVER THE PAST YEAR
The past year in the crypto industry was tumultuous.[2] When this committee heard AB 2269 a year ago, crypto markets had recently experienced a sharp downturn, sparked by the collapse in May 2022 of the so-called stablecoin, TerraUSD, which was a token designed and marketed to keep a value of $1.00. Along with its sister token, Luna, the collapse of TerraUSD wiped out $40 billion of market value and catalyzed the eventual failures of several large crypto companies, including Three Arrows Capital, Celsius, Voyager, BlockFi, and Genesis. These failures affect not only the owners and employees of these companies, but also have imposed financial losses on those companies’ customers, who range from sophisticated institutional investors to working people who unwittingly invested their savings or retirement assets in companies that were far riskier than they realized.
After several months of relative quiet, turmoil returned in early November 2022 with reports revealing that FTX, a large crypto exchange, and its associated trading firm, Alameda Research, engaged in related-party transactions with significant conflicts of interests, calling into question the financial viability of the two companies. The reports initiated a run on FTX with accountholders liquidating their balances or pulling their assets off of the platform. Subsequent reporting revealed that FTX lent billions of dollars of customer assets to Alameda Research, who subsequently gambled the assets away, and by November 11, 2022, FTX filed for chapter 11 bankruptcy protection. The following month, Sam Bankman-Fried, founder and CEO of FTX, was arrested in the Bahamas after federal prosecutors in New York filed criminal charges related to fraud, money laundering, and other crimes.
The revelation of Sam Bankman-Fried’s alleged criminal activities likely contributed to a change in tone at the federal level related to regulating crypto businesses. In 2021 and 2022, FTX had spent millions of dollars on advertising campaigns, using celebrities and star athletes to build the company’s brand identity and attract customers to its platform. Meanwhile, Bankman-Fried was among the most prominent advocates lobbying federal regulators and Congress to support new laws that would arguably give FTX and other crypto businesses preferential treatment compared to traditional financial institutions. The combination of high public visibility and active lobbying and associated campaign contributions had bolstered the perceived credibility of FTX and Bankman-Fried in the eyes of regulators and Congress, which made the criminal allegations particularly shocking and has likely led to a more skeptical view in Washington, D.C. of the entire industry, especially among Democrats.
The response from federal regulators in 2023 has been pronounced. Federal banking regulators issued in January 2023 a joint statement to banks about crypto activities, which stated that issuing or holding crypto is “highly likely to be inconsistent with safe and sound banking practices.”[3] The Federal Reserve followed on January 27th with a rejection of an application from a crypto-focused bank to gain access to the central bank’s payment system. In February the Securities and Exchange Commission (SEC) proposed a rule that may make it more difficult for many asset managers to invest their clients’ funds in crypto assets.
On the law enforcement front, the SEC, Commodities Futures Trading Commission, the U.S. Department of Justice, and state regulators have brought actions against nearly all of the major players in the industry for alleged violations of laws. Settled or outstanding cases include multiple actions against Binance and Coinbase, the two most prominent exchanges, as well actions against Kraken, Gemini, Genesis, Do Kwon (the founder of Terra), Justin Sun (the founder of BitTorrent and Tron), Nexo, Bittrex, and Paxos. In various lawsuits and enforcement actions, the SEC has declared at least 55 crypto assets as unregistered securities, including nearly half of the top 20 tokens in purported market cap: BNB token (issued by Binance), XRP (issued by Ripple), Cardano, Solana, Tron, Polygon, Toncoin, Avalanche, and Binance USD.[4] As alleged by law enforcement entities, a large portion of the crypto markets have been operating – and continue to operate – out of compliance with existing law.
In recent weeks, Prime Trust, a Nevada-chartered trust company that serves as a custodian for crypto firms, was revealed to be insolvent, and the Nevada financial regulator is pushing the company into receivership.[5] Prime Trust has apparently been insolvent since 2021 when the company discovered that is was unable to access digital wallets that stored assets on behalf of the company’s customers. Prime Trust had relationships with other crypto companies who interacted directly with consumers, while Prime Trust was intended to be a safe place for consumers’ assets to be stored. The failure of Prime Trust is another reminder of the technological and operational risk inherent within the crypto ecosystem and the downsides presented by blockchains that make transactions difficult, and sometimes practically impossible, to reverse.
- COMPARING THIS BILL TO AB 2269 OF 2022
The table below provided by the author’s office compares several key differences between this bill and AB 2269 of 2022 that was vetoed by the Governor. In general, this bill enhances consumer protections in several areas, while providing additional flexibility to industry participants and DFPI to address a number of implementation concerns. In addition to the items in the table below, the amendments recommended in Comment #8 below include changes that are intended to address additional concerns raised by industry, provide specificity to provisions that would require DFPI to conduct rulemaking if left vague, and better align terminology in this bill with laws that DFPI already administers. In summary, the changes proposed by this bill, compared to last year’s bill, are intended to reduce the burden and cost for DFPI to administer the law, to avoid potential problems in standing-up the licensing program which could disrupt business activity in the market, and to relax aspects of the licensing program to avoid compliance challenges for industry, all while maintaining strong consumer protections throughout the law.
AB 39 (2023) | AB 2269 (2022) |
Consumer protections go into effect on January 1, 2024. AB 39 requires all crypto companies to comply with the bill’s key consumer protections starting on January 1, 2024. Companies that do not comply with these protections will be unable to get a permanent license. | Consumer protections would have taken effect on January 1, 2025. AB 2269’s consumer protections would not have taken effect until the required licensure date of January 1, 2025. As a result, consumers would have remained vulnerable in that window of program implementation. |
Conditional licensing for those licensed or chartered in New York AB 39 allows for an ongoing conditional license to any company that is licensed or chartered to do business in New York State. These companies must still comply with AB 39’s other provisions. | No conditional licensing provision. AB 2269 would not have allowed for a conditional license for companies holding a New York license or charter. |
Exchanges must self-certify that crypto assets meet certain standards. AB 39 requires any crypto exchange, prior to listing a token or crypto asset for sale, transfer, or exchange, to self-certify that the exchange has conducted a comprehensive risk assessment, and provided full and fair disclosure of all materials related to conflicts of interest, among other topics. | Proposed a “best interest” standard for crypto exchanges. AB 2269 would have required a crypto exchange to serve the best interests of their customers by disclosing and mitigating conflicts of interest, forming a reasonable basis for any recommendations made to customers, and exercising reasonable diligence to evaluate specified criteria before listing any specific digital financial asset as available for exchange. |
Requires licensees to have live customer service 10 hours a day, 5 days a week. AB 39 aligns customer service requirements to those that apply to licensed money transmitters. | Requires licensees to have live customer service 24 hours a day, 7 days a week. AB 2269 would have required licensees to have live customer service around the clock. |
Permanently requires stablecoins to be fully backed by reserves. AB 39 prohibits crypto companies from making a so-called “stablecoin” available for exchange, transfer, or storage unless the stablecoin’s value is backed by reserve assets. | Temporarily required stablecoins to be fully backed by reserves. AB 2269 would have also prohibited crypto companies from making a so-called “stablecoin” available for exchange, transfer, or storage unless the stablecoin’s value is backed by reserve assets, but only until January 1, 2028. |
- ARGUMENTS IN SUPPORT
The Consumer Federation of California writes in support, as sponsor:
AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational “rules of the road” are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers.
- ARGUMENTS IN OPPOSITION
Crypto Council for Innovation (CCI), an association whose members include Andreessen Horowitz, Block, Coinbase, Electric Capital, Fidelity Digital Assets, Gemini, OpenSea, Paradigm, and Ribbit Capital, writes in an “oppose unless amended” position:
CCI is grateful for the progress the Committee has made in addressing industry concerns following Governor Newsom’s veto of AB 2269, including the expedited licensing pathway for businesses operating in compliance with New York’s virtual currency business activity regulations and the exemption for smaller digital asset businesses…
CCI continues with requests for various amendments, some of which have been incorporated by the author in the current version of the bill and some of which are reflected in proposed amendments in the subsequent comment. Outstanding items of concern for CCI include, but are not limited to, the requirement that stablecoins are fully backed by high-quality assets, a desire for an entities-based exemption for entities registered with the Commodities Futures Trading Commission, an increase in the exemption threshold for small companies to $2 million of business activity, and a desire for more concrete application and review timelines.
- AMENDMENTS
Committee staff recommends and the author has agreed to the following amendments.
- Align definition of “control” with existing law in Financial Code Section 1250.
Amend paragraph (2) of subdivision (c) of Section 3102 to read:
(2) When used in reference to a person, the direct or indirect power: to direct the management, operations, or policies of the person through legal or beneficial ownership of voting power in the person or under a contract, arrangement, or understanding.
- To vote 25 percent or more of any class of the voting securities issued by a person; or
- To direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or nonmanagement services), or otherwise; provided, however, that no individual shall be deemed to control a person solely on account of being a director, officer, or employee of such person.
- Ensure definition of “executive officer” is not overly prescriptive by including those persons who make or implement policies.
Amend subdivision (l) of Section 3102 to read:
“Executive officer” includes, but is not limited to, means an individual who is a director, officer, manager, managing member, partner, or trustee of a person that is not an individual, or any other person who performs similar policy-making or policy-implementation functions.
- Exempt a licensee from the definition of “resident” so that California-based licensees are not limited to only engaging in digital financial asset business activity with other companies that are licensees.
Amend subdivision (r) of Section 3102 to read:
- “Resident” means any of the following:
- A person who is domiciled in this state.
- A person who is physically located in this state for more than 183 days of the previous 365 days.
- A person who has a place of business in this state.
- A legal representative of a person that is domiciled in this state.
- “Resident” does not include a licensee or an affiliate, as defined in subdivision (a) of Section 90005, of a licensee.
- Remove exemption for digital asset control services vendor. The failure of Prime Trust highlights the need for state oversight of non-customer-facing custodians and other service providers who exert control over the digital financial assets of California residents.
Delete paragraph (13) from subdivision (b) of Section 3103.
- Provide DFPI with ability to exempt, in whole or in part, persons or transactions from the licensing law, as appropriate. Business activity related to digital financial assets is evolving quickly. If provisions of this licensing law are ill-fit for new or emerging business models or practices, DFPI may be better equipped to ensure consumer protections by granting businesses flexibility with case-by-case exemptions, rather than codifying broad and rigid statutory carve-outs.
Add the following subdivision (d) to Section 3103.
(d) The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division. The commissioner shall post on the commissioner’s Internet Web site a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the part or parts of this division from which they are exempt. The commissioner may, by regulation or order, amend or rescind any exemption made pursuant to this subdivision.
- Specify the documentation that an applicant would provide to demonstrate compliance with capital and liquidity requirements. This language was borrowed from existing regulations that apply to money transmitters.[6]
Amend subparagraph (J) of paragraph (2) of subdivision (a) of Section 3203 to read:
(J) Documentation demonstrating that the applicant has the capital and liquidity required by Section 3207. Documentation includes, but is not limited to:
(i) A copy of the applicant’s audited financial statements for the most recent fiscal year and, if available, for the two-year period next preceding the submission of the application.
(ii) A copy of the applicant’s unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(iii) If the applicant is publicly traded, a copy of the most recent report filed with the United States Securities and Exchange Commission under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
- Increase the time for a licensee to comply with a requirement from DFPI to increase the amount of security deposited or capital or liquidity required pursuant to Section 3207.
Change from 15 to 30 the number of days provided by Section 3207(a)(4) and (e).
- Clarify inconsistencies and vagueness in the provision related to liquidity requirements. As currently drafted, subdivisions (c) and (d) of Section 3207 are inconsistent and unclear. Subdivision (c) provides that DFPI determines the proportion of specified assets that may be used to meet the liquidity requirement, while subdivision (d) suggests that the licensee has a role in calculating its capital and liquidity. Subdivision (c) also includes terms that lack specificity and precision.
Amend subdivision (c) and delete subdivision (d) of Section 3207, as follows:
(c) A licensee shall hold liquidity liquid assets required to be maintained in accordance with this section in the form of cash, digital financial assets other than digital financial assets over which the licensee has control for a resident entitled to the protections of Section 3503, or high-quality, liquid assets as defined in subdivision (a) of 12 C.F.R. 249.20 highly-liquid, investment grade assets, in proportions determined by the department.
(d) (1) A licensee may include in its calculation of capital and liquidity the value of digital financial assets other than the digital financial assets over which it has control for a resident entitled to the protections of Section 3503.
(2) For purposes of this subdivision, the value of digital financial assets shall be the average value of the digital financial assets in United States dollar equivalent during the prior six months.
- Clarify and narrow the type of investigations and data security breach events that require disclosure by the licensee to DFPI to those where the licensee is the subject of the investigation or breach.
Amend subparagraphs (C) and (D) of paragraph (3) of subdivision (b) of Section 3211 by replacing the two instances of “involving” with “of.”
- Specify the scope of changes in a licensee’s business that require reporting to DFPI, by aligning with requirements of New York’s BitLicense program.
Amend paragraph (2) of subdivision (a) of Section 3307 to read:
(2) A material change in the licensee’s business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A) The change may raise a legal or regulatory issue about the permissibility of the licensee’s digital financial business activity.
(B) The proposed change may raise safety and soundness or operational concerns.
(C) A change is proposed to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
- Modify the parameters for determining whether a person has control over a licensee to more closely reflect existing law that applies to other licensing programs administered by DFPI, such as those found in Financial Code Section 1250.
Amend subdivision (b) of Section 3309 to read:
(b) The following rules apply in determining whether a person has control over a licensee:
(1) There is a rebuttable presumption of control if a person directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(12) A person has control over a licensee if the person’s voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(23) A person has control over a licensee if the person’s voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other person’s voting power in the licensee constitutes at least 25 10 percent of the total voting power of the licensee.
(34) A person does not have control over a licensee solely because that person is an executive officer of the licensee.
- Align DFPI enforcement authority related to the timing of alleged unlawful acts with existing law under the California Consumer Protection Law.
Amend subdivision (a) of Section 3403 and subdivision (a) of Section 3407, as follows:
3403. (a) The department may take an enforcement measure against a licensee or person that is not a licensee but has engaged, is engaging, or proposes to engage in digital financial asset business activity with, or on behalf of, a resident in any of the following instances:
(1) The licensee or person materially violates this division, a rule adopted or order issued under this division, or a law of this state other than this division that applies to digital financial asset business activity of the violator with, or on behalf of, a resident.
(2) The licensee or person does not cooperate substantially with an examination or investigation by the department, fails to pay a fee, or fails to submit a report or documentation.
(3) The licensee or person, in the conduct of its digital financial asset business activity with, or on behalf of, a resident, has engaged, engages, or proposes to engage in any of the following:…
3407. (a) If a person other than a licensee has engaged, engages, or proposes to engage in digital financial asset business activity with, or on behalf of, a resident in violation of this division, the department may assess a civil penalty against the person in an amount not to exceed one hundred thousand dollars ($100,000) for each day the person is in violation of this division.
- Clarify that the “no private right of action” language does not intend to block any existing common law rights and remedies.
Amend Section 3413 to read:
(a) This chapter does not shall not be construed to provide a private right of action to a resident.
(b) The duties and obligations imposed by this chapter are cumulative with any other duties or obligations imposed under other law, and shall not be construed to relieve any party from any duties or obligations imposed under other law.
(bc) This section does not preclude an action by a resident to enforce rights under Section 3503.
- Add provisions intended to protect customers’ assets in the event a licensee falls into financial trouble or files for bankruptcy, modelled after protections found in the Money Transmission Act.
Add the following subdivisions (d) and (e) to Section 3503:
(d) Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons’ digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. No digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.
(e) A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.
- Clarify the definition of “stablecoin” to better reflect the intent of the provision to prevent the marketing of so-called stablecoins that are not backed by high-quality assets. The current language in the bill may have a loophole for tokens that do not have an express redemption feature. This important provision is motivated by the meltdown of TerraUSD, mentioned in a previous comment, in which the so-called stablecoin de-pegged and is now valued at essentially nothing. Users of Terra USD collectively lost billions of dollars on a crypto asset that was marketed as a substitute for fiat currency or bank money – these users were not speculating on the price of the token going up, rather they were assuming that the token would simply keep its $1.00 value.
Amend paragraph (3) of subdivision (b) of Section 3601 as follows:
(3) “Stablecoin” means a digital financial asset that is denominated in United States dollars or pegged to the United States dollar or denominated in or pegged to another national or state currency and is issued with a fixed nominal redemption value and is marketed with the intent of establishing in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption value effectively fixed.
- Fix a drafting error that contains duplicative language and that unintentionally delays the operative date for certain aspects of the bill. With this change, the licensing requirement has a delayed implementation date of January 1, 2025, while consumer protection requirements related to disclosures, fully-backed stablecoins, and business policies and procedures (i.e., Chapters 5-7 of the bill) will be effective on January 1, 2024.
Delete Section 3801.
- DOUBLE REFERRAL
This bill is double-referred to the Judiciary Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association
California Credit Union League
California Low-income Consumer Coalition
Cameo - California Association for Micro Enterprise Opportunity
Consumer Federation of California
Consumer Reports
Consumers for Auto Reliability & Safety
Digital Currency Traders Alliance
Los Angeles County Democratic Party
Oakland Privacy
Opposition
Crypto Council for Innovation
-- END --
See Senate Banking and Financial Institutions analysis dated 6/20/2022 at the following link: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202120220AB2269# ↑
The following events were chronicled in many media outlets. The facts summarized in this comment were sourced from the following article published by The Wall St. Journal: https://www.wsj.com/articles/crypto-crisis-a-timeline-of-key-events-11675519887?mod=ftx-ribbon, accessed on June 21, 2023. ↑
https://www.occ.gov/news-issuances/news-releases/2023/nr-ia-2023-1a.pdf ↑
https://cointelegraph.com/news/sec-labels-61-cryptocurrencies-securities-after-binance-suit ↑
https://www.coindesk.com/policy/2023/06/27/nevada-places-crypto-custodian-prime-trust-into-receivership/ ↑
10 CCR § 80.4111 ↑
ASSEMBLY THIRD READING
ATR Bill Id:AB 39
Author:(Grayson)
As Amended Ver:May 18, 2023
Majority vote
SUMMARY
Establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI) for digital financial asset business activity, as specified.
Major Provisions
- Establishes the Digital Financial Assets Law to be administered by DFPI and prohibits a person from engaging in digital financial asset business activity beginning on January 1, 2025, without a license with DFPI, as specified.
- Defines a "covered person" as a person required to obtain a license, and requires a covered person to comply with specified provisions beginning on January 1, 2024.
- Exempts from the new licensing program: registered or qualified securities; banks and credit unions; persons providing only specified computing, network, data storage, or security services; and persons whose digital financial asset business activity is reasonably expected to be valued at $50,000 or less, among other specified exemptions.
- Authorizes DFPI to issue a conditional license to a person with a valid license or charter to conduct virtual currency activity under New York Law, provided that the license or charter was issued or approved prior to January 1, 2023.
- Requires a licensee to maintain a surety bond or trust account for the benefit of its customers in a form and amount as determined by DFPI for the protection of the licensee’s customers, as specified.
- Requires a licensee to maintain capital and liquidity in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of specific risks applicable to the licensee, as specified.
- Requires a covered exchange, as defined, prior to listing or offering a digital financial asset, to certify on a form provided by DFPI that the exchange has conducted a comprehensive risk assessment, established policies and procedures to evaluate the appropriateness of the listing, and provided full and fair disclosure of all materials related to conflicts of interest, among other topics.
- Provides that a covered person may not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless the issuer of the stablecoin is licensed pursuant to this bill or is a bank and the issuer at all times owns eligible securities having an aggregate market value calculated in accordance with generally accepted accounting principles of not less than the amount of its outstanding stablecoins issued or sold in the United States.
COMMENTS
A digital financial asset (also known as cryptocurrency, crypto asset, or virtual currency) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Bitcoin, the most well-known virtual currency, and many other virtual currencies are created and tracked via a decentralized protocol, rather than the centralized issuance model that prevails in the world of fiat money.
Cryptocurrency and decentralized finance proponents believe that these products and systems are viable alternatives to those found in the traditional financial system. They argue that cryptocurrency is beneficial because it is decentralized, allows peer-to-peer transactions, makes transactions easy and fast, diversifies portfolios, acts as an inflation hedge, encourages cross-border payments, and provides transactional freedom.
Despite its name, there is doubt that cryptocurrency could work well as money. First, as a matter of definition, cryptocurrency is not issued by a central government, and there is no obligation for the government to accept it. And, unlike most fiat currencies, cryptocurrency also appears to be highly vulnerable to confidence shocks, fraud, and price instability, and consumers must navigate a host of technological and practical obstacles when using it.
Moreover, many holders of cryptocurrencies use these digital assets to engage in speculative investment activities or other types of financial services activities rather than facilitating payments and conducting everyday transactions. Most cryptocurrency trading happening today treats it as an asset class – a group of investments with particular characteristics – owned for purposes other than payments for goods and services.
In recent years, market turmoil has exposed a host of consumer and investor risks in the crypto market. Those risks include fraud, hacks, scam products, extreme volatility, insider trading, and information asymmetry, and a lack of clear federal and state legal protections. These risks expose everyday investors and consumers to financial losses outside of their control. More recently, the well-known company FTX collapsed and the head of the company, Sam Bankman-Fried, was arrested.
This bill establishes a licensing framework for a business engaging in digital financial asset business activity, which is the most common regulatory approach to financial services at the state level. DFPI administers licensing laws for a range of companies, including banks, credit unions, money transmitters, lenders and brokers, mortgage loan originators, student loan servicers, and debt collectors. Like those licensing programs, this bill establishes an upfront process, requires companies to maintain adequate financial security to provide assurance that the business can meet its obligations to its customers, and authorizes DFPI to routinely examine businesses for compliance and to take enforcement actions, if needed.
According to the Author
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
Arguments in Support
AB 39 is sponsored by the Consumer Federation of California and is supported by a coalition of consumer advocacy organizations, organizations representing banks and credit unions, and organizations representing retail crypto traders. The Consumer Federation of California argues:
"AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational "rules of the road" are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers."
Arguments in Opposition
The Crypto Council for Innovation (CCI), an alliance of companies whose membership includes Coinbase, Block, Gemini, Paradigm, and Andreessen Horowitz, opposes AB 39 unless amended. CCI states:
"The legislature must work to increase clarity and improve communication structures in the bill, so that expectations for potential licensees and regulators are better aligned. In order to ensure regulated entities are best positioned to compete in a crowded marketplace, the legislature should provide concrete application and review timelines, narrow the scope of the overly broad digital financial asset business activity definition, and ensure licensees are provided written notice before examinations. Additionally, the legislature must expand the federal registration exemption to include entities registered with the Commodity Futures Trading Commission (CFTC) and clarify the mergers and consolidation approval authority it is granting regulators."
FISCAL COMMENTS
According to the Assembly Appropriations Committee, costs of an unknown, but significant amount, likely in the tens of millions of dollars, to DFPI to establish and maintain the new licensing program for DFA business activity. Costs to establish the new program include equipment, software to analyze blockchain, and other information technology operating expenses, as well as workload related to promulgating regulations and training for DFPI staff. Ongoing costs include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities. Given the program’s size and complexity, DFPI will likely need specialized staff with technical expertise in a rapidly evolving field to support the program’s operations.
A General Fund (GF) loan is likely necessary in the first several years to establish the program. Revenue from new program fees may offset DFPI’s administrative and enforcement costs to some extent. Any actual increase in fee revenue to DFPI will depend on the number of entities seeking to become licensed to engage in DFA business activity.
VOTES
ASM BANKING AND FINANCE: 11-0-1
YES: Grayson, Bauer-Kahan, Cervantes, Dixon, Mike Fong, Gabriel, Petrie-Norris, Soria, Waldron, Wicks, Wilson
ABS, ABST OR NV: Chen
ASM APPROPRIATIONS: 11-0-5
YES: Holden, Bryan, Calderon, Wendy Carrillo, Mike Fong, Hart, Lowenthal, Papan, Pellerin, Weber, Ortega
ABS, ABST OR NV: Megan Dahle, Dixon, Mathis, Robert Rivas, Sanchez
UPDATED
VERSION: May 18, 2023
CONSULTANT: Luke Reidenbach / B. & F. / (916) 319-3081 FN: 0000754
Date of Hearing: May 10, 2023
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Chris Holden, Chair
ABPCA Bill Id:AB 39
Author:(Grayson) – As Amended Ver:April 26, 2023
Policy Committee: | Banking and Finance | Vote: | 11 - 0 |
|
| ||
|
|
Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill enacts the Digital Financial Assets Law under the Department of Financial Protection and Innovation (DFPI), establishing a licensing and regulatory framework for digital financial asset (DFA) business activity.
Specifically, this bill:
- Prohibits, beginning January 1, 2025, a person from engaging in DFA business activity with, or on behalf of, a resident unless the person is licensed with DFPI. DFPI must determine a nonrefundable license application, investigation, and renewal fee amount to cover the reasonable costs of regulation.
- Authorizes DFPI to conduct examinations of a licensee and take enforcement action against a licensee or a person that is not a licensee but engaging in DFA business activity.
- Requires a licensee to maintain certain records, including a general ledger posted at least monthly listing all assets, liabilities, capital, income, and expenses of the licensee, and make certain disclosures to a resident, including a schedule of fees and charges the licensee may assess, before engaging in DFA business activity.
FISCAL EFFECT:
Costs of an unknown, but significant amount, likely in the tens of millions of dollars, to DFPI to establish and maintain the new licensing program for DFA business activity. Costs to establish the new program include equipment, software to analyze blockchain, and other information technology operating expenses, as well as workload related to promulgating regulations and training for DFPI staff. Ongoing costs include additional staffing resources to conduct licensing, examination, investigation, and enforcement activities. Given the program’s size and complexity, DFPI will likely need specialized staff with technical expertise in a rapidly evolving field to support the program’s operations.
A General Fund (GF) loan is likely necessary in the first several years to establish the program. Revenue from new program fees may offset DFPI’s administrative and enforcement costs to some extent. Any actual increase in fee revenue to DFPI will depend on the number of entities seeking to become licensed to engage in DFA business activity.
COMMENTS:
- Purpose. According to the author:
While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
- Support and Opposition. This bill is sponsored by the Consumer Federation of California, which notes “In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market.” This bill is also supported by other consumer groups and banking associations.
This bill is opposed, unless amended, by the Crypto Council for Innovation, which argues “The legislature must work to increase clarity and improve communication structures in the bill, so that expectations for potential licensees and regulators are better aligned.”
- Background.
DFA. A DFA (also referred to as “cryptocurrency” or “crypto”) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, a DFA is not considered legal tender, but private parties may agree that it is tender to facilitate an economic exchange. The most commonly used technology that produces and supports a DFA is distributed ledger technology, which is a decentralized database managed by multiple parties within a network. Blockchain is the most well-known type of such technology.
Federal and State Regulatory Efforts. They crypto industry has operated primarily outside of state and federal regulatory frameworks that apply to similar traditional financial products and services, thus posing significant risks to consumers given the lack of established rules for companies operating in the industry. The notorious volatility of the crypto market made major headlines in recent years, most notably the November 2022 collapse of Sam Bankman-Fried’s FTX. The federal Securities and Exchange Commission has ramped up enforcement against crypto companies for alleged violations of security laws, but Congress is not near any agreement on how to address crypto-related risks.
On May 4, 2022, Governor Newsom issued Executive Order N-9-22, with the aim of creating “a transparent regulatory and business environment for web3 companies which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.” This bill establishes a licensing and regulatory framework administered by DFPI for DFA business activity, providing DFPI additional tools to stem predatory activities in the market.
- Prior Legislation. AB 2269 (Grayson), of the 2021-22 Legislative Session, was substantially similar to this bill. AB 2269 was vetoed by Governor Newsom, who stated:
It is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm. Additionally, standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the [GF] in the tens of millions of dollars for the first several years. Such a significant commitment of [GF] resources should be considered and accounted for in the annual budget process.
In response, this bill incorporates several differences to provide more flexibility to DFPI and licensees. For example, this bill grants conditional licenses to companies with a valid New York BitLicense, New York’s robust state-level DFA licensing program. This bill also outlines a more straightforward process by which a company must certify a DFA meets specified standards.
Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081
Date of Hearing: April 24, 2023
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Timothy Grayson, Chair
ABPCA Bill Id:AB 39 (
Author:Grayson) – As Amended Ver:January 30, 2023
As Proposed to be Amended
SUBJECT: Digital financial asset businesses: regulatory oversight
SUMMARY: Establishes a licensing and regulatory framework, administered by the Department of Financial Protection and Innovation (DFPI) for digital financial asset business activity, as specified.
Specifically, this bill:
- Establishes the Digital Financial Assets Law to be administered by DFPI and prohibits a person from engaging in digital financial asset business activity beginning on January 1, 2025, without a license with DFPI, as specified.
- Defines a “covered person” as a person required to obtain a license, and requires a covered person to comply with specified provisions beginning on January 1, 2024, including provisions related to disclosures (described in #17, below) and stablecoins (#18).
- Exempts from the new division: registered or qualified securities; banks and credit unions; and persons providing only specified computing, network, data storage or security services; and persons whose digital financial asset business activity is reasonably expected to be valued at $50,000 or less, among other specified exemptions.
- Authorizes DFPI to issue a conditional license to a person with a valid license or charter to conduct virtual currency activity under New York Law, provided that the license or charter was issued or approved prior to January 1, 2023.
- Establishes requirements of an application for licensure, authorizes DFPI to charge a fee to cover the reasonable costs of regulation, and requires DFPI to investigate specified characteristics of the applicant before making a decision on the application.
- Requires a licensee to maintain a surety bond or trust account for the benefit of its customers in a form and amount as determined by DFPI for the protection of the licensee’s customers, as specified.
- Requires a licensee to maintain capital in an amount and form as DFPI determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of specific risks applicable to the licensee, as specified.
- Establishes a process for a licensee to renew its license on an annual basis.
- Authorizes DFPI to adopt rules necessary to implement the division and issue guidance as appropriate.
- Requires a licensee to file with DFPI a report related to a material change in the information provided in the application for licensure, a material change in the licensee’s digital financial asset business activity, or a change of an executive officer, responsible individual, or person in control of the licensee.
- Provides specified applicable rules in determining whether a person has control over a licensee; requires that, at least 30 days prior to a proposed change in control of a licensee, the proposed person to be in control submit an application with the information required by this division for an application for licensure, as applicable; and requires DFPI to decide whether to approve the application, as specified.
- Establishes a process for an application of a proposed merger or consolidation of a licensee with another person.
- Defines “enforcement measure” as an action that contains, but is not limited to the following: (a) suspend or revoke a license; (b) order a person to cease and desist from doing digital financial asset business activity; and (c) request the court to appoint a receiver for the assets of a person doing digital financial asset business activity
- Specifies processes related to enforcement actions, including a person’s rights to notice and opportunity for a hearing as appropriate, when revocation of a license is effective, and when a suspension of a license is effective.
- Authorizes DFPI to enter into a consent order with a person regarding an enforcement measure and permits the order to provide that it does not constitute an admission of fact.
- Requires a covered exchange, as defined, prior to listing or offering a digital financial asset, to certify on a form provided by DFPI that the exchange has conducted a comprehensive risk assessment, established policies and procedures to evaluate the appropriateness of the listing, and provided full and fair disclosure of all materials related to conflicts of interest, among other topics.
- Requires a covered person to provide disclosures, as specified, to its customers. Information required to be disclosed includes but is not limited to the following, as specified: (a) a schedule of fees and charges; (b) whether the product or service provided is covered by insurance or other guarantees from loss; (c) a description of specified terms related to their customers’ rights and responsibilities and processes associated with transfers or exchanges; (d) that no digital financial asset is currently recognized as legal tender by California or the United States; and (e) a list of instances over the past 12 months when the licensee’s service was unavailable to 10,000 or more customers due to a service outage, as specified.
- Provides that a covered person may not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless the issuer of the stablecoin is licensed pursuant to this bill or is a bank and the issuer at all times owns eligible securities having an aggregate market value calculated in accordance with generally accepted accounting principles of not less than the amount of its outstanding stablecoins issued or sold in the United States.
EXISTING LAW:
- Establishes DFPI as the state agency responsible for licensing, regulating, and supervising a range of financial services companies that provide products or services to California consumers, including but not limited to, securities issuers, broker-dealers, investment advisers, and investment advisers representatives; persons offering or selling off-exchange commodities; persons holding securities as custodians on behalf of securities owners; money transmitters; and persons offering or providing consumer financial products or services. (Financial Code Section 300)
- Provides the Corporate Securities Law of 1968, administered by DFPI, which governs the issuance and sale of securities in California. (Corporations Code Sections 25000 et seq.)
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such sale has been qualified by DFPI, as specified, or the sale is covered by an express exemption from qualification. (Corporations Code Section 25110)
- Provides the Money Transmission Act, administered by DFPI, which requires licensure of persons engaged in the business of money transmission, unless the person is exempt. (Financial Code Section 2000 et seq.)
- Defines money transmission as selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission. (Financial Code Section 2003(q))
FISCAL EFFECT: Unknown. This bill is keyed Fiscal by Legislative Counsel.
COMMENTS:
- Purpose.
According to the author:
AB 39 will promote a healthy and sustainable crypto asset market by licensing and regulating businesses that help Californians buy and sell these new digital financial products. While crypto assets have the potential to empower consumers and disrupt the financial sector in unexpected ways, their high volatility and the prevalence of fraud, illicit behavior, and technical and security vulnerabilities expose California consumers to significant financial harm. AB 39 strikes a balance between protecting consumers from harm and fostering a responsible innovation environment by establishing clear rules of the road.
- Background.
A digital financial asset (also referred to as “cryptocurrency,” a “crypto asset,” or “virtual currency,” terms used interchangeably in this analysis) is a digital representation of value that is not issued or backed by a government or central bank. Unlike the dollar, cryptocurrency is not considered legal tender, but private parties may agree to it to facilitate an economic exchange. Bitcoin, the most well-known virtual currency, and many other virtual currencies are created and tracked via a decentralized protocol, rather than the centralized issuance model that prevails in the world of fiat money.
The most commonly used technology that produces and supports virtual currency is distributed ledger technology, which is a decentralized database managed by multiple parties within a network. Blockchain is the most well-known type of distributed ledger technology and supports Bitcoin and many other types of virtual currencies on the market today. Blockchain also enables decentralized finance (DeFi), which is an effort to replicate traditional finance systems through the use of blockchain-enabled contracts. DeFi is built on one of a dozen or so blockchains, including Ethereum, and DeFi applications allow cryptocurrency holders to lend or borrow from other users and engage in other financial activities, such as entering into derivative markets.
Cryptocurrency and DeFi proponents believe that these products and systems are viable alternatives to those found in the traditional financial system. They argue that cryptocurrency is beneficial because it is decentralized, allows peer-to-peer transactions, makes transactions easy and fast, diversifies portfolios, acts as an inflation hedge, encourages cross-border payments, promotes financial inclusion, and provides transactional freedom.
- Is cryptocurrency money?
As cryptocurrency has grown from a small group of early adopters and hobbyists into a trillion dollar market, a lingering question has been: how should policymakers classify cryptocurrency and regulate it?
There is doubt that cryptocurrency, as it works today, could work well as money. First, as a matter of definition, cryptocurrency is not issued by a central government, and there is no obligation for the government to accept it. Moreover, as a practical matter, it remains doubtful that cryptocurrency could be a viable privately-issued legal tender or facilitate everyday payments. Cryptocurrency can function as a unit of account, a store of value, and a medium of exchange, three necessary features of money. But, unlike most fiat currencies, cryptocurrency also appears to be highly vulnerable to confidence shocks, fraud, and price instability, and consumers must navigate a host of technological and practical obstacles when using it. These are not desirable features of money.
Moreover, many holders of cryptocurrencies use these digital assets to engage in speculative investment activities or other types of financial services activities rather than facilitating payments and conducting everyday transactions. Most cryptocurrency trading happening today treats it as an asset class – a group of investments with particular characteristics – owned for purposes other than payments for goods and services.
- What are the consumer risks for Californians?
As cryptocurrency proponents note, digital assets, and the accompanying decentralized network of alternative financial systems that support them, present a number of opportunities that could lead to a more efficient financial system.
However, these assets pose significant risks to consumers given the lack of regulatory clarity and established rules for companies operating in this space. These risks have been highlighted in the last year and a half amid the market turmoil of high-profile cases of fraud (discussed in greater detail below) that have led to multiple firms to declare bankruptcy or reduce operations. Those consumer risks include:
- Fraud, hacks, and scams. Given the newness of the cryptocurrency market and its rapid adoption worldwide, it is not surprising that fraud and scams are widespread. Based on complaints to the Consumer Financial Protection Bureau (CFPB), cryptocurrency wallets and exchanges are often the target of fraud and theft, with some consumers reporting having lost thousands of dollars to unauthorized account access. DeFi is also rife with hacks and theft, with more than $10.5 billion lost in 2021 alone.[1]
- Volatility. Digital financial assets can see their value decline or increase sharply in short periods of time. Unlike a stock or a treasury bond, a cryptocurrency’s value is not derived from the market’s faith in the underlying company or country; instead, its value is derived from the number of people who believe it has value. As such, cryptocurrency appears particularly susceptible to sell-offs and scares.
- Insider trading and lack of information. A significant risk to consumers is their informational disadvantage compared to industry insiders. This informational disadvantage can manifest in acute terms, such as with insider trading. Media reports and federal investigations suggest that insider trading is a widespread problem in markets for digital financial assets.[2]
These risks have resulted in significant consumer harm over the last few years, and commentators have highlighted the specific adverse impact on disadvantaged consumers. Crypto industry stakeholders often discuss the role crypto assets can play in promoting financial inclusion, and some studies show that Black and Latino investors are more likely to own cryptocurrency. Unfortunately, this has also meant that recent market events, described below, have likely disproportionally harmed these groups.[3]
- Recent events in crypto.
The notorious volatility of the crypto market made major headlines in 2022 and 2023. Last year began on a high note for many industry participants with token prices near all-time highs and venture capital investment pouring into the space. However, beginning in early Spring 2022, a series of major crypto projects collapsed, including:
- In May 2022, the so-called “stablecoin” TerraUSD was unable to maintain its 1:1 peg with the US dollar, precipitating a $60 billion crash that reverberated across the crypto ecosystem. By mid-May, the Terra collapse had triggered an estimated $300 billion loss industrywide.
- In June 2022, Celsius, a crypto lender that marketed itself as an alternative to traditional banks, froze withdrawals and would eventually file for bankruptcy the following month. Three Arrows Capital, a crypto hedge fund, was the next shoe to drop as it was unable to repay its debt obligations, which triggered Voyager, another crypto lender, to file for bankruptcy in early July.
- In November 2022, Sam Bankman-Fried’s FTX and Alameda Research empire collapsed, resulting in the eventual arrest of Sam Bankman-Fried himself. In essence, the closely tied companies that Bankman-Fried controlled, led by FTX and Alameda Research, were little more than a fraudulent scheme to steal money from customers and investors. While the specific details of the scheme are currently under investigation by law enforcement across the globe, Bankman-Fried and his co-conspirators apparently had been duping their customers and investors for years and using their customers’ assets to make risky bets in crypto markets and to support lavish spending on advertising, international real estate, and political contributions.
- In March 2023, Silvergate Capital Corp, a California-chartered bank that specialized in crypto-related services, announced it would wind down operations and liquidate after it was hit with losses following the collapse of FTX.
- An update on federal oversight.
Rapid digital asset adoption has led to calls for greater clarity regarding how the federal government should regulate this new and complex world. In March 2022, President Biden signed an executive order (EO) aimed at ensuring the responsible development of digital assets. However, following that EO and the subsequent reports, the Biden Administration’s public stance on crypto ranges from disinterest to outright hostility. For example, in March 2023 the Council of Economic Advisors (CEA) released its annual Economic Report to the President, and this report included a dedicated section on digital financial assets. CEA says:
It has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits.[4]
As the Biden Administration remains publicly skeptical of crypto, the Securities and Exchange Commission (SEC) has ramped up its enforcement against crypto companies for their alleged violations of securities laws. Recent SEC actions include:
- A February 2023 settlement with crypto exchange Kraken related to unregistered securities, with Kraken agreeing to cease offering or selling securities through the crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.[5]
- A February 2023 settlement with NBA Hall of Famer Paul Pierce for unlawfully touting crypto asset securities, with Pierce agreeing to pay $1.3 million in penalties, disgorgement, and interest.[6]
- An April 2023 complaint against crypto asset trading platform Bittrex, Inc., for operating as an unregistered national securities exchange, broker, and clearing agency.[7]
In addition to SEC enforcement actions, in January 2023 the Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency sent a letter to banking organizations highlighting the risks associated with crypto assets. The letter identifies a hosts of risks and warns that “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”[8]
Congress, on the other hand, does not appear to be nearing any particular agreement on how to address crypto-related risks. Several bills received considerable attention in 2022, including a bill to regulate stablecoins and a bill to regulate the spot markets of certain crypto assets. Neither bill was taken up by either the House or the Senate. In the current Congress, several crypto-related bills have been introduced, but the prospects of any becoming law are unclear given the partisan divide in leadership and increased skepticism of the crypto industry due to the bankruptcy of FTX.
- An update on state oversight.
Until 2022, the state of California had not taken a proactive stance on regulating crypto, but the activities in the crypto market last year sparked action from the Newsom Administration and Legislature.
On May 4, 2022, Governor Newsom issued EO N-9-22 with the aim of “creat[ing] a transparent regulatory and business environment for web3 companies which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.”
As the Administration conducted its activities under the executive order, the Legislature considered its own response to the chaotic conditions of the crypto market. In June 2022, AB 2269 (Grayson), which is similar to this bill, was introduced. The Legislature broadly supported AB 2269, with the Senate passing the bill 31-6 and the Assembly supporting it 71-0. AB 2269 was vetoed by the Governor, whose veto message read, in part:
It is premature to lock a licensing structure in statute without considering both this work and forthcoming federal actions. A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm. Additionally, standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the general fund in the tens of millions of dollars for the first several years. Such a significant commitment of general fund resources should be considered and accounted for in the annual budget process.
I am committed to working collaboratively with the Legislature to achieve the appropriate regulatory clarity once federal regulations come into sharper focus for digital financial assets, while ensuring California remains a competitive place for companies to invest and innovate.
In December 2022, the Governor’s Office released an interagency report reflecting the Administration’s work to implement the executive order.[9] The report summarizes DFPI’s work aimed at creating clear and responsible regulatory frameworks. The department met with a variety of federal regulatory agencies and other states’ financial regulators to align with government agencies beyond California. DFPI also solicited public comments for feedback on how California should regulate the crypto industry.
On February 22, 2023, the Senate Committee on Banking and Financial Institutions and the Assembly Committee on Banking and Finance convened an oversight hearing to evaluate the state’s approach to regulating the crypto industry following the high-profile bankruptcies discussed in Comment #5. DFPI staff presented an update on their role in implementing the EO, and legislators voiced concerns about crypto’s harm to consumers and the slow response from the state to adequately protect consumers.
- What would AB 39 do?
AB 39 would broadly regulate crypto activities through a licensing framework that gives DFPI additional tools to address predatory activities in the crypto market while protecting Californians from bad actors in the industry.
Many provisions found in AB 39 originate from model law drafted by the Uniform Law Commission (ULC). In July 2017 the ULC adopted the Uniform Regulation of Virtual-Currency Businesses Act after an extensive stakeholder process and multiple rounds of drafting, review, and amendments.
AB 39 is substantively similar to last year’s AB 2269, though there are several differences that will provide more flexibility for DFPI and licensees. For example, AB 39 allows for conditional licenses for companies with a valid New York BitLicense, a licensing program that remains the most robust state-level regulatory framework in the country. AB 39 also replaces AB 2269’s “Best Interest” standard with a more straightforward process by which a company must certify that a digital financial asset meets specified standards, thereby reducing unnecessary complexity for all stakeholders.
The below table highlights key differences between AB 39 and AB 2269.
COMPARISON OF KEY PROVISIONS IN AB 39 (2023) VS AB 2269 (2022)
AB 39 (2023) | AB 2269 (2022) |
Consumer protections go into effect on January 1, 2024. AB 39 requires all crypto companies to comply with the bill’s key consumer protections starting on January 1, 2024. Companies that do not comply with these protections will be unable to get a permanent license. | Consumer protections would have taken effect on January 1, 2025. AB 2269’s consumer protections would not have taken effect until the required licensure date of January 1, 2025. As a result, consumers would have remained vulnerable in that window of program implementation. |
Conditional licensing for those licensed or chartered in New York AB 39 allows for an ongoing conditional license to any company that is licensed or chartered to do business in New York State. These companies must still comply with AB 39’s other provisions. | No conditional licensing provision. AB 2269 would not have allowed for a conditional license for companies holding a New York license or charter. |
Exchanges must self-certify that crypto assets meet certain standards. AB 39 requires any crypto exchange, prior to listing a token or crypto asset for sale, transfer, or exchange, to self-certify that the exchange has conducted a comprehensive risk assessment, and provided full and fair disclosure of all materials related to conflicts of interest, among other topics. | Proposed a “best interest” standard for crypto exchanges. AB 2269 would have required a crypto exchange to serve the best interests of their customers by disclosing and mitigating conflicts of interest, forming a reasonable basis for any recommendations made to customers, and exercising reasonable diligence to evaluate specified criteria before listing any specific digital financial asset as available for exchange. |
Permanently requires stablecoins to be fully backed by reserves. AB 39 prohibits crypto companies from making a so-called “stablecoin” available for exchange, transfer, or storage unless the stablecoin’s value is backed by reserve assets. | Temporarily required stablecoins to be fully backed by reserves. AB 2269 would have also prohibited crypto companies from making a so-called “stablecoin” available for exchange, transfer, or storage unless the stablecoin’s value is backed by reserve assets, but only until January 1, 2028. |
- Support
AB 36 is sponsored by the Consumer Federation of California and is supported by a coalition of consumer advocacy organizations the California Low-Income Consumer Coalition, and Consumer Reports, who argue:
AB 39 will license digital financial assets companies under the California Department of Financial Protection and Innovation (DFPI), giving industry necessary regulatory clarity on how to operate safely while protecting consumers. Licensing in this area will provide basic consumer protections and is an appropriate and necessary next step to ensure that foundational “rules of the road” are met and followed to do business in the state of California. In 2022 alone, $3.7 billion was lost to crypto scams, and FTX’s bankruptcy was just one of five within the crypto market. AB 39 seeks to boost transparency, adopt a regulatory framework, and, above all, protect consumers.
AB 36 is also supported by the California Credit Union League (CCUL) and the California Bankers Association (CBA). In their letter, CBA argues:
We believe that a comprehensive regulatory framework that applies the same standards to digital assets that are equivalent to those that apply to depository financial institutions when engaged in functionally similar activities is essential to the safety and soundness of the digital assets’ ecosystem.
Finally, groups representing technology companies and crypto traders write in support. Chamber of Progress, a tech industry association, writes:
The United States has been in need of clear rules of the road for the incredibly nascent digital asset industry, which has faced recent challenges with fraud, hackers, bank runs and liquidity. This bill gives California a seminal moment to showcase its regulatory model across the nation, testing a permission-based licensing model’s effectiveness of maintaining innovation and attracting competition to the state. With the licensing model, California would establish strong consumer protections.
The Digital Currency Traders Alliance (DCTA), a pro-cryptocurrency consumer protection group dedicated to representing retail investors writes in support, citing the need for regulatory clarity. DCTA writes:
AB 39 also prioritizes efficient program administration through provisions that will give flexibility to both licensees and the regulator. These provisions also include flexibility for specified small actors by exempting them from certain provisions of the bill – allowing the state to incubate and spur innovation in the sector.
Although we support the bill and hope it is passed into law, we do have some thoughts on potential exempted entities, and we look forward to working with your office to further clarify the entities that are exempt from the bill’s licensing requirements.
- Support if amended.
Dapper Labs, Inc. and Sorare, Inc. support AB 39 if amended to clarify that non-financial digital consumer products such as NFTs sports trading cards be exempt. They write:
…We are concerned that some may interpret AB 39 to regulate digital assets even if they are not financial, payment, monetary, or investment products. Thus, we request that AB 39 be amended to explicitly clarify that non-financial digital consumer products such as NFT sports trading cards and concert tickets will not be regulated by DFPI. We acknowledge that in the future there may be NFTs used for securities and financial services, and we agree that those would fall within the scope of this legislation and be subject to regulation by DFPI.
- Oppose unless amended
The Crypto Council for Innovation (CCI), an alliance of crypto companies whose membership includes Coinbase, Block, Gemini, Paradigm, and Andreessen Horowitz, to name some, opposes AB 39 unless amended, writing:
The legislature must work to increase clarity and improve communication structures in the bill, so that expectations for potential licensees and regulators are better aligned. In order to ensure regulated entities are best positioned to compete in a crowded marketplace, the legislature should provide concrete application and review timelines, narrow the scope of the overly broad digital financial asset business activity definition, and ensure licensees are provided written notice before examinations. Additionally, the legislature must expand the federal registration exemption to include entities registered with the Commodity Futures Trading Commission (CFTC) and clarify the mergers and consolidation approval authority it is granting regulators
CCI also lists the 24/7 hour customer service requirement and AB 39’s stablecoin provisions as problematic for crypto industry stakeholders.
- Other
The Blockchain Advocacy Coalition (BAC) does not take a position but has sent a letter expressing concern that AB 39 is overly prescriptive. Among AB 39’s provisions, BAC appears to be most concerned with the stablecoin provisions, and concludes that policymakers and stakeholders must try to “strike a balance between protecting California’s consumers while also sending a market signal that our state embraces new technologies that foster financial inclusion, empowerment, and innovation.”
- Next steps and committee amendments.
The author’s office and sponsor indicate they are still holding meetings with stakeholders and reviewing feedback, and that additional changes may be forthcoming as the bill moves through the legislative process. Moreover, to address the Governor’s concerns about implementation and costs, as stated in the AB 2269 veto message, the author’s office indicates that it is reviewing other licensing laws to identify ways to make AB 39 more consistent with how DFPI currently administers such programs.
The committee also recommends the below amendments. These amendments: (a) Narrow the customer service requirement from 24 hours a day, 7 days a week to 10 hours a day, 5 days a week; (b) Establish the NMLS process, as seen in other licensing programs; (b) Eliminate the requirement that operational and informational security policies be disclosed to customers; (d): Expand conditional licensing opportunities to companies with a New York State limited purpose trust charter; and, (e): Make a variety of technical changes.
Specifically, the committee recommends:
- On page 12, in line 24, strike out “3209.” and insert: 3207.
Rationale: Correct drafting error.
- On page 12, in line 29, strike out “paragraph (1) of”, in line 29, strike out “(d)” and insert: (a)
- On page 12, in line 29, strike out “6254” and insert: 7929.000
Rationale: Correct outdated reference to the Public Records Act (PRA).
- On page 12, in line 35, strike out “Regulations,” and insert: Regulations or a charter as a New York state limited purpose trust company with approval to conduct a virtual currency business under New York law,
On page 12, in line 35, after “license” insert: or approved
On page 13, in line 3, strike out “Regulations.” and insert: Regulations or disapproval or revocation of a charter as a New York state limited purpose trust company with approval to a conduct virtual currency business under New York law.
Rationale: Include companies chartered under New York’s limited purpose trust regime as those companies eligible for conditional licensing.
- On page 13, in line 36, strike out “department”, strike out lines 37 and 38 and insert: commissioner.
Rationale: Fix a drafting error.
- On page 18, between lines 3 and 4, insert:
3217. (a) The commissioner may establish relationships or contracts with the
Nationwide Multistate Licensing System & Registry or other entities designated by the Nationwide Multistate Licensing System & Registry to collect and maintain records and process transaction fees or other fees related to licensees or other persons subject to this division.
(b) For the purpose of participating in the Nationwide Multistate Licensing
System & Registry, the commissioner may waive or modify, in whole or in part, by rule, regulation, or order, any or all of the requirements of this division and to establish new requirements as reasonably necessary to participate in the Nationwide Multistate
Licensing System & Registry.
(c) The commissioner may use the Nationwide Multistate Licensing System &
Registry as a channeling agent for requesting information from, and distributing information to, the Department of Justice, any other governmental agency, or any other source, as directed by the commissioner.
(d) The commissioner shall establish a process through which applicants and licensees may challenge information entered into the Nationwide Multistate Licensing
System & Registry by the commissioner.
3219. (a) Except as otherwise provided in Section 1512 of the SAFE Act (12
U.S.C. Sec. 5111(a)), the requirements under any federal law or the Information
Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Part 4 of Division
3 of the Civil Code) regarding the privacy or confidentiality of any information or material provided to the Nationwide Multistate Licensing System & Registry, and any privilege arising under federal or state law, including the rules of any state court, with respect to that information or material, shall continue to apply to the information or material after the information or material has been disclosed to the Nationwide Multistate Licensing System & Registry. The information and material may be shared with all state and federal regulatory officials with industry oversight authority without the loss of privilege or the loss of confidentiality protections provided by federal law or the Information Practices Act.
(b) Information or material that is subject to a privilege or confidentiality under subdivision (a) shall not be subject to any of the following:
(1) Disclosure under any federal or state law governing the disclosure to the public of information held by an officer or an agency of the federal government or the state.
(2) Subpoena or discovery, or admission into evidence, in any private civil action
or administrative process, unless with respect to any privilege held by the Nationwide
Multistate Licensing System & Registry with respect to the information or material,
the person to whom the information or material pertains waives, in whole or in part,
in the discretion of that person, that privilege.
(c) This section shall not apply with respect to the information or material relating
to the employment history of, and publicly adjudicated disciplinary and enforcement
actions included in, the Nationwide Multistate Licensing System & Registry for access
by the public.
3221. The commissioner shall regularly report violations of this division, enforcement actions under this division, and other relevant information to the Nationwide Multistate Licensing System & Registry, but only to the extent that the information is publicly available.
Rationale: Align DFPI’s administration with other licensing programs, including the Debt Collector Licensing Act (DCLA), the most recent addition to the Financial Code that incorporates NMLS-related authorization.
- On page 31, in line 8, strike out “coin” and insert: digital financial asset
Rationale: Fixes a drafting error.
- On page 32, in line 22, strike out “24” and insert: 10
On page 32, in line 23, strike out “Sunday,” and insert: Friday,
Rationale: Align customer service provisions with requirements under current law for licensed money transmitters.
- On page 33, in line 33, strike out “or registrant” and in line 34, strike out “or registrant”
Rationale: Fixes a drafting error.
- On page 35, strike out line 28 and insert: section, and may request a determination from the department that a policy or procedure is not subject to the disclosure requirement described in subdivision (k) due to potential security risks.
On page 35, in line 35, strike out “Policies” and insert: (1) Except as provided in paragraph (2), policies
On page 35, between lines 38 and 39, insert:
(2) This subdivision does not apply to either of the following: (A) An adopted information security program or an operational security program described in subdivision (a).
(B) Any policy or procedure the department previously determined is not subject to this subdivision due to potential security risks.
Rationale: AB 39 requires the disclosure of information and operational policies and programs, along with a variety of policies such as antifraud policies. Stakeholders have expressed concerns this would create security risks for companies and their customers. These amendments exempt those information and operational security policies and procedures from disclosure.
REGISTERED SUPPORT / OPPOSITION:
Support
Consumer Federation of California (Sponsor)
California Bankers Association
California Credit Union League
California Low-income Consumer Coalition
Cameo - California Association for Micro Enterprise Opportunity
Chamber of Progress
Consumer Reports
Consumers for Auto Reliability & Safety
Digital Currency Traders Alliance
Los Angeles County Democratic Party
Oakland Privacy
Support If Amended
Dapper Labs, INC
Sorare
Oppose Unless Amended
Crypto Council for Innovation
Other
Blockchain Advocacy Coalition
Analysis Prepared by: Luke Reidenbach / B. & F. / (916) 319-3081
Elleptic, DeFi: Risk, Regulation, and the Rise of DeCrime (November 2021), available at
https://www.elliptic.co/resources/defi-risk-regulation-and-the-rise-of-decrime. ↑
See, e.g., Ben Foldy and Caitlin Ostroff, “Crypto Might Have an Insider Trading Problem,” Wall Street Journal (May 2022), available at:https://www.wsj.com/articles/crypto-might-have-an-insider-trading-problem-11653084398 ↑
Paulina Cachero, “Crypto Collapse Threatens to Leave Black, Hispanic Investors Further Behind.” Bloomberg (July 2022), available at: https://www.bloomberg.com/news/articles/2022-07-07/crypto-collapse-threatens-to-leave-black-hispanic-investors-further-behind#xj4y7vzkg ↑
Council of Economic Advisors, Economic Report to the President (March 2023), available at: https://www.whitehouse.gov/briefing-room/statements-releases/2023/03/20/statement-from-cea-chair-cecilia-rouse-on-the-economic-report-of-the-president/ ↑
“Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges.” Securities and Exchange Commission (February 2023), available at: https://www.sec.gov/news/press-release/2023-25 ↑
“SEC Charges NBA Hall of Famer Paul Pierce for Unlawfully Touting and Making Misleading Statements about Crypto Security,” Securities and Exchange Commission Press Release (February 2023), available at: https://www.sec.gov/news/press-release/2023-34 ↑
“SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency,” Securities and Exchange Commission (April 2023), available at: https://www.sec.gov/news/press-release/2023-78 ↑
Federal Reserve et al, “Joint Statement on Crypto-Asset Risks to Banking Organizations,” (January 2023), available at:https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230103a1.pdf ↑
Business Consumer Services and Housing Agency et al, “Towards Responsible Innovation: An Interagency Web3, Crypto Asset, and Blockchain Progress Report to the Governor of California,” (December 2022), available at: https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/12/TowardsResponsibleInnovation_221202.pdf ↑
Discussed in Hearing
45SEC
Assembly Floor
1MIN
Senate Floor
43SEC
Senate Standing Committee on Appropriations
9MIN
Senate Standing Committee on Judiciary
18MIN
Senate Standing Committee on Banking and Financial Institutions
1MIN
Assembly Floor
10MIN
Assembly Standing Committee on Banking and Finance
Bill Author
