California has dusted off its notion of a ‘Virtual Currency Act.’ A new bill seeks to prohibit a person from engaging in any virtual currency business sans license from the Commissioner of Business Oversight (or is therefrom exempt). Introduced by Assemblymember Matt Dababneh (D – Encino), the new bill, A.B. 1123, parallels an earlier bill he eventually took off the table, A.B. 1326.
The current Money Transmission Act prohibits individuals from engaging in the business of traditional money transmission in California, including the advertising, soliciting, or holding itself out as providing money transmission in this state without a license. Assemblymember Dababneh wants it to be similar for those who wish to transmit virtual currency like Bitcoin.
Persons would need to apply for the license (and pay an application fee). The legislation, which is compared to New York’s BitLicense, would require applicants to provide personal information, prior virtual currency services offered, a sample form of receipt for the business and specified financial statements. Licenses are subject to annual renewal.
“This bill would require each licensee to maintain at all times such capital as the commissioner determines, subject to specified factors, is sufficient to ensure the safety and soundness of the licensee, its ongoing operations, and maintain consumer protection,” reads the legislation for AB1123. “The bill would require each licensee to maintain a bond or trust account in United States dollars for the benefit of its consumers in the form and amount as specified by the commissioner.”
The bill authorizes the state to examine any business and branch office to determine whether the business is being run in a lawful manner. Licensees will be required to file annual audits and quarterly financial statements verified by 2 licensee principal officers.
One may be eligible for a license if they do not have outstanding obligations and the state determines the business a low risk to consumers. The license fee is $500.
“The commissioner may at any time and from time-to-time examine the business and any branch office, within or outside this state, of any licensee in order to ascertain whether that business is being conducted in a lawful manner and whether all virtual currency held or exchanged is properly accounted for,” reads the document.
An earlier bill, A.B. 1326, had been pulled by Dababneh last August. Internet freedom groups like EFF and “a coalition of virtual currency and consumer protection organizations” had a role in the bill’s defeat.
“Unfortunately, the current bill in print does not meet the objectives to create a lasting regulatory framework that protects consumers and allows this industry to thrive in our state. More time is needed and these conversations must continue in order for California to be at the forefront of this effort,” Assemblymember said in a statement.
The EFF stated in an opposition letter to A.B. 1326 that the bill would fail to protect consumers, as it originally set out to do.
“[T]the bill will discourage innovation in a burgeoning industry, and its broad terms, including the definition of ‘digital currency business,’ reach much farther than the bill’s drafters could possibly have intended, regulating not only digital currency users but also businesses that are far removed from digital currency transactions and have absolutely no control or influence over such transactions,” wrote the EFF. “Further, while the bill purports to have a light regulatory touch—it is portrayed as an enrollment pilot program for digital currency businesses—it places unduly burdensome requirements on businesses and provides the Department of Business Oversight (DBO) with nearly unfettered regulatory discretion to pick winners in the digital currency industry.”
The EFF also condemned the bill’s apparent problematic understanding of digital currencies, as highlighted by vague definitions throughout the bill.
“Digital currency users often directly transmit digital currency value to others without any intermediary, meaning those users would have been subject to the regulations even though they are merely using a digital currency,” wrote the EFF in a news article about the rescinding of the bill. “Additionally, despite the bill purporting to have an exemption for parties such as Bitcoin miners, they would also have to register because in appending transactions to the Blockchain, they could be viewed as transmitting digital currency.”
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