California Courts Dangerously Onerous Crypto Regulatory Bill

It’s been a maxim in politics that “as California goes, so goes the nation,” and we hope that doesn’t hold true in this case, because the Golden State is seriously weighing a bill that could wholly disrupt the crypto industry.

While some of it is couched as consumer protection, a lot of it could cripple crypto innovators operating in California, and could effectively spread far beyond the state, Barron’s reports.

Analysts say some of the provisions would be difficult for companies to implement just in California, meaning the bill could have national implications.

The centerpiece of the bill is a new license–similar to one already required by New York state–that crypto companies would need to operate in California. But the California bill also addresses many of the hot-button issues that have paralyzed Congress.

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The bill puts an effective ban until 2028 on algorithmic stablecoins by forbidding platforms with the California license to allow them to trade. Unlike traditional stablecoins, algorithmic stablecoins don’t rely on reserves to hold their value. Instead they try to maintain their one-dollar peg by giving traders an arbitrage opportunity to swap the stablecoin with another cryptocurrency.

Under the bill, even some asset-backed stablecoin issuers, such as Circle Internet Financial and Tether Holdings, would need to get their own California licenses to remain available to customers.

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“Many of these concepts are brand new for crypto intermediaries,” says Matthew Wholey, an analyst for Washington, D.C.-based PolicyPartner. Wholey noted that the California bill also creates a “best interest” standard for crypto companies that requires them to test investments’ suitability before offering them to customers.

On Wall Street, such standards are controversial and have led to pitched political battles. In crypto, where nearly all assets are volatile, Wholey notes, it’s unsettled what such a standard could even mean. “It creates a wide range of qualitative suitability standards a firm must incorporate when making investment recommendations and listing assets for exchange,” he says.

The bill moved through California’s senate and assembly at the end of their session in the last two weeks of August and seems to have mostly taken the industry by surprise. Only a handful associations even registered to lobby on the bill in the state.

“The bill would effectively outlaw all of the crypto businesses that are currently thriving in California unless they are able to navigate an onerous, uncertain, and likely expensive licensing regime,” wrote Blockchain Association senior policy manager A. Jae Gnazzo in a letter to California lawmakers in the days before the bill passed. “We urge you to reconsider this bill.”

The bill now goes to Gov. Gavin Newsom who has until the end of the month to sign or veto the measure. And given the executive order he signed in May that he said would “spur responsible Web3 innovation” – a characterization strongly disputed by the crypto industry, odds are he will sign it into law.