BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 129
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          Date of Hearing:   January 21, 2014

                                 Roger Dickinson, Chair
                    AB 129 (Dickinson) - As Amended:  January 7, 2014
          SUBJECT  :   Lawful money: Alternative currency.

           SUMMARY  :   Specifies that current law which bans the issuance or  
          circulation of anything but lawful money of the United States does  
          not prohibit the issuance and use of alternative currency.

           EXISTING STATE LAW  provides under Corporations Code section 107  
          that no corporation, flexible purpose corporation, association, or  
          individual shall not issue or put in circulation, as money,  
          anything but the lawful money of the United States.

           EXISTING FEDERAL LAW  provides that manufacturing counterfeit United  
          States currency or altering genuine currency to increase its value  
          is a violation of Title 18, Section 471 of the United States Code  
          (U.S.C.) and is punishable by a fine of up to $5,000, or 15 years  
          imprisonment, or both. 

          Possession of counterfeit United States obligations with fraudulent  
          intent is a violation of Title 18, Section 472 of the U.S.C. and is  
          punishable by a fine of up to $15,000, or 15 years imprisonment, or  

          Anyone who manufactures a counterfeit U.S. coin in any denomination  
          above five cents is subject to the same penalties as all other  
          counterfeiters. Anyone who alters a genuine coin to increase its  
          numismatic value is in violation of Title 18, Section 331 of the  
          U.S.C., which is punishable by a fine of up to $2,000, or  
          imprisonment for up to 5 years, or both. 

          Forging, altering, or trafficking United States Government checks,  
          bonds, or other obligations is a violation of Title 18, Section 510  
          of the U.S.C. and is punishable by a fine of up to $10,000, or ten  
          years imprisonment, or both. 

          Printed reproductions, including photographs of paper currency,  
          checks, bonds, postage stamps, revenue stamps, and securities of  
          the United States and foreign governments (except under the  
          conditions previously listed) are violations of Title 18, Section  
          474 of the U.S.C. Violations are punishable by fines of up to  


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          $5,000, or 15 years imprisonment, or both. 

          Section 31 U.S.C. 5103. Declares that United States coins and  
          currency (including Federal Reserve Notes and circulating notes of  
          Federal Reserve banks and national banks) are legal tender for all  
          debts, public charges, taxes, and dues.

           FISCAL EFFECT  :   None

           COMMENTS  :  

          This bill makes clarifying changes to current law to ensure that  
          various forms of alternative currency such as digital currency,  
          points, coupons, or other objects of monetary value do not violate  
          the law when those methods are used for the purchase of goods and  
          services or the transmission of payments.  Modern methods of  
          payment have expanded beyond the typical cash or credit card  
          transactions.  Bitcoin, a digital currency (Also called  
          cryptocurrency), has gained massive media attention recently as the  
          number of businesses has expanded to accept Bitcoins for payment.   
          Long before the introduction of digital currencies, various  
          businesses have created points models that reward consumers with  
          points for completion of various tasks such as spending a certain  
          dollar amount, or even by purchasing points with dollars.  These  
          point systems effectively operate as currency allowing the  
          consumers to buy a retail item or pay for some type of service.   
          Many communities across the United States and in California have  
          created "community currencies" that are created by members of a  
          community in conjunction with merchants who agree to accept the  
          alternative currency.  These "community currencies" are created for  
          a variety of reasons, some of which include encouraging consumers  
          to shop at small businesses within the community or increasing  
          neighborhood cohesiveness.  "Community currency" has also become a  
          form of political protest as some communities that use such  
          currency do so in protest of US monetary policies, or large  
          financial institutions.  The following is a list of "community  
          currencies" in California:

             Barter Bucks- Concord, California
             Bay Bucks San Francisco, California
                 Berkeley Barter Network Berkeley, California
                 Berkeley Bread Berkeley, California


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             Central Pound Clovis, California
             Davis Dollars Davis, California
                 Escondido Dollars Escondido, California
             Fairbuck Fairfax, California
                 Humboldt Hours Eureka, California and Arcata, California
                 Mendocino SEED Fort Bragg, California
                 North Fork Shares North Fork, California
                 San Luis Obispo Hours San Luis Obispo, California
                 Sand Dollars Bolinas, California
                 Santa Barbara Hours Santa Barbara, California
                 Santa Monica Hours Santa Monica, California
                 Sequoia Hours Garberville, California
                 Sonoma County Community Cash Santa Rosa, California
                 TradeMarket Nevada City, California
             Ukiah Hours Ukiah, California

          The following is a list of the largest digital currencies  
          (cryptocurrencies) that are in use:


          Recently, a new digital currency attempted to emerge, known as  
          COINYE (Originally called COINYE West) which was modeled after  
          Bitcoin and implied a connection to rapper Kanye West via a cartoon  
          picture of Kanye West as the currency's logo.  A lawsuit filed in a  
          Manhattan federal court sought to stop COINYE on the grounds that  
          it used the rapper's image to cash in on his popularity without his  
          consent, damaging his reputation and confusing consumers about the  
          source of the cryptocurrency.

          Facing legal action, creators of COINY have ended the project and  
          COINYE is now Lost in the World, but may have been nothing more  
          than a Dark Fantasy.  

          Bitcoin has garnered the most attention of any other digital  


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          currency, but even for its increasing awareness in the marketplace,  
          many people do not completely understand what it is or how it  
          works.  Bitcoin has been called the world's "first decentralized  
          digital currency" and was created in 2009 by a programmer using the  
          alias, Satoshi Nakomoto.  The idea behind Bitcoin is that it  
          doesn't have a central clearinghouse or any singular authority and  
          it is not pegged to any real tangible currency.  Its value arises  
          from the value that people assign to it.  It works via peer-to-peer  
          network where tasks are shared amongst multiple interconnected  
          peers who each make a portion of their resources (computing power)  
          directly available to other network participants, without the need  
          for centralized coordination by servers.  The network depends on  
          users who provide their computing power to reconcile transactions  
          and keep the block chain.  These users in the system are called  
          "minors" because they can potentially be rewarded for their  
          participation in the network with the creation of Bitcoins.    
          Bitcoins are created (mined) as thousands of dispersed computers  
          solve complex math problems.  With the solving of the complete math  
          problem Bitcoins are created.  Bitcoin was designed to be a finite  
          resources such as gold or silver, thus the total number that can  
          ever be created is capped at 21 million Bitcoins.  It has been  
          estimated that the last .00000001 of a Bitcoin will be "mined" in  

          Transactions occur via public key encryption which generates two  
          mathematically related keys.  One key, the private key is retained  
          by the individual and the other key is made public.  The intended  
          recipients public key is used to encode payments, which can only be  
          retrieved by the associated private key.  The payer in the  
          transaction uses his or her own private key to approve the transfer  
          to the recipient.  Every Bitcoin transaction is registered in a  
          public, distributed ledger called the block chain.  New  
          transactions are checked against the block chain to ensure that the  
          same Bitcoins have not already been spent.  

          Is Bitcoin completely anonymous?  No, it has been described as  
          pseudonymous as it is somewhat like cash in that once Bitcoins have  
          been received by one party no third party exists between the  
          parties that knows their identities.  However, the transaction  
          information is recorded in the block chain as has every Bitcoin  
          transaction that has occurred in history.  Additionally, a person's  
          identity, such as IP address, is recoded when the person makes a  
          Bitcoin transaction at a website or uses one of the numerous  
          services to exchange dollars from Bitcoins.  One study, "Evaluating  
          User Privacy in Bitcoin" by Elli Androulaki found that using  


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          behavior based analytical techniques could reveal the identities of  
          40% of Bitcoin users.
           Emergence of New Payment Systems Under Old Statutory Regimes  .

          In 2013, this committee held several oversight hearings examining  
          the growth of technological innovation in the payments industry and  
          the lack of modernity in some of California's statutes that address  
          the movement of money.  The most recent hearing, The Technology of  
          Consumer Financial Transactions, occurred on November 21, 2013 and  
          highlighted the growing trends and changes within the payments  
          world (Background paper available at  
          document.pdf  ).  What emerged from that hearing is that California  
          has a growing and innovative payments market, but a stagnant  
          regulatory regime.  The majority of all hearing participants agreed  
          that for most payment transactions a law already exist, but  
          technology has confused the manner in which that law may apply and  
          ultimately who may have the various legal responsibilities in the  
          event of loss.  

          AB 129 is a continuation of efforts began last year to update,  
          California's codes concerning payment systems.  AB 129 amends  
          Corporations Code 107, a largely outdated prohibition on the  
          issuance and use of "anything but the lawful money of the United  
          States."   According to the literal meaning of the statute anyone  
          that issues or uses digital currency, community currency, or  
          perhaps even reward points is in violation of the law. However,  
          staff is unaware of any prosecutions, arrest or enforcement actions  
          relating to this statute.   Section 107 can actually be traced back  
          to the first state constitution of California, established in 1849,  
          which contained a provision prohibiting the creation and issuance  
          of paper to be used as money by any bank.  This was a common  
          prohibition across the states during the 19th century as the risk  
          of states, or even non-state entities creating their own money was  
          a real concern.  In 1972, during a series of revisions to the  
          California Constitution the currency provision was removed from the  
          Constitution and placed in the Corporations Code.

          Section 107 may not be necessary at all, but until further research  
          is conducted staff recommends simply amending Section 107 until it  
          is clear that its elimination will not create unintended  
          consequences.  In the intervening time the following technical  
          amendments are suggested:


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             1)   Eliminate references to "corporation, flexible purpose  
               corporation, association, or individual" and instead replace  
               with "person."  The Corporations code already defines "person"  
               to mean "corporation" and "individual" is never defined as a  
               term, but is typically included in the "person" definition.

             2)   Insert "of the United States" after "money" on page 3, line  


          None on file.

          None on file.
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081