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Last year, California passed a new law to change the regulatory landscape for cryptocurrency business operations in the state. Signed by Governor Gavin Newsom on October 13, the law is the first comprehensive regulatory framework guiding crypto firms, which previously operated without much hindrance.
California’s Digital Financial Assets Law is expected to sanitize the state’s crypto scene in different ways, with varying implications for businesses and individuals. In addition to specifying conditions for operations, the law may encourage businesses to push the limits of innovation past supporting crypto trades to issuing innovative tokens. The law can also promote healthy competition among issuers, allowing a crypto with most upside and tangible utility to compete favorably with others and possibly rise above the competition.
Let’s find out more about some other important details that will influence the crypto market in the Golden State.
The Digital Financial Assets Law will take effect from July 2025. A significant change is expected, as all crypto businesses operating in California must obtain a license from the state. The law specifies eligibility conditions, including rules for record-keeping and disclosure.
California has provided extensive definitions for several concepts as part of the law. For instance, the term “digital financial asset” covers digital mediums of exchange, stores of value, and units of account. In addition to the definition of an asset, there are specifications for activities that are covered by the law.
Digital financial asset business activity includes the direct or indirect transfer, storage, or exchange of digital financial assets. It also covers issuing and transferring electronic representations of precious metals, including the exchange of shares and electronic certificates. Furthermore, digital financial asset business activity covers the exchange or transfer of in-game assets or other representations of value in online games.
These definitions are crucial for multiple reasons. Firstly, they serve as a guide for new businesses looking to do business in California, helping them to shape their operations according to the permitted limits of the law. In addition, existing companies can use the law to analyze their business practices and determine whether or not their business practices require a license from the state.
The Digital Financial Assets Law extensively describes expectations of crypto exchange. One major requirement is that the exchange must determine the likelihood that a cryptocurrency could be classified as a security by state or federal regulators. Unfortunately, this task is challenging because there is still a lot of uncertainty about cryptocurrencies and blockchain technology. For instance, the United States Securities and Exchange Commission (SEC) has received a lot of criticism for using enforcement action against the cryptocurrency industry instead of promoting clarity.
Another requirement is that the exchange must assess each listed token to determine possible risks holders may be exposed to, including concerns around fraud, price manipulation, and general cybersecurity. Furthermore, the platform must maintain asset exchange rates that are favorable to consumers.
The strict requirements for crypto exchanges may be challenging for the average firm. While established platforms may already operate the structure necessary to meet these requirements, new platforms may struggle. This could impact the availability of crypto trading options in California and reduce the amount of competition required for the state’s crypto landscape to thrive.
Interestingly, California exempts exchanges that received a crypto BitLicense from the New York Department of Financial Services (NYDFS) on or before January 1, 2023, offering them a conditional license. The BitLicense is well-known in crypto circles because of its strict requirements and costs associated with the registration process.
There are also disclosure expectations that California crypto businesses must meet. Before conducting crypto business activities, the entity must disclose its method of calculating and imposing fees, specify whether products have insurance covers, and describe strategies for solving errors, among several others.
Starting July 2025, the crypto businesses in California will be governed by the Department of Financial Protection and Innovation (DFPI). Governor Newsom’s statement to the California State Assembly encouraged the agency to thoughtfully execute its duties and promote clarity. However, the DFPI’s broad authority over the sector is cause for some concern.
The agency has the freewill to investigate or indict any entity that “has engaged, is engaging, or is about to engage” in crypto business dealings. This stretches the DFPI’s regulatory power to an extent that may be considered worrisome. Since the law does not specify a timeline for the “has engaged” or “about to engage” parts of the law, the DFPI may have unrestricted control. This means that crypto platforms in the preliminary business or product development stage could come under DFPI scrutiny without a working prototype or viable product.
All jurisdictions that allow cryptocurrency operations must enact laws to guide permitted activity in the sector, protect customers, and encourage growth. These laws help to create a solid base that can serve as a launchpad for cryptocurrency activity in the state. However, any ambiguity, such as noted in the DFPI’s powers, can negatively impact potential progress and lead to regression. In addition, if the requirements expected of crypto businesses are too difficult, the regulatory landscape becomes unfavorable and may force crypto companies to more accommodating jurisdictions.
