Crypto Industry Girds Itself for California’s New Licensing Law

Cryptocurrency companies are turning their attention to a California agency that will write regulations in the aftermath of a new law that will license the sector for the first time.

California lawmakers passed in September a bill (A.B. 39) to license the cryptocurrency industry, but the comprehensive regulations for the statute won’t come into effect until July 2025.

Gov. Gavin Newsom’s signature earlier this month marked a major milestone after he vetoed a similar bill last year. The Golden State, home to nearly a quarter of the blockchain companies in North America, will join New York as the two major states with a licensing regime. The state activity comes as federal action lags despite turmoil in the cryptocurrency market.

“I thank the [bill] author for the effort to create a clear and comprehensive approach to regulating the digital assets market. Stronger consumer and investor protections will prevent fraud and ensure bad actors are held accountable,” Newsom, who has been a proponent of blockchain innovation, said in his signing message.

The governor, however, added that there is still “ambiguity” in the licensing framework that will require potential cleanup legislation and regulatory clarity. Industry representatives are now focusing the state Department of Financial Protection and Innovation, which will write regulations regarding licensing and enforcement.

Exemptions

The new cryptocurrency law details numerous requirements, from what information has to be included within an application to how the state should evaluate applicants. But the measure also gives the department wide-ranging discretion over who’s regulated in the first place.

For instance, the bill’s prohibition on stablecoins—currencies which peg their value to another asset like the US dollar—allows the department to approve of exceptions to that ban. More broadly, the department is allowed to exempt anybody from any or all of the licensing requirements if it’s “in the public interest.”

The agency will decide what that means, but industry groups will likely lobby for more exemptions than less. The Crypto Council for Innovation, a coalition that represents companies like Coinbase Global Inc. and Gemini Trust Co., wants the department or the legislature to broaden exemptions for startups or smaller companies. The group also argues that some definitions in the law are too overreaching and advocates for cleanup legislation.

“I think we want to ensure that for activity or technology or individuals that aren’t financial service-related, [those aren’t] captured in a financial services-like regulatory regime,” said Pete Herzog, who leads state government relations for the council. Those examples include services like Web3 gaming or online storage providers.

Joe Ciccolo, founder of cryptocurrency compliance advisory firm BitAML and board member of the Digital Currency Traders Alliance, said the department could use its exemption power in various ways. It could grant exemptions systemically, putting different activities into different risk classes, or the department could regulate on a case-by-case basis to adapt to emerging technologies.

Regardless, consumer advocates contend the department should scrutinize exemptions so they don’t undermine the law.

“Everybody thinks they’re special and unique, and they have their story, and they don’t think this should apply to them,” said Robert Herrell, executive director of the Consumer Federation of California, which backed the law. “By and large, that’s kind of not going to fly.”

Logistical Fears

California faces many steps to establish its licensing infrastructure, and industry groups say they do not want a repeat of how New York rolled out its licensing system, when it took up to years in some cases for applications to be processed.

“I’m much more concerned with the rollout because we’re going from zero to a hundred miles an hour,” Ciccolo said. “They’re going to be inundated with applications from all these different business models and products and services and companies, big and small.”

Ciccolo said communication will be key, and he hopes the department releases a public plan on how it will build the staff and resources to handle the applications, which could total in the thousands. He noted that California officials have communicated with their New York counterparts, which is an encouraging sign.

Herzog said the Crypto Council for Innovation wants follow-up legislation that would establish time frames for when the state has to respond to or review applications and other requests to provide clarity to companies.

Observers said they are encouraged so far because state officials have listened to the industry as the bill advanced in the legislature, and they hope it will continue to do so with implementation.

“My hope is that that [outreach] will go a long way towards a more sort of favorable outcome, not just for the crypto space, but for consumers and taxpayers and everybody involved,” said Ciccolo.