AB 2269 is a bill introduced by Assemblymember Tim Grayson (D-CA) that aims to try and create a regulatory licensing framework for crypto companies operating in California and ban the use of algorithmic stablecoins. Similar to the Responsible Financial Innovation Act, but only within California’s jurisdiction. The CA Senate Banking & Financial Institutions Committee considered the bill on Wednesday, June 22nd.
The bill received support from the Consumer Federation of California (the sponsor), the California Association for Micro Enterprise Opportunity, Greenlining Institute, and the California Reinvestment Coalition. All of the supporters cited the recent market turmoil resulting from the Terra USD crash and the recent volatility in the market as signs that industry actors needed more regulation to create a more stable and predictable future market.
On the other hand, the Blockchain Advocacy Coalition, the Electronic Transactions Association, and the Crypto Council for Innovation expressed concern but failed to take an explicit “oppose” position. They cited the bill’s potentially onerous licensing requirements, concern over a one-size-fits-all system, and belief that a ban on technology hampers innovation.
DCTA took a support-if-amended position and asked that the author amend the bill to implement an open registration system without any of the onerous licensing requirements, maintain a low bar of entry, and differentiate licensing requirements between industry actors.
Lawmakers had a robust debate about ensuring we don’t repeat past mistakes witnessed during periods of lax banking regulations. However, they professed their belief that we should continue moving and refining the bill through the process. They ultimately opted to advance the bill on a vote of six (6) aye votes, zero (0) no votes, and three (3) abstentions. It will be heard in the Senate Judiciary Committee on Tuesday, June 28th.
Our Stance on California AB 2269
The Digital Currency Traders Alliance (DCTA) has a SUPPORT IF AMENDED position on AB 2269 (Grayson). While we fully support the intent of AB 2269, and we thank Assemblymember Grayson for his leadership and foresight in introducing this bill, we wanted to outline our perspective on the proposed legislation.
California is a hub for tech companies and the source of much of the innovation witnessed in the technology sector over the last 20 years. However, in the previous few years, many states have drastically increased their efforts to convince California tech companies to relocate to their states with incentives such as lower taxes and reduced regulatory requirements.
This is why AB 2269 comes at a critical moment – it has the potential to provide much-needed regulatory clarity, but only if we take the time and care to ensure that this framework is designed effectively.
We think that AB 2269 gets many things right:
- Customer Service Requirements – We applaud the bill’s requirement that licensees display a toll-free telephone number for customers to utilize for customer service and other inquiries. This is long overdue.
- Accountability – We believe it is vital to hold bad actors accountable, and we look forward to continuing to work with the author’s office to flesh out and further define specific language such as: “unsafe or unsound act or practice”; “another dishonest act”; and “unfair or deceptive act or practice.”
- Insurance Requirements – Ensuring that licensees maintain adequate insurance to cover against theft or loss helps to protect consumers from user error, malicious actors, and potential cases of insolvency.
- Stablecoins – Recent events in the wider cryptocurrency market have helped to underscore the fallibility of algorithmic-backed stablecoins and the critical need to ensure that stablecoins are backed by reserves that represent a minimum of 100% of the total value of issued stablecoins.
- Insider Trading – We were deeply disturbed by recent news stories alleging insider trading at major exchanges. AB 2269’s provisions to protect against these unfair practices are an excellent first step to preventing future insider trading. This provision helps improve the overall health of the cryptocurrency sector.
- Conflict of Interests – We fully support the disclosure of potential conflicts of interest so that customers can make intelligent, informed choices about which digital assets to invest in. We also fully support the disclosure of the process and thinking behind what crypto assets are listed on exchanges.
However, there are a few areas of concern that we feel hamper the bill’s overall impact and effectiveness. We recommend that the author’s office consider the following points.
- Open Registration – At this early stage, we believe it is premature to fully embrace a licensing system. Instead, we encourage a simple and easy open registration process to encourage cryptocurrency businesses to voluntarily come forward and register their presence and activities with the state. Further, the bill’s current $35,000 threshold separating licensees and registrants is far too low. A single user can rack up this kind of figure in their day-to-day trading – this threshold must be substantially increased.
Alternatively, we propose a two-tiered licensing system that would distinguish between custodial actors and non-custodial actors. Custodial actors, companies that hold a user’s funds, should have to meet a higher regulatory threshold than non-custodial actors. This would simultaneously protect small actors and startups while striking the appropriate balance between strong consumer protections and economic growth and innovation.
- Need for New Paradigm – There are many elements of AB 2269 that seem to borrow from existing laws and policies impacting stocks, securities, and other commodities that do not fully apply to the cryptocurrency sector. For example, exchanges typically don’t make recommendations to clients about what cryptocurrencies to buy, although this may change in the future. We should be cautious in applying the existing system of rules to cryptocurrency and instead should develop a new paradigm to apply to digital assets.
- Low Bar of Entry – It is essential that we maintain a low bar of entry to encourage cryptocurrency businesses and entrepreneurs to participate in this new regulatory system. Functionally, we believe that costs and fees should be kept to a minimal and reasonable level. Further, despite their importance, we are concerned that the policies and procedures requirements are onerous. We would suggest that resources and guidance be developed and provided in order to make this requirement simple and easy to comply with.
- Privacy – The record-keeping requirements are not particularly onerous but must be balanced with robust privacy protections to ensure that a user’s identifying information is kept secure.
- Small Actors – It appears that AB 2269 envisions that most crypto users would interact with the ecosystem similar to how they would with a stockbroker. This is incorrect – many users simply buy, sell, and hold cryptocurrencies on an exchange or via an app like Robinhood or Venmo. We should ensure that they are held to a different standard, especially when making wallet-to-wallet transactions that are never converted into US dollars.
- Redundancy – It is important to note that this bill is being pushed despite a concurrent push from Governor Newsom, as outlined in Executive Order N-9-22. The Governor’s order also tasks DFPI with helping to develop a regulatory framework, which they have already started developing through the regulatory process.
California has been a tech leader for decades. By acting now, we can ensure that California can continue to lead for decades to come. That is why we earnestly support the creation of a robust regulatory framework to create an environment that simultaneously balances economic growth and innovation with strong consumer protections.