California’s Push for Regulatory Clarity on Crypto Assets & Potential DFPI Enforcement Actions
Fort Lauderdale, Fla. (May 10, 2022) - In an effort to promote regulatory clarity and establish a “comprehensive, thoughtful, and harmonized regulatory and business environment for crypto assets,” California Governor Gavin Newsom issued California Executive Order N-9-22 on May 4, 2022 (the Order). California is currently the largest hub in the United States for crypto and digital asset related companies and home to two of the largest cryptocurrency exchanges in the world. The executive order is noteworthy because it is among one of the first state-led efforts to push for regulatory clarity and may serve as a framework for other states.
Concurrent with the federal strategy articulated in President Biden’s Executive Order No. 14067, issued on March 9, 2022 (“Ensuring Responsible Development of Digital Assets”), California’s Order directs state agencies to concentrate on four critical areas:
- Collecting input from crypto and blockchain stakeholders;
- Creating a regulatory framework with respect to crypto-related assets that is “harmonized” at the federal and state level;
- Exploring and establishing public service use cases; and
- Building research and workforce pipelines, led by the governor’s Council for Postsecondary Education.
The Order also requires that certain state agencies provide a report to the governor’s office within 60 days of the federal publication with respect to the “report on the future of money and payment systems” outlined in section 4 of the federal Exec. Order No. 14067.
The Order has a heavy emphasis on consumer protection, as well as monitoring and implementing solutions for potentially negative consequences associated with crypto assets, such as energy consumption and environmental impact. To protect consumers, California’s Department of Financial Protection and Innovation (DFPI) is also being directed for the first time to initiate enforcement actions as appropriate to:
- stop violations of the California Consumer Financial Protection Law (CCFPL);
- enhance collection and review of consumer complaints related to crypto assets and financial products and services;
- work with crypto companies to remedy complaints; and
- consult with appropriate law enforcement agencies regarding criminal activity.
Previously, the DFPI has only published filed consumer complaints and issued advisory opinions with respect to cryptocurrency and digital assets.
The Order does not provide any detail on what violations of the CCFPL may be at issue or what crypto-related companies should be on the lookout for. The Order does state that consumer protection principles shall be published and the DFPI’s expectations of California’s state-chartered banks and credit unions as related to crypto-related assets are to be published by March 31, 2023. The California Order, in addition to laws and regulations promulgated in New York and Illinois, is among the first major efforts to address the issues surrounding the intersection of digital assets, cryptocurrencies, and banking.
Identifying New Crypto Opportunities
Finally, the Order encourages members of the governor’s Council for Postsecondary Education to identify opportunities to create a research and workforce environment that can explore and power blockchain tech and crypto assets. This is to be achieved primarily through exposing students to opportunities in emerging industries, creating a pipeline of talent. The Order also emphasizes the generation of basic and applied research to continue leading on future generations of blockchain tech.
Individuals and businesses with ongoing concerns related to cryptocurrencies and or digital assets in the State of California are encouraged to submit public commentary regarding proposed regulations to the DFPI by June 3, 2022.
Lewis Brisbois is on the cutting edge of legal issues related to digital assets and is currently helping clients navigate various securities issues, intellectual property rights, cybersecurity and tax matters in the space. For more information, contact the author or editor of this alert. Visit our Complex Business & Commercial Litigation Practice page to learn more about our capabilities in this area.
Ishmael Green, Associate
Sean P. Shecter, Partner