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California Reconsidering the “Digital Financial Assets Law”

by Paul Morgan

California Introduces Revised Digital Financial Assets Law: AB 39

As readers may recall, California previously attempted to enact a “Digital Financial Assets Law” with the introduction of AB 2269 in February 2022. However, Governor Newsom vetoed the bill in September 2022, claiming it to be premature. Not long after, California reintroduced an amended version of the law, AB 39.

AB 39, similar to its predecessor, imposes stringent licensing requirements and ongoing reporting obligations on entities engaging in or holding themselves out as being able to engage in “digital financial business activity” with or on behalf of California residents. The bill takes inspiration from New York’s “BitLicense” requirements for virtual currency businesses.

Fortunately, Governor Newsom vetoed AB 2269 with the goal of creating a transparent regulatory environment that can foster responsible innovation and consumer protection within the rapidly evolving federal regulatory landscape. However, the reintroduction of AB 39 suggests that California is still committed to regulating digital assets.

AB 39, effective from July 1, 2025, prohibits engaging in digital financial asset business activity with or on behalf of a resident unless the person is licensed, has submitted an application awaiting approval, or is exempt from licensing. The bill defines “digital financial asset business activity” as exchanging, transferring, or storing digital financial assets, holding electronic precious metals, or exchanging digital representations of value used in online games or platforms.

Importantly, AB 39 also includes stablecoins within the scope of the term “digital asset” and imposes regulatory obligations related to stablecoins.

In addition to the licensing requirement, AB 39 authorizes the Department of Financial Protection and Innovation (DFPI) to conduct examinations of licensees and requires licensees to maintain certain records for five years. The DFPI has the power to take enforcement measures against licensees or persons engaged in digital financial asset business activity that violate the provisions of the law.

Furthermore, licensees are required to make certain disclosures to residents before engaging in digital financial asset business activities, including schedules of fees and charges.

While AB 39 seems likely to pass this year, it is crucial for the California legislature to refine the bill and address its problematic provisions. For example, the bill’s broad definition of “about to engage” in digital financial asset business activity leaves room for interpretation and raises concerns for new and innovative companies in the virtual currency business.

Entities engaged in virtual currency business activities should carefully review the full text of the bill to understand how it will impact their operations.

Overall, California’s ongoing efforts to regulate digital financial assets reflect the state’s commitment to responsible innovation and consumer protection, but it is essential to strike a balance that ensures transparency and fosters innovation in this rapidly evolving field.

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