California Gov. Gavin Newsom says he will consider the bill when it reaches his desk.
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While Washington is just beginning to wrap its arms around the digital asset industry, an under-the-radar bill in California threatens to upend the way crypto firms have done business for a decade.
The bill passed in late August implements many provisions – including giving crypto customers more favorable prices when shopping – that consumer protection advocates have sought for years. It would also temporarily ban some of the most volatile crypto products and impose what the industry claims is a burdensome licensing regime on firms. Analysts say some of the provisions would be difficult for companies to implement just in California, meaning the bill could have national implications.
The centerpiece of the bill is a new license — similar to one already required by New York state — that crypto companies must operate in California. But the California bill also addresses many of the hot buttons that have paralyzed Congress.
Trading platforms like
Coin base
(ticker: COIN) will have to offer its customers so-called best execution when they trade, which means that the company must use “reasonable diligence” to find the market or counterparty that offers the most favorable price. That’s a standard rule for broker-dealers in stocks, but until now it hasn’t been the case in crypto, leading some regulators to require companies to send orders to places that bring them the most profit.
“Injuries happen to consumers on a daily basis, and the basic safeguards and protections are not there in this industry, and they need to be,” said Robert Herrell, executive director of the Consumer Federation of California, which supports the bill. Herrell cited the May collapse of algorithmic stablecoin TerraUSD and the July bankruptcy of crypto lender Celsius Network as evidence of the problem.
The bill effectively bans algorithmic stablecoins until 2028 by banning platforms with the California license to allow them to trade. Unlike traditional stablecoins, algorithmic stablecoins do not rely on reserves to hold their value. Instead, they are trying to maintain the one-dollar peg by giving traders an arbitrage opportunity to exchange the stablecoin for another cryptocurrency.
Under the bill, even some asset-backed stablecoin issuers, such as Circle Internet Financial and Tether Holdings, would have to obtain their own California licenses to remain available to customers.
It is unclear how that could happen
Tether
,
whose dollar-backed stablecoin, USDT, is the largest in the world with a market cap of around $69 billion. The company, which has been accused by regulators of lying about its reserves in the past, does not have operations in the U.S. “While we do not operate in the U.S., we look forward to continuing to work with regulators to cement the existence of digital currencies and stablecoins as a staple of economic freedom and innovation,” a Tether spokesperson said. Tether has previously said it has always maintained sufficient reserves and has never failed to satisfy a redemption request.
Circle and Coinbase did not respond to requests for comment.
“Many of these concepts are completely new to crypto intermediaries,” says Matthew Wholey, an analyst for Washington, DC-based PolicyPartner. Wholey noted that the California bill also creates a “best interest” standard for crypto companies that requires them to test the suitability of investments before offering them to clients.
On Wall Street, such standards are controversial and have led to political battles. In crypto, where almost all assets are volatile, Wholey notes, it’s uncertain what such a standard could even mean. “It creates a wide range of qualitative suitability standards a firm must incorporate when making investment recommendations and listing assets for exchange,” he says.
The bill passed the California Senate and Assembly at the end of the session in the last two weeks of August and appears to have taken the industry by surprise. Only a handful of associations registered to lobby the bill in the state.
“The bill would effectively ban all of the crypto businesses currently thriving in California unless they are able to navigate a burdensome, uncertain and likely expensive licensing regime,” Blockchain Association senior policy manager A. Jae Gnazzo wrote in a letter to California lawmakers in the days before the bill passed. “We urge you to reconsider this bill.”
The bill passed the Senate 31 to 6 and in the Assembly 71 to zero.
Now the potential law will go to the desk of California Governor Gavin Newsom who has until September 30 to sign or veto the bill. If he doesn’t act by then, it will become law and companies will have to acquire the new license by 2025. Newsom signed an order in May that his office said was “to stimulate responsible Web3 innovation” in the state, which which crypto advocates say the bill disproves.
A spokesman for the governor declined to comment on the pending legislation. “The bill will be evaluated on its merits when it reaches the governor’s desk,” the spokesman wrote in an email.
Write to Joe Light at [email protected]
