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California BitLicense Bill: Can the Golden State Save U.S. Crypto Interests?

Published October 17, 2023 10:58 AM
Teuta Franjkovic
Published October 17, 2023 10:58 AM

Key Takeaways

  • California Governor approved the Digital Financial Assets Law, scheduled to take effect in 2025.
  • This law sets up a regulatory framework for crypto firms similar to New York’s “BitLicense.”
  • California joins federal initiatives to improve security and oversight in the crypto sector as regulators explore applying the Electronic Fund Transfer Act to crypto platforms.

According to recent reports,  California has the highest levels of interest in cryptocurrencies in the US, scoring a crypto market score of 10 across all search phrases.

That is why the news about California Governor Gavin Newsom approving  a cryptocurrency bill that enforces stricter regulations on businesses conducting crypto operations is not really surprising.

California – Land of Opportunity

A crypto licensing measure is scheduled to go into effect in July 2025 and will establish a legal framework for companies operating in the crypto industry.

According to Newsom’s announcement on Friday, October 14, the Digital Financial Assets Law would require everyone to obtain a Department of Financial Protection and Innovation (DFPI) license in order to continue doing business in California.

The newly passed legislation is regarded as California’s response to New York’s “BitLicense.” The rule expands the state’s current money transmission regulations, which at the moment forbid banking and transfer services from operating without the required license from the DFPI commissioner.

In the letter , Governor Gavin Newsom stated:

“To offer clarity to consumers, regulators, and businesses subject to this new license structure, the regulatory process and the statute will need to be further refined due to the vagueness of some terminology and the bill’s reach. We must strike the right balance between safeguarding consumers from harm and promoting ethical innovation. To do this, I am looking forward to working with the bill’s author.”

Change of Heart On Crypto Regulation

The passage of the crypto regulatory law represents a substantial change from Governor Newsom’s prior viewpoint.

A similar bill that intended to create a licensing and regulatory framework for digital assets in the state was not signed by Newsom in 2022. Governor Newsom declined to sign the bill even though the California State Assembly passed it with a unanimous vote, sending it back “without my signature.”

The bill’s apparent need for better adaptability to the cryptocurrency market’s fast-changing environment was Newsom’s main issue.

At the time, Newsom argued for caution and advised waiting for federal laws before initiating extensive crypto licensing activities in partnership with the state legislature.

The federal government is aggressively pursuing various regulatory solutions to increase security and oversight in the cryptocurrency industry while California’s Governor Newsom adopts the new bill.

History Repeating Or Gen Z Taking A Lead?

In July this year, despite opposition from the panel’s senior Democrat, Rep. Maxine Waters (D-Calif.), who denounced  the proposal as “a wish list of Big Crypto” and organized legislators to vote against it, the Financial Services Committee adopted the measure in a 35-15 vote.

Despite its flaws, this legislation, in my opinion, improves the current situation, said Himes.

The conflict exemplifies how crypto policy is subject to shifting politics in the wake of a boom and crash that exposed severe business mismanagement and consumer protection issues.

The House Republicans who developed the bill said on Wednesday that it was an effort to close gaps in the current regulatory framework and to prevent companies that deal in digital assets from leaving the United States for nations with crypto-specific regulations.

Financial Services Chair Patrick McHenry remarked, “It is better, at worst, than what we have now.”

The crypto lobby has long wanted this agreement amid an increasing dispute with the SEC over its authority. The decision, according to Kraken’s global policy director Jonathan Jachym, was “a critical step towards regulatory clarity.” The Coinbase exchange’s head of U.S. policy, Kara Calvert, stated that “crypto legislation is facing a strong wind.”

Still, it is important to stress that nowadays generations are not neccesarily complying with whatever Dems or Reps do.

Zoomers’ interest in cryptocurrencies  is being driven by their familiarity with technology and exposure to financial crises. A staggering 93% of copy traders who engaged in futures trading and 82% who engaged in spot trading, including at least 50% of Gen Z, made profits, which says volumes about the market’s potential.

The ability of this generation to use technology well may hold the secret to streamlining crypto. Due to copy trading, there is already a 23% reduction in time spent on exchanges. Their skill at disseminating information via social media may also lower obstacles.

The Gen Z cohort, whose oldest members are in their mid-20s, was born in the late 1990s and early 2000s.

According to the recent study  from the CFA Institute and Financial Industry Regulatory Authority’s Investor Education Foundation, exchange-traded funds (ETFs) were held by 23% of investors, followed by mutual funds (35%), nonfungible tokens (25%) and individual equities (41%), in that order.

The most popular investment among Gen X investors, those who were born between 1965 and 1980, was mutual funds. Mutual funds were held by 47% of respondents, followed by individual equities (43%) and cryptocurrencies (39%).

The relative high concentration of Gen Z investors in individual equities and cryptocurrencies, such as bitcoin and ethereum, “may be cause for concern” if risk isn’t properly considered and managed, according to Gerri Walsh, president of the Finra Investor Education Foundation.

Sales Tax Exemption For Crypto Transactions

In California, virtual and cryptocurrency purchases and sales are exempt from sales and use tax . Cryptocurrencies and virtual goods are not real, movable property.

More specifically: When tangible personal property is sold or used in California, a sales and use tax is applied. According to California sales and use tax law, a transaction is not considered a “sale” if no tangible personal property is transferred. Therefore, cryptocurrency transactions (i.e., the buying and selling of bitcoin) are exempt from sales and/or use tax.

The Storyline

Sens. Ron Wyden (D-Ore.) and Mike Crapo (R-Idaho), the co-chairs of the Senate Finance Committee, wrote an open letter in July requesting input from the cryptocurrency industry on tax problems relating to loans, staking, mining, constructive sales, and wash trading. This month’s deadline for these comments has passed.

What’s at stake?

Tax matters are regulated by the Senate Finance Committee. Its supervision of a comment period for the general public is a first step towards prospective legislation or hearings on crypto taxes in the United States, an issue that the sector sees as preventing wider acceptance or usage.

To conclude:

A de minimis rule and overseas reporting requirements were also addressed in the letter from July, which set a deadline for responses of September 8. A capital gains tax exemption on realised gains that fall below a specific threshold is referred to as the de minimis rule.

Several crypto entities made similar recommendations that they hope the legislators will take into account. These include taxing cryptocurrencies generated by staking (also known as staking rewards) when they are sold rather than when they are generated as income, clarifying the rules surrounding wash trading, and, of course, the de minimis rules themselves

California Takes the Lead in Shaping Crypto Regulation

California, boasting an economy larger than most nations and being a global hub for technological innovation, took a groundbreaking step as the first state to proactively explore the integration of cryptocurrency and blockchain innovations.

Governor Gavin Newsom’s executive order aligns California with President Joe Biden’s vision, directing state agencies to collaborate with federal efforts in formulating regulations for digital currencies and to investigate the incorporation of blockchain technology in government operations.

This move recognizes the potential of blockchain and cryptocurrency to foster economic growth, job opportunities, and new businesses while acknowledging the uncertainties surrounding the industry. With California leading the way, the state could serve as a model for the broader U.S. crypto landscape, which has been striving to establish a meaningful impact.

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