FameEX Hot Topics | California Approves New Law Regarding Digital Financial Assets

On October 13, 2023, California ushered in a pivotal moment in its regulatory landscape by enacting the Digital Financial Assets law. This groundbreaking legislation marks the state's inaugural comprehensive framework for governing digital asset markets, and it brings substantial changes that will significantly affect crypto companies and individuals engaged in digital financial asset activities involving California residents. Starting from July 2025, they will be mandated to secure licenses to operate within this domain or present themselves as capable of conducting such activities.

One of the key aspects of the Digital Financial Assets law is the extensive enforcement powers bestowed upon the California Department of Financial Protection and Innovation (DFPI). The DFPI has been granted the authority to initiate enforcement actions against entities currently involved in or planning to engage in digital financial business activities. However, the law's broad and occasionally vague language has raised concerns among various stakeholders, including Governor Gavin Newsom, who has called for greater clarity. It's expected that efforts will be made to refine and narrow down the DFPI's jurisdiction.

Among the law's provisions, one noteworthy requirement pertains to cryptocurrency exchanges. They are now obliged to evaluate whether digital financial assets listed on their platforms could be classified as securities according to federal or California regulatory standards. However, the law does not provide specific guidelines on how these determinations should be made. Additionally, exchanges must ensure full disclosure of material facts related to conflicts of interest associated with the assets listed on their platforms. Furthermore, they are mandated to conduct comprehensive risk assessments aimed at safeguarding consumers from a spectrum of risks, including cybersecurity threats, malfeasance, code defects, and market-related issues such as price manipulation and fraud.

Moreover, exchanges are tasked with establishing policies and procedures for ongoing evaluation of the suitability of maintaining digital financial assets on their platforms. This includes notifying affected consumers and counterparties of any significant changes. Conversely, they must also establish protocols for delisting or discontinuing digital financial assets, complete with notification processes. To further enhance consumer protection, the law grants the DFPI discretionary authority in the approval of stablecoins for exchange, transfer, or storage. The evaluation process will consider factors like the quantity, nature, and quality of assets held by the stablecoin issuer to support redemption requests from residents. Additionally, the DFPI commissioner may require stablecoin issuers to obtain licenses to ensure the well-being of residents using stablecoins for payments or as a store of value.

Lastly, the law emphasizes the importance of stablecoin issuers maintaining eligible securities, the market value of which must equal or exceed the combined value of all outstanding stablecoins issued or sold. This requirement adheres to U.S. generally accepted accounting principles.

While the Digital Financial Assets law signifies a significant leap forward in the regulation of California's digital asset landscape, lingering concerns about its expansive scope and potential ambiguities remain. The ongoing process of refining the law's provisions and addressing these concerns will likely play a pivotal role in shaping its ultimate implementation and its impact on the state's cryptocurrency industry.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.