The New California Digital Asset Bill

In a decisive move towards regulating crypto currencies, California Governor Gavin Newsom has signed the Digital Financial Assets Law to bridge the gap in regulating alternative currencies in the state.

Crypto and alternative currencies have been lurking in the background for years. However, over the last decade, cryptocurrencies gained popularity as a viable tender that moved fast, globally, and efficiently without any governmental oversight or bureaucracy, a key appeal for many users.

Bitcoin, the most popular and widely used cryptocurrency, was created in 2009 by Satoshi Nakamoto (a pseudonym for one or several programmers). The first real-world transaction was on May 22, 2010, when a man paid 10,000 bitcoins for two Papa John pizzas worth $25. On October 26, 2023, 10,000 bitcoins were valued at $338,508,000.00. Also, May 22^nd is now known as Bitcoin Pizza Day!

To further demonstrate its adoption, at the end of 2022, there were 260,000 bitcoin transactions in the U.S. every day. Around 23,000 businesses in the country accept bitcoin as a form of payment, with about 440 of those businesses based in California, the most active state.

Now that Fortune 500 companies have embraced crypto currencies, like Ferrari, which recently announced that it will now accept bitcoin as payment for its luxury cars, it is safe to say that digital assets have reached critical mass. However, many believe cryptocurrencies would benefit from regulation, and California’s new law is the first step towards making that happen across the country.

What is the Digital Financial Assets Law? 
The Digital Financial Assets Law is legislation introduced to regulate business activities using Digital Financial Assets (DFAs) in the state of California, or on behalf of California residents.

The Digital Financial Assets Law will require individuals and entities that engage in DFA transactions to follow established regulations, including licensing, disclosures, record-keeping, and more. The law applies to those engaging in business activity with DFAs within the state of California or on behalf of a resident of California, with some notable exceptions.

What is considered a Digital Financial Asset?
The Digital Financial Asset Law recognizes a DFA as:

• A digital medium of value used in exchange
• A unit of account
• A store of value
• And is not a legal tender

DFAs do not include:

• A transaction within a reward program in which the value of the digital asset cannot be exchanged for a traditional legal tender or a DFA
• SEC-registered digital asset securities or securities exempt from SEC registration
• A digital asset of value within a platform or family of platforms, such as online games

Who will be required to comply with the new Digital Financial Assets Law? 
The Digital Financial Assets Law will apply to both individuals and business entities involved in the following DFA activities:

• The exchange of DFAs of value
• The transfer of DFAs of value
• The storage of DFAs of value
• The administration of DFAs of value directly or through asset control services such as digital asset fund administration
• The holding or issuing of shares of electronic metals or electronic certificates that represent shares of electronic metals
• The exchange of DFAs of value within online games or gaming platforms (with exceptions)

When will the Digital Financial Assets Law go into effect? 
The law will go into effect on July 1, 2025, giving those who fall under the bucket ample time to implement and adopt all regulations.

Who will be the Regulatory Body in charge of rulemaking and enforcement?
The California State Department of Financial Protection and Innovation (DFPI) has been delegated the task of establishing regulations, procedures, and enforcement actions.

For those interested in submitting a comment regarding the new law, the DFPI is currently accepting comments from the public on such matters until January 12, 2024.

Comments can be submitted to [email protected] with the subject line "PRO 02-23”. More information can be found here.

Businesses with questions regarding eligibility can learn more about whether the new law will affect them by emailing the DFPI at [email protected].

The legal team at Jacko Law Group is closely monitoring the new Digital Financial Asset Law and will continue to keep you updated. Jacko Law Group works with investment companies, investment advisers, advisers to private funds, and broker-dealers on developing and maintaining a robust compliance program, ensuring all new regulations and amendments are taken into account. If you have any questions on how the Digital Asset Financial Law may affect you, feel free to give us a call at 619.298.2880.