The race to establish a national framework for the regulation of digital assets is heating up, with both California and New Jersey taking action this past week.

On June 1, 2022, the California Department of Financial Protection and Innovation (DFPI) issued an Invitation for Comments on Crypto Asset-Related Financial Products Under the California Consumer Financial Protection Law (Invitation for Comments).¹ The Invitation for Comments seeks feedback from the public regarding the regulatory environment for entities offering crypto products and services in California, aiming to “provide clarity and supervision” to the industry. It lists example topics to guide those that wish to submit comments, including how to best (i) protect consumers from fraud related to crypto assets, (ii) mitigate the climate risks associated with crypto, (iii) protect investors, and (iv) ensure financial stability in the market.

The Invitation for Comments was issued pursuant to an executive order (EO) signed by Governor Gavin Newsom on May 4, 2022, which directed state agencies to begin developing regulations and guidance for blockchain and crypto companies.² The EO emphasizes California’s desire to become a leader in blockchain innovation, and lists priorities regarding blockchain and crypto asset technologies. These priorities include, among other things: (1) creating a transparent and consistent regulatory environment for blockchain businesses that balances the risks and benefits to consumers; (2) collecting input from stakeholders, including communities traditionally underserved by emerging technologies; (3) creating use cases for blockchain technologies that serve the public; (4) engaging with other state and federal agencies to “promote a common approach” to blockchain technologies, in order to protect consumers and decrease compliance burdens; (5) increasing California residents’ awareness of the risks and benefits of blockchain technologies and crypto assets by publishing consumer education materials, including information on avoiding scams and frauds; and (6) identifying ways to involve students in the “emerging opportunities that blockchain represents,” including creating pathways for students to work in the industry. The Invitation for Comments seeks feedback from stakeholders on the priorities outlined in the EO and the developing regulatory framework.

Notably, the California EO repeatedly references President Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets. Newsom’s EO shares many similarities with Biden’s EO, including its stated desire to balance innovation with consumer and environmental protection and its efforts to facilitate an interagency approach to establishing a cohesive framework. It also outlines how California intends to use Biden’s EO as a jumping off point, by, for example, requiring California state agencies to assemble a report no more than 60 days after the federal “report on the future of money and payment systems” mandated by Biden’s EO is released. This report would summarize the federal report’s findings and make recommendations for next steps. In addition to working in concert with federal developments, Newsom’s EO requires California agencies to develop rules for blockchain and crypto assets by working with other state financial regulators to create a “common approach” to regulating the emerging industry.

In addition, on June 2, the New Jersey State Assembly Financial Institutions and Insurance Committee approved two bills: one bill would require businesses to obtain licenses to engage in digital asset business activities, and the other seeks to establish a regulatory scheme for virtual currency businesses.³ According to Assemblywoman Yvonne Lopez, one of the licensing bill’s sponsors, the bill could serve as a national model, and “strikes the perfect balance between regulation and innovation … allow[ing] an innovative industry to grow while offering consumers the confidence of robust protections and recourse options.” Other Committee members, however, were less enthusiastic about the bills. For example, Assemblywoman Victoria A. Flynn abstained from voting on the regulatory framework bill, stating she believed that the bill required more testimony due to the complexity of the technologies at play.

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California’s EO and Invitation for Comments and the New Jersey bills mark the latest developments in a push on both the state and federal level to implement regulatory guardrails on the rapidly growing blockchain and digital asset industry. In the coming months, additional states may enter the arena, issuing similar executive orders or introducing legislation. At the same time, there will likely be a flurry of rulemaking by federal agencies—particularly after the interagency reports mandated by the Biden EO are published. US Congressional members have also been vocal about introducing federal legislation to address these topics.

As federal and state regulators and legislatures increasingly explore these issues, players in the blockchain and digital asset industry should seize opportunities to help shape the evolving regulatory landscape. For example, companies can articulate and advocate for their positions by actively engaging in the rulemaking process. To that end, stakeholders should consider submitting comments to the California Department of Financial Protection and Innovation in response to the Invitation for Comments no later than August 5, 2022.

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