Assembly Standing Committee on Banking and Finance

Well, thank you. We currently don't have a quorum. We're gonna start as a subcommittee. With that, we'll have, Mr. Chair, would you like to present the bill?

Thank you, Mr. Chair. And we wanna start as members of the amendments for AB 2285 provide the state with clear guidelines about how to create staking as a service. This service is an important utility that strengthens the blockchain protocol. And as a result, participants are compensated for that. Californians should not be left out of this opportunity.

Furthermore, I am seeking additional amendments to remove the fee cap limitation on staking commissions. These amendments maintain the disclosure requirements that protect consumers while allowing for more flexibility for a working business model. This responds to concerns from all stakeholders providing both transparency for consumers and a viable model for providers. With that, happy to answer any questions.

Thank you, Mr. Chair. Do we have any key witnesses in support? Any e me twos?

Hello, Chair, Members. Kelly Larue with Resilient Advocacy on behalf of the Crypto Council for Innovation and support. Thank you.

Thank you. Now do we have any key witnesses in opposition?

Mister Chairman, Members, I'm Chris Schultz for the California Bankers Association. Our position is opposed unless amended. Section one of the bill relates to staking. There's some confusion about staking of native cryptocurrencies or whether the bill covers stable

I apologize. I'm so sorry. I'm gonna pause for a second and believe we have a quorum. Is that correct? Five?

Let's go in and call the roll, please, madam secretary. [Roll Call] We have a quorum.

We have quorum. I apologize for that. You have your time back, sir.

Quite alright. Good now. Stablecoin rewards are the core issue that Congress has yet to resolve in the thanks so much. In the Federal Clarity Act debate. Eliminating section one or clarifying languages that we're not talking about stable coin rewards would resolve our concerns in section one.

On Section two, our concerns are about a level playing field. The Clarity Act details 14 different crypto related activities that federally chartered banks and credit unions could engage in. As I read the bill this bill, I think it would allow state charter banks and credit unions to offer only three of those crypto products or services. This creates an unlevel playing field for state charter banks who compete with naturally chartered institutions and could accelerate the conversion to federal charters.

The legislature could wait for the federal clarity act to pass so we all understand what the floor looks like, or the bill could be amended to provide parity for state charters with the activities that federal charters are allowed.

Asking this legislature to wait for this Congress or this administration is often a losing argument. But in this case, because of the dual charter system, we think it runs a real risk of harming state chartered institutions if they're allowed a more restricted menu of offerings than their federally chartered counterparts. Thanks very much.

Thank you for your testimony. Next speaker.

Good afternoon, Mr. Vice Chair and Members. Robert Harrell. I'm the Executive Director of the Consumer Federation of California, I'll try to be brief, but there's a number of reasons for that. The bill was just it got amended a couple weeks ago, June May 22, and then amended again last week. And I understood that that triggered the 77.2 pullback hearing, I gather, which this is, a little bit of an interesting way to do it.

But let's set that aside for a second. We think overall, the bill significantly lowers the bar on consumer protection. My colleague from the Bakers Association, who we don't often sit on the same side of the table, it should be noted, on many other issues, had indicated the notion of an unlevel playing field.

Let me extend that and say that what you're doing is you're jumping California right into the middle of the hottest debate on Capitol Hill that is going on right now, and that's the Clarity Act. Or as I like to call it, the lack of Clarity Act, which is essentially a deregulatory regime for the crypto industry, which says we want rules.

But what they really wanna do is they want the rules as low or nonexistent as possible. So for example, all the things that mister Schultz's members have to abide by, KYC, know your customer, AML, anti money laundering, FDIC, insurance protection in case something awful happens, none of that applies to crypto.

Let's also just remember that crypto is, for all its merits and or demerits, and blockchain, which is separate, merits and or demerits, this is the preferred venue for international criminals and terrorist organizations to move their money. This is one of the things that's funding the wars in Europe and in The Middle East is crypto money. So let's not be naive or pollyannish about this.

The thing it does most directly as it pertains to California is it directly undermines California's Department of Financial Protection Innovation, DFPI. This essentially overrules them and says, we're gonna change the rule so that we're gonna create a level playing field for a much riskier product. And let me tell you, when the next crypto winter happens, it won't just be siloed into the crypto industry. The effects will be felt far beyond because of this increasing integration of crypto, which the industry wants, into the broader economy.

Then a lot of other people are gonna get hurt too.

I could read you, but I won't, the story after story after story of people who have lost everything in crypto scams and ripoffs. They are record breaking in number and volume. I will just note that Coinbase, which appears to be the intended beneficiary, although not the only one, but the intended beneficiary of this bill, could deal with this by simply registering at that security with the state of California.

We're not saying that they can't stake or provide interest or things like that, but they would have to register with the state of California. They are choosing not to.

What that does is that puts Californians at risk and their own members of Coinbase at risk. I'd like to read to you just some of the organizations that have small mom and pop organizations that have successfully qualified their securities offerings in California. Two mobile home park associations, the white water

Please say so much. I'm sorry. Thank you so much. Time is up.

You can do this. And many of these small mom and pops have done it. You just have to register as a security, and Coinbase is unwilling to do that because they are worried that what a lot of crypto is is an unregistered security.

Thank you for your you

for your answer questions.

Thank you for your testimony. B two's in opposition, please. We're gonna do tweeters after?

Yeah. Yeah.

Hi. Eileen Ricker with California's Credit Unions in respectful opposition. We have concerns as opposed unless amended like the bankers do. Thank

you. Tweeners.

Sorry. Arrived thirty seconds too late. Jamie Minor in support of amended position on behalf of the California Blockchain Adipacy Coalition. We really appreciate the assembly member's work on this. We understand, you know, there's still some complexities, especially as we are trying to track what's happening federally, which is pretty, you know, groundbreaking, bipartisan.

We're very plugged into these conversations, but at the end of the day, we do believe that there is value and benefit to California consumers in some of the clarity this bill is trying to address and look forward to, you know, discuss discussing some of the other provisions and topics. Thank you.

Thank you.

Hi. Deanna Latorrekeen on behalf of Satoshi Action Fund. Just also stepped in a few seconds later. Just wanna register support. Thank you.

Thank you. I'll take this back to committee. Committee owners, do we have any questions? Miss Dixon.

Thank you, mister chair. So, assembly member, could you clarify some of these concerns that the consumer opposition well, both opposition and your attempts to mitigate this going forward? This is this is the final bill. We use find ways to work with the industry banking industry to ensure that we don't create channels for criminal activities and that type of thing.

could be a response.

Okay. It

Not the final version of this bill to the banking institution's concern. Happy to discuss how we could find some commonality on those issues. I I hear it loud and clear to the method that we are implementing on this specific bill. I find it on the counter of what was just stated. This is as transparent as we possibly can be.

The amendments were brought to the appropriate committee hearing in the house, where this bill currently sits before it got onto the assembly floor and things get convoluted. So I pride myself when it comes to ensuring that the legislation that I carry, is transparent, and is in the best interest of consumers. I'm also carrying other pieces of legislation, that touch or impact the blockchain and crypto technology spaces that are very pro consumer and regulatory because of the concerns that were expressed.

Like any new endeavor or technology, there will be an evolving culture and dynamic. This isn't the first time we've seen this in the financial sector.

We can go all the way back to the time when checks were invented, the original debit cards. We're seeing fraud and misuse happen today with those consumer tools, yet we are not doing anything about that per se. So for us to limit the advancement of technology and something that could be extremely impactful, to society in a positive way, I think it's worthwhile having these conversations. As a matter of fact, I've shared with some of you all already, how the state is fully integrating blockchain technology.

The ID, the driver's license, the digital driver's license that many of us have, there's 2,000,000 Californians who are piloting that program as we speak.

That blockchain is powered by the Avalanche coin. And in order to continue to grow that ecosystem, to strengthen that ecosystem, staking is an essential component of that to ensure that there's security across the blockchain.

When it comes to the fraudulent activity that takes place, There have been multiple studies and examples that show that because of the digital tracking that blockchain itself is founded on, it makes it that much easier and likely to actually find the individuals who are committing those crimes, whereas we are not able to do that right now with current banking models. So I hope that answers some of your questions.

Yes. And thank you. So the this isn't a done deal. I mean, this is still in in a work in progress as you want to move it forward.

Okay. Thank you.

Absolutely.

Thank you, Senator Dixon. Do we have any more questions? This is Michelle, though.

So so I guess I'm curious. Well, I guess, first, mister Harel, I know you're a little cut off at the end, and I think you were talking about others who are doing have gone through this staking process as, like, through the securities requirements.

Yeah. You just have to you have to register with DFPI. These are companies that have successfully qualified their securities offerings in California. It includes Ace Hardware Corporation, the Sinai Temple down in in LA, era. The Chatsa Verdeira Country Club, which I don't know where that is.

But it just seems to me that this sort of implication that, oh, it's just so difficult to go through that process. Point based doesn't want to go through that process because the whole object of much of the leaders of the crypto industry is that we are not a security. And, therefore, we shouldn't be regulated like a security, which has historically been at the SEC at the federal level, although you have Bitcoin regulated by the Commodities Futures Trading Commission at the federal level.

I would just note that a New York Times expose pointed out that any lawyer at the CFTC who dared to question certain types of companies that had business before the CFTC has been shunted aside.

And another entity that has occasionally been looking at this in the past is the Consumer Financial Protection Bureau, whose former head, Rohit Chopra, was named a month ago by the governor to be the new agency head for the entity that will oversee DFPI, the Department of Consumer Affairs, and a number of other entities.

So we're just very concerned that, you know, these are very risky assets. They have been a roller coaster to say the least. And even if you say, well, this is an FDIC insured, which I think the author has been trying to make that that point, at least at what I've seen elsewhere, I don't think that there is a full realization of the risk involved here.

And all the unlevel playing field that, mister Schultz from the bankers talked about really applies in spades here, especially if you're gonna expand it to mirror the Clarity Act, which is still pending, which is being literally negotiated. I spent the better part of last week in DC, and this was topics one, two, and three of the conversations that I was often involved in.

So we're just very worried that this hastily amended bill is going to have a fundamental impact that weakens consumer protection, and it undermines the very entity that you all said should be overseeing this. There is active litigation between DFPI and Coinbase on this very matter. And the department presumably won't comment on active litigation or active legislation, so that's why they're not here at the table. It would be nice if they were. But I understand how this works.

But this is very problematic

At a whole bunch of levels.

Thank you.

Mister Chair, would you like to respond?

Thank you, Mr. Chair. I can't speak for any blockchain or crypto entity, only for myself. I do believe that there is a stark difference between what we traditionally define as a security and what this new technology is. We have seen time and time again throughout the legislative process where definitions change due to adaptations. We're having those conversations right now in the AI space.

So this isn't an uncommon process. I understand, that there is some concern or fear of change, but the fact of the matter is is that this could substantially benefit the the ecosystem and society as a whole by implementing this technology.

I mean, I

And I'm sorry. I have, Can I can I add one more Yeah? Point? I know you also mentioned the the pending lawsuit, which is something to note. By no means do I wanna disregard that. But as a state legislator, when I took my oath, it was to create legislation for the state of California.

You know, my civics 101 class taught me that the regulatory agency should be just that, is to regulate what statute is passed into law. Year in, year out, we passed statute in this building that changes the regulatory process. So this is no different in that sense. There were some media outlets that communicated some statements from the department stating, and I can quote this because this is what was publicly quoted, that they will regulate whatever law is passed into statute.

So, again, I do believe that securities and what this is are two different things, and we should, at the very least, explore the potential of this type of consumer tool.

Certainly certainly, departments will enforce laws that we pass. We expect that. Right? But I think what's unique and, you know, and I've spoken with some folks who have been in this building much longer, have much longer memories in this building than I do. What's unique about this situation is that you're doing legislation that undermines current legal action taken by a state department and will basically take their case away.

Right? And that is, from my understanding, very rare. One person could think of one other example when that's Harabedian it was around appointments, which is now the process that we do appointments. So it just seems like, you know, to do that in in the middle of pending litigation against Coinbase that will benefit Coinbase. It it's very concerning for me.

I feel like that's something that we should allow to play out. And then if we you know, I mean, obviously, legal actions create legal precedent. And if we as a legislature decide we think where they ended up is a bad place to be, then I think that's something that we we then take back. And we have, you know, we have the amazing opportunity to change law here.

But kind of to to put the the thumb or more like it feels like a hammer on the scale of that process going forward right now, I really I do not I do not feel comfortable about doing.

But I think but that aside, you know, I feel like this whole issue around staking and and the implications of that to basically take crypto out of being a security when it it look, you know, walks like a duck, acts like a duck. I think it's a duck. You know, it behaves as a security.

And if you, in a staking process, are like, at the end of the day, if the it seems like the whole issue is, you know, crypto, whoever it may be, Coinbase or others, just don't wanna be regulated. But but the whole point of that is the transparency that we're talking about that is so important.

Right? And and it doesn't it's it's not overly burdensome regulation. I mean, mobile home parks can figure out how to do it without fancy Wall Street attorneys.

And so, you know, but but it it's a it's an important backstop on people who are putting their whole savings into crypto, which I am one of them, who put my whole savings into crypto when I ran for office hoping that it would gain enough that I could get myself through the year and a half when I had to quit my job. And it did not at the end of the day.

But people are doing that, and this gives at least DFPI a chance to say, like, yes. Okay. This seems safe or this doesn't seem safe. And and, you know, and put some guardrails on it if it seems like a riskier type of investment. And I think that having that kind of protection for such a volatile investment, I'll call it an investment security, then, you know, it seems like that's the least that we can do as a state.

And so so, you know, putting now into this bill with this late amendment, that kind of a a significant change that takes them out of that process is also something that I'm really concerned about. And even, you know, like, even inside the industry, they talk about there's estimates of a $154,000,000,000 in in criminal activity in a single year, and that's industry people making that estimate.

So for us to just keep some some reasonable guardrails for people, I think, is an important role for us as the state to protect people in these kinds this emerging kind of investment space that a lot of people don't understand, a lot of people can easily be you know? I mean, it's it's what's it's being used for fraud right now. And so I think we just have to be really careful in this space, and this this does not feel like it's meeting that balance.

And so it's not something I can support today.

Appreciate that. I'm sorry to hear about your specific experience with crypto and investing as you put it, Assemblymember, in crypto. Just do wanna make the differentiation that this staking component is separate than an individual buying into a cryptocurrency. Two separate issues, and I don't want there to be a misinterpretation of that.

It's right. It's I mean, there are different activities within the crypto space, but it's still you know, you're saying, I'm gonna invest this and you're gonna and then, like, who you're staking it with is saying, we're gonna give you a return.

Yeah. And Right? I understand that, but

Sounds like an investment.

We're comparing apples to oranges when we're comparing an insured banking deposit to this. Right? The reason that we actually provide government backed investments into banking institutions is because how they're fundamentally developed. Right? Banking institutions can go, and as soon as you deposit a dollar, reinvest that elsewhere.

So if the bank were to go run off with that. There would be some sort of consumer protection. If not, the banks could just run away with individual's money.

And these are not insured.

Blockchain and crypto technologies do not go and reinvest these assets. Right? They they're put back into the ecosystem to strengthen them. So, again, they're they're fundamentally different in terms of how they're used.

But, like, you can just simply change a line of code and siphon off money, which we've seen happen. I mean, someone was put into jail for doing that. So while, yes, they're not taking that money back out and recirculating it in the economy like banks do, I mean, they can take it out in other ways.

I would argue any day that a transaction on a blockchain is more safe and more efficient than a transaction on a traditional banking platform. So I hear you on those specific examples, but let's open up the dialogue and have a conversation about about fraud as a whole in the financial space. I'm happy to find some commonality commonality with you in that sense I know. And have a conversation.

But, again, I don't want the conversation to shift in a way that doesn't take into consideration, hold accountable the entire financial industry.

Right? When Blockchain technology

has a 145 or $54,000,000,000 of of criminal activity happening. You don't hear about that in the banks. You know? I So, I mean so okay. So so that aside, my last concern I will I will raise is that I feel like we're also just the the original premise of the bill is getting ahead of the feds when and it's kind of, like, trying to guess this is where we think they're gonna end up.

I know there's been speculation and, you know, maybe one person's opinion and but it's you know, it it hasn't solidified yet. And so we're trying to say we're gonna do what the feds are doing, and we think this is what they're doing. But it's not clear that that's what they're doing yet either. And so, again, like, why not wait and see what that looks like?

And, again, because I believe, when there is lack of precedent or regulatory authority regulatory authority by the Federal Government, I think it's the state's job to fill that gap, and that's exactly what I'm trying to do with this piece of legislation. Thank you.

Thank you for the questions. This is Solomon Crowe.

Thanks so much, and I appreciate the author's efforts on this bill and, you know, efforts to have California lead in this space. I do share some concerns about the timeline here and ensuring that what California does is workable within the federal framework, which as my colleague pointed out is, you know, a little bit unknown at this point. I've been following the Clarity Act a little bit.

So I just wanna know in terms of amendments that you plan to take in the future, do you think you'll be able to do something to ensure that the Fed the the state charter fits within the Federal charter?

Yeah. I'm open to exploring that. Right? I wanna find some commonality and take a step forward. If for whatever reason, we are preempted, then that's a point that we have to take into consideration.

Right? And, again, just by definition, if we're preempted, we can't do anything in that space, so we will have to adjust. But until then, I think it's productive for California consumers, the industry as a whole, because I do believe there are incredible attributes that blockchain technology can provide society. So I think moving the conversation forward is more.

And then in terms of what we've we've talked about fraud and the potential to fraud and the existence already of widespread fraud. How do you think your bill would impact or potentially reduce that?

Sure. Again, the concept of blockchain is a digital trace in perpetuity. Right? So that is the beauty of security is being able to backtrack and find the original source. Whereas in current financial institutions, that is much more complicated.

So by definition, this is a safer approach to certain financial systems.

Mister Vice Chair, could I just on the preemption issue, Assemblymember Krell, I would just note that, you will be hard pressed to find anyone in or around the negotiations on the Clarity Act who will say that it will not, preempt the states. Everyone I talked to who's involved in those negotiations, has been quite clear that those offering up the Clarity Act intend to preempt the states.

Well, only to the extent that there's a conflict between the federal law and the state law. And so what my question was, and I think what his answer was that this was gonna comport with that.

Which gets us all the way back to the lawsuit between DFPI and Coinbase.

One second. So, McCraw, are you okay with the dialogue? I'm only gonna go through if you're.

I'm good with the dialogue.

Okay.

Yeah. That you can that's that's why as the analysis points out, you you have this ongoing litigation with Coinbase and DFI here. And if I'm not mistaken, I could be wrong and correct me if I am, I believe that Coinbase sued DFI in that case, I think, but I'll double check that.

So because they don't want to do what, you know, these mobile home parks and ag cooperatives and hard money lenders like Working Capital for Communities Inc are willing to do, which is just fill out some paperwork. I'm not saying that you can't stake, but let's not pretend that something that that that that is is something else.

There's this sort of, you know, Kabuki theater fiction kind of going on here about, well, we're not a security, and we could spend hours talking about the how we test and all that.

Well, I think that's a real question. I mean, I think, like like, your point is, like, it looks like a duck and walks like a duck. I think the other side of that is, no. It doesn't. This is something else.

This entire this this requires an entirely different thought process.

But the next part I do Works like a duck assembly member is literally why on a bipartisan basis, this legislature passed twice legislation to create a crypto licensing process, which is literally being stood up at DFPI as we speak. It will go active on July 1. They were given extra time to make sure that they could line it up right. So to me, that just feeds into this notion of this being dramatically premature given you have the state standing up a state crypto licensing regime.

You've got the feds, national bank regulators trying to undermine that with a new type of trust license and things like that for folks who kinda don't wanna play or don't wanna follow the rules.

And you have the Clarity Act brewing, which literally the Clarity Act changes about four times a day based on who you talk to on on Capitol Hill.

Yeah. I mean, I

think exactly the wrong moment to be doing this.

I think the questions about the timeline of this are are are totally valid, and that's that was kind of my line of questioning to be so to the chair.

I really appreciate the questions and hopefully, this was helpful in some way. I'm not trying to be argumentative Okay. Even though it seems like you're doing it for a living.

I believe that, Mr. Chair, you have a a response or Yes.

Thank you. And I would like to make it very clear to the committee that California is now the only state that is actually still enforcing this cease and desist that was shared. So, again, all other states are allowing their consumers, their residents to benefit from this tool. And I do believe that Californians also deserve that.

Thank you, Mr. Chair. With that committee, do we have any more additional questions? Assembly Member Schiavo.

Just on that point, the I mean, that is has a lot to do with Trump winning and Republican states then pulling off of what was a bipartisan legal action at that time. So I don't know that it is so much an indicator of we wanna, you know, let this all flow as much as it was political, and they didn't wanna be crosswise with Trump who is trying to be the king of cryptocurrency and, you know, and and open the floodgates federally.

So I just that seems like a mischaracterization of what's going on with the lawsuit. Okay.

Committee Members, any more questions? With that, Mr. Chair, would you like to close?

As I shared earlier, happy to continue dialogue, and and hope of finding some sort of middle ground and compromise. I wanna make sure that the foundation and regulatory framework that we create in California, is most beneficial and could be the model for the nation. Maybe we get to the point to where the Federal Government looks to California yet again to move in the most appropriate direction for consumer protection and also implementing this consumer tool. With that, I respectfully ask for a yes vote.

Thank you, Mr. Chair, for your close. With that, do we have a motion and second? Is that due pass recommendation?

Move the bill.

It's due pass as amended. It's been moved and seconded. With that, madam secretary, please call the roll.

AB 2285 by Assembly Member Valencia. The motion is due pass as amended. [Roll Call] 702.

The bill has some notes, Mr. Chair. The bill is out. Thank you, Mr. Chair.

Thank you, Mr. Chair. Thank you all.