California Governor Gavin Newsom vetoed the Digital Financial Assets Law requiring companies offering services that involve investing, lending, or trading cryptocurrencies to register with the state’s Department of Financial Protection and Innovation.

In a letter to the California General Assembly, Newsome said licensing was a premature step given an Executive Order he issued in May and pending federal regulation.

“On May 4, 2022, I issued Executive Order N-9-22 to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation, and protects consumers who use digital asset financial services and products – all within the context of a rapidly evolving federal regulatory picture,” Newsom wrote in a message explaining his veto. “Over the last several months, my administration has conducted extensive research and outreach to gather input on approaches that balance the benefits and risk to consumers, harmonize with federal rules, and incorporate California values such as equity, inclusivity and environmental protection.”

Newsom said he shared the author of the bill’s “intent to protect Californians from potential financial harm while providing clear rules for crypto-businesses operating in this state,” but licensing was a step too far at this time.

“A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm,” he wrote.

Differing opinions on cryptocurrency licensing, including NY’s BitLicense

Proponents of the bill called it balanced and claimed it established responsible guardrails to protect consumers, while detractors argue it would produce an onerous process that would drive crypto businesses from the state – an important issue given that California is home to some notable crypto players, including Coinbase and Ripple.

Neither the licensure requirements nor the related concern and criticism are new: New York’s BitLicense regime went into effect in 2015 (the first such license was issued that year), despite criticism of over-regulation and an unduly burdensome application process. Indeed, some companies purportedly left and/or limited their services in New York as a result of the law, though New York’s Department of Financial Services has approved 31 credentials, including companies such as Robinhood, Block and Gemini.

If you would like more information on this topic, please reach out to Xanthe M. Larsen at (202) 285-3543 or xlarsen@harrisbeach.com; Constantine P. Lizas at (202) 975-9780 or clizas@HarrisBeach.com; or Paulo M. Coelho at (516) 880-8389 or pcoelho@harrisbeach.com.

This alert is not a substitute for advice of counsel on specific legal issues.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.