California Governor Issues Executive Order Aimed at the Regulation of Blockchain and Crypto Assets

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On May 4, 2022, California Governor Gavin Newsom signed Executive Order N-9-22 to create a coordinated state regulatory approach for cryptocurrency and blockchain, with the further aim of harmonizing the state’s laws with those (potentially) enacted at a federal level. Another goal of the Order is to determine the usage of blockchain technology for state and public institutions. Through the Order, California is aiming to continue its innovation leadership by developing new and clear rules in support of the further development of emerging cryptocurrency and related blockchain technologies.

From the accompanying press release:

California is a global hub of innovation, and we’re setting up the state for success with this emerging technology—spurring responsible innovation, protecting consumers, and leveraging this technology for the public good,” said Governor Newsom. “Too often government lags behind technological advancements, so we’re getting ahead of the curve on this, laying the foundation to allow for consumers and business to thrive.

The Order states that “responsible innovation has been encumbered by regulatory uncertainty, especially with regard to federal law.” Ambitiously, it adds: “State agencies should work with, and concurrently to, the federal government to make California the first state to establish a comprehensive, thoughtful, and harmonized regulatory and business environment for crypto assets.”

The press release issued with the Order outlined seven priorities:

  1. Create a transparent and consistent business environment for companies operating in blockchain, including crypto assets and related financial technologies, that harmonizes federal and California laws, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.
  2. Collect feedback from a broad range of stakeholders, create a regulatory approach to crypto assets harmonized between federal and state authorities, explore and establish public-serving use cases (such as incorporating blockchain technologies into state operations), and build research and workforce pipelines.
  3. Collect feedback from a broad range of stakeholders for potential blockchain applications and ventures, with particular attention to crypto assets and related financial technologies. Engagement should include technical experts, stakeholders interested in addressing inequities and environmental impact, companies based both in and outside California, and more.
  4. Engage in a public process and exercise statutory authority to develop a comprehensive regulatory approach to crypto assets harmonized with the direction of federal regulations and guidance, creating consumer protections and solidifying California’s status as the premiere global location for responsible crypto asset companies to start and grow.
  5. Engage in and encourage regulatory clarity via progress on the processes outlined in the federal executive order, with state agencies coordinating closely with the Washington, DC, office of the California governor.
  6. Explore opportunities to deploy blockchain technologies to address public-serving and emerging needs, working with the private sector, academia and community to present pilots for innovative policies, programs and solutions that demonstrate and showcase the potential of adopting blockchain technologies to respond to specific challenges identified by state agencies.
  7. Identify opportunities to create a research and workforce environment to encourage innovation in blockchain technology, including crypto assets. The goals will be to expose students to emerging opportunities, power emerging industries, and help ensure economic benefits are experienced equitably.

The Order tasks various state agencies, including the Department of Financial Innovation and Protection (DFPI), with proposing and implementing new regulatory structures for companies and for the protection of consumers. These state agencies are to further act in conjunction with federal agencies such as the CFPB, CFTC and SEC. California itself aims to potentially foster blockchain innovation for projects like implementing smart contracts and encouraging sustainability through its state Blockchain Working Group and Go-BIZ economic development initiatives. It will also encourage the use of various blockchain technologies by state agencies through vendor procurements.

Similar to mandates in the Federal Executive Order, the Order requires DFPI and Go-BIZ to engage with and gather input from interested stakeholders in the near term. It also instructs DFPI to increase enforcement activities under the California Consumer Financial Protection Law (CCFPL).

Input Welcome…
On June 1, 2022, California’s Department of Financial Protection and Innovation formally invited stakeholders and the public to provide input on potential guidance and regulations involving crypto asset-related financial products and services, following the above discussed executive order from Gov. Newsom.

The DFPI’s invitation for comments articulates various topics and questions to provide clarity to those potentially providing input, but also declared that stakeholders can comment on “any potential area for rulemaking” relating to crypto asset-related products and services. Comments to the DFPI are due by August 5, 2022.

California’s efforts in this space are not limited to those at the executive and agency levels. Legislators are also moving forward with proposals to enact change at the legislative level. One bill, introduced by State Sen. Sydney Kamlager would allow state agencies to accept cryptocurrency in payment for providing services (SB 1275). Separately, former Majority Leader of the California State Assembly-turned-political consultant Ian C. Calderon, working with Bitcoin advocate Dennis Porter, is pushing a proposal to make Bitcoin legal tender in the state.

As with movements at the federal level, including the much discussed but still to be released Lummis-Gillibrand crypto regulation bill, states such as California are beginning to slowly step toward providing the guidance this rapidly evolving industry needs to scale into the mainstream. As the Governor’s press release stated, “a burgeoning industry, crypto assets and blockchain technology surpassed a $3 trillion market cap last November, up from $14 billion just five years prior.”

Surely, the time has come for those transacting in the space to get clarity on the rules (to be) enacted by the government, the uncertainty of which continues to hamstring this dynamic ecosystem.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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