Regulatory Efforts Pick Up Steam: Bill Introduced In California Legislature
Note: This article was originally posted here as a member article for the Digital Currency Council on March 5, 2015.
On February 27, Matt Dababneh of the California state legislature introduced a bill to expand the state’s money transmission laws to include digital currency businesses. This may be the second domino to fall as state regulators nationwide are waking up to the industry’s growing usefulness and participant base.
While FinCEN has produced considerable guidance for digital currency businesses at the federal level, most states have been quiet on their treatment of the new asset class. Lowell Ness, a California-based digital currency attorney at Perkins Coie, told me just days earlier that “the general consensus is we are going to see a lot of the state regulators falling into line this year and next year.”
The earliest state regulatory agencies to pass down their opinions, Texas and Kansas, were early because it was easy – they concluded that digital currencies did not fit the definition of currency in their statute and therefore they had no authority to regulate it. On the other hand, the New York Department of Financial Services concluded they could regulate under existing statutes, and are nearing finalization of the first licensing program.
California regulators appear to consider themselves in the former category, with digital currencies not captured by the scope of their state’s statutes. As a result, the legislature must pass clarifying law before California’s Department of Business Oversight can do anything at all. No state legislature has come close to touching the subject yet, though New Jersey has held a hearing to potentially prepare for action.
Initial hope was to see regulators outside of New York take a lighter-handed approach. “If New York winds up being pretty aggressive and difficult with their regulations it wouldn’t surprise me if we see California try to do something very different [in order to] be a little bit more company friendly,” Ness said.
Dababneh’s bill contains some stringent requirements very similar to those in New York’s proposed regulation. First, applicants must pay $5,000 and provide details about their company, its ownership, and the proposed digital currency business plan. Second, each licensee must meet a minimum capital requirement equal to the value of the digital currency that the licensee has on deposit for its customers. Unlikely New York, the bill would not allow for the capital requirement to be met with digital currency holdings. Finally, the licensee would be required to comply with all the traditional requirements of running a money transmission business.
However, Dababneh’s attempted approach has some clear advantages as well. Expanding existing money transmission laws to include digital currency will allow a single license to cover each business. In New York, many digital currency businesses will be required to be licensed twice and held to a duplicate set of standards. In addition, Dababneh’s bill does not contain New York’s the overbearing requirement to seek approval for every material change to business services.
Dababneh’s bill must navigate the California Assembly and may look very different by the time regulators are given the keys to target digital currency businesses. But it’s a step in the right direction for those waiting for a legal roadmap to operate their business.
“In general, Bitcoin companies make money and there’s ability to deal with some of the friction that’s being brought on by regulators,” Ness said. “I don’t feel it’s something that is going to stop anything. It’s really a good thing for the industry to have clarity.”