FameEX Hot Topics | California Passes Legislation for Digital Financial Assets

On October 13, 2023, California enacted the Digital Financial Assets law, marking the state's first comprehensive regulatory framework for digital asset markets. This law introduces significant changes, especially for crypto companies and individuals conducting digital financial asset business activities involving California residents. Effective from July 2025, they will be required to obtain licenses to operate or represent themselves as capable of engaging in such activities.

The Digital Financial Assets law also grants the California Department of Financial Protection and Innovation (DFPI) wide-ranging enforcement authority. The DFPI can initiate enforcement actions against entities involved in or planning to engage in digital financial business activities. However, the law's broad and somewhat vague language has raised concerns, prompting Governor Gavin Newsom to call for clarification.

One notable requirement under this law is that crypto exchanges must assess whether digital financial assets listed on their platforms could be classified as securities by federal or California regulators. However, it doesn't offer specific guidance on how to make such determinations. Exchanges are also mandated to provide full disclosure of material facts related to conflicts of interest associated with the assets listed on their platforms. Additionally, they must conduct comprehensive risk assessments to protect consumers from cybersecurity risks, malfeasance, code defects, and market-related risks like price manipulation and fraud.

Furthermore, exchanges must establish policies and procedures for ongoing evaluation of the appropriateness of listing digital financial assets, including notification to affected consumers and counterparties. They are also required to ensure that exchange rates between assets are as favorable as possible to consumers under prevailing market conditions. The law grants the DFPI discretion in approving stablecoins for exchange, transfer, or storage. When evaluating stablecoin issuers, the DFPI will consider factors such as the amount, nature, and quality of assets held by the issuer to fund redemption requests from residents. The DFPI commissioner may also require stablecoin issuers to obtain licenses to safeguard residents' interests when using stablecoins for payments or as a store of value.

To enhance consumer protection, the law mandates that stablecoin issuers maintain eligible securities with a market value equal to or greater than the aggregate value of all outstanding stablecoins issued or sold, as per U.S. generally accepted accounting principles. While the Digital Financial Assets law represents a significant step in regulating California's digital asset market, concerns about its breadth and potential ambiguities persist. The ongoing efforts to clarify its provisions and address these concerns will likely shape its implementation and impact on the state's crypto industry.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.