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Changing Crypto Regulations: State-Level Initiatives Gain Ground

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Andrew R. Michaud

• September 19, 2023

Federal lawmakers may not have immediate plans to pass comprehensive crypto legislation, but that doesn't mean the regulatory landscape isn't shifting in ways that could impact the industry.

California Introduces Licensing Regime

Recently, the California legislature advanced a bill aimed at establishing a licensing regime for crypto firms, among other rules. The bill now awaits Gov. Gavin Newsom's decision regarding whether to sign or veto it. A spokesperson for Newsom stated that the bill would be evaluated on its merits before the deadline of Oct. 14.

New York Proposes Updated Standards

Meanwhile, the New York Department of Financial Services, which already operates under a similar law, has proposed new standards for trading platforms when listing or delisting tokens (cryptocurrencies). These two developments serve as a reminder that, in the absence of federal regulation, states are taking initiative.

Concerns Over Cost and Possible Bans

Certain crypto firms have expressed concerns that the California bill could increase their operating costs and effectively ban certain products. For instance, the bill mandates full reserves for "stablecoins" - tokens typically pegged to the US dollar. This requirement could effectively ban "algorithmic stablecoins," which maintain a one-to-one value with the dollar through alternative methods. Additionally, the bill would require crypto firms to obtain licenses from California's consumer financial protection regulator, mirroring New York's existing requirements.

Implications for Companies' Strategies

In response to New York's crypto licensing regime implemented eight years ago, some firms chose not to conduct business in the state to avoid compliance. However, if similar requirements are enacted in California, companies may find it more challenging to avoid both of these major U.S. markets.

Congress's Stance on Crypto Legislation

While federal-level progress on major crypto-related legislation appears unlikely at the moment, the House Financial Services Committee has made strides with bills that aim to establish safeguards for crypto-trading platforms and stablecoins. However, these bills currently lack sufficient support from Democrats to make progress in the Senate, leaving their fate uncertain.

Introduction

Cryptocurrency Regulation in California

Last week, Senate Banking Committee Chairman Sherrod Brown expressed his reservations about limited disclosure requirements for digital asset tokens in a letter to Treasury Secretary Janet Yellen and regulators. He emphasized the need to use "existing tools" to combat bad actors in the crypto space.

The proposed California bill has garnered support from consumer groups. However, it has faced opposition from industry players such as Coinbase Global and Andreessen Horowitz. These firms are advocating for amendments to the bill, citing concerns related to stablecoin requirements and the absence of licensing exemptions for small businesses and those already registered with the Commodity Futures Trading Commission.

It is worth noting that this is not the first time that the California legislature has attempted to regulate cryptocurrencies. Similar efforts were made last year, but the bill was eventually vetoed by Governor Newsom, who believed it was premature given pending federal initiatives.

The Need for Consensus

The collapse of the crypto trading platform FTX.com amid fraud allegations just weeks after the previous bill's veto highlighted the urgency for regulation. Federal regulators have taken numerous enforcement actions against digital asset firms, and the Treasury Department-led agencies have issued reports outlining their proposed regulatory frameworks for crypto.

However, achieving a consensus on new cryptocurrency laws has proven to be a challenge for lawmakers. According to Matthew Wholey, an analyst at PolicyPartner, the main difference this time is the backdrop. With federal crypto policy becoming more defined, states like California are stepping in to address the remaining regulatory void.

Conclusion

The ongoing efforts to regulate cryptocurrencies in California reflect the growing need for comprehensive legislation. While consumer groups support the proposed bill, crypto firms have raised concerns regarding certain provisions. The challenges faced by lawmakers in achieving consensus highlight the complexities involved in regulating this rapidly evolving industry. As federal crypto policies continue to take shape, it is likely that states will play a significant role in shaping the future of cryptocurrency regulation.