California is on the brink of implementing a new regulatory framework for cryptocurrency, as the state legislature recently approved a bill that would impose a licensing system and other regulations on cryptocurrency firms. The proposed legislation is currently awaiting approval or veto from Governor Gavin Newsom, who has until October 14, 2023, to make a decision.
This move comes on the heels of the New York Department of Financial Services proposing new standards for how trading platforms list or delist tokens. These developments highlight the increasing role states are playing in shaping cryptocurrency regulation in light of absent federal guidelines.
The proposed California bill has raised concerns among some cryptocurrency firms over potential cost increases and product bans. Specifically, the bill requires full reserves for "stablecoins," tokens typically tied to the dollar. This requirement could potentially ban algorithmic stablecoins, which strive to maintain a one-to-one value with the dollar through alternative methods. Furthermore, the bill would require cryptocurrency companies to secure licenses from California's consumer financial protection regulator, mirroring regulations already in place in New York.
Eight years ago, New York introduced its own cryptocurrency licensing system, prompting some firms to refrain from doing business in the state. If California implements similar measures, avoiding compliance could become more challenging due to the significant market size of both states.
Despite the House Financial Services Committee making progress on crypto-related bills this summer, it seems unlikely that Congress will enact any substantial legislation soon. The lack of Democratic support makes progress in the Senate doubtful. Senate Banking Committee Chairman Sherrod Brown has urged regulators to use existing tools to target misconduct.
While consumer groups have lauded the proposed California legislation, it has met opposition from some cryptocurrency firms. The Crypto Council for Innovation, which includes members such as NASDAQ:COIN and venture-capital firm Andreessen Horowitz, has objected to the bill unless it undergoes amendments. Their concerns primarily center around stablecoin requirements and the absence of licensing exemptions for small firms and those already registered with the Commodity Futures Trading Commission.
This is not California's first attempt to regulate cryptocurrencies. Last year, a similar bill was vetoed by Governor Newsom, who deemed it "premature" given ongoing federal efforts. However, Matthew Wholey, a crypto policy analyst at PolicyPartner, believes that states will step in to fill the regulatory void as there is more clarity around federal crypto policy. He predicts that Newsom is likely to sign the bill into law this time.
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