California’s AB 39 Crypto Regulation Bill: Implications for the Industry and Bitcoin Adoption

California is once again making moves to tighten cryptocurrency regulations with the introduction of a new bill, AB 39, on Tuesday. This legislative effort follows a previous attempt in February 2022 when the state introduced AB 2269. This AB 2269 was aimed to impose stringent licensing requirements and hefty reporting responsibilities on companies engaged in digital financial activities with California residents, much like New York’s BitLicense.

However, Governor Newsom vetoed that bill in September 2022, citing the need for a more transparent regulatory environment to balance innovation and consumer protection amid rapidly changing federal rules on digital assets.

AB 39: A Closer Look at Its Implications for Bitcoin Adoption in the US

The reintroduced AB 39 outlines key provisions that will take effect starting July 1, 2025. According to the bill, an entity can only engage in or claim to engage in digital financial asset business activities with California residents if they meet specific conditions.

These conditions include holding a valid license, having a pending license application, or qualifying for an exemption from licensing requirements. The legislation defines “digital financial asset business activity” broadly, encompassing various activities such as digital asset exchange, transfer, and storage, including Bitcoin-related activities.

1/8 In California's ending legislative session, crucial #cryptobills AB 39 & SB 401 are near passage. The impact extends beyond borders, influencing national regulations. @BitAML testified for protection, sensible rules & countered industry misconceptions. pic.twitter.com/yVya5yY6zK

— BitAML (@BitAML) August 29, 2023

Furthermore, AB 39 explicitly extends its regulatory scope to stablecoins, categorizing them as digital assets. It also establishes rigorous regulatory responsibilities for businesses involved in stablecoin operations. As per the new California Financial Code sections, companies must maintain comprehensive records of all digital financial asset activities for a minimum of five years from the date of the activity.

Enforcement Measures and Transparency Challenges

The bill grants the Department of Financial Protection and Innovation (DFPI) the authority to examine licensees and enforce AB 39. The DFPI can act against licensed and unlicensed entities that violate the provisions of AB 39 or other relevant California laws. The legislation also empowers the DFPI to impose civil penalties for such violations.

However, some concerns have arisen due to specific vague provisions within AB 39. For instance, it allows the DFPI to take enforcement action against a person “about to engage” in digital financial activities without specifying the criteria for being considered “about to engage.”

This ambiguity raises potential challenges for new businesses planning to enter the California market and contradicts Governor Newsom’s previous call for a transparent regulatory environment.

AB 39 is garnering attention as a likely candidate for approval this year. Entities operating in the digital financial asset sector, including Bitcoin and other cryptocurrencies, should thoroughly review the bill to comprehend its implications for their business.

As California makes another attempt to establish a regulatory framework for the cryptocurrency industry, the outcome could have far-reaching consequences for Bitcoin adoption and crypto regulation in the United States. While the state aims to protect consumers, ambiguities in some provisions may pose challenges for businesses planning to operate in the digital financial asset space.

This legislative effort marks a crucial moment in the ongoing evolution of cryptocurrency regulation in the US, with potential ripple effects throughout the industry.

NB: Any Information provided here is NOT FINANCIAL ADVICE. Do Your Own Research before making any Financial Decisions.