On October 13, California Governor Gavin Newsom signed into law Assembly Bill 39 (AB 39), establishing a Digital Financial Assets Law (DFAL) set to go into effect July 1, 2025.
Whereas previously the California Department of Financial Protection and Innovation (DFPI) declined to extend its money transmission statute to apply to digital asset activities, the new DFAL establishes a comprehensive licensing and examination regime that some are likening to the Bitlicense framework New York pioneered in 2015.
The DFAL licensure requirement extends to businesses conducting a “digital financial asset business activity” with or on behalf of a California resident. “Digital financial asset business activity” is defined as:
- Exchanging, transferring or storing a digital financial asset, or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor.
- Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person, or issuing shares or electronic certificates representing interests in precious metals.
- Exchanging one or more digital representations of value used within one or more online games, game platforms or family of games for either of the following:
- A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
- Legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.
“Digital financial asset” is defined broadly and would likely include many tokens presently circulating on public blockchains, but the term excludes certain closed loop rewards points, certain digital assets used solely within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform, and any registered or exempt security.
The law requires the DFPI to create a robust regulatory framework, including licensure, supervision, enforcement and rulemaking authorities. The licensure process will require applicants to make certain disclosures relating to officers and owners, establish operational and technical security policies, and meet and maintain capital and liquidity the DFPI determines is sufficient for the applicant based on the applicant’s specific characteristics and business. Notably, the new law also includes specific provisions relating to the licensure of stablecoin issuers, including that the stablecoin issuer must own high-quality liquid assets worth the amount of issued stablecoins.
AB 39 is the latest piece of a patchwork of state licensure regimes seeking to extend prudential safeguards and consumer protections to the conduct of centralized intermediaries involved with digital assets. Given its market size and its share of software companies in this space, this law has the potential to be a significant driver for compliance efforts in the industry. Companies pursuing state-by-state money transmission licensure for digital asset activities will need to consider whether the DFAL applies to their business.
Having vetoed a prior version of the bill last year, Gov. Newsom signaled support for this bill as a thoughtful approach that fostered responsible innovation, though he expressed reservation that “ambiguity of certain terms and the scope of this bill will require further refinement in both the regulatory process and in statute.” Fortunately, the long timeline to the law’s effective date of July 1, 2025, will provide a window of opportunity for productive engagement from the industry.
We will continue to monitor developments with AB 39 and whether there are opportunities for the teams building new products and services to weigh in.