BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 129 (Dickinson) Hearing Date: June 4, 2014
As Amended: May 22, 2014
Fiscal: No
Urgency: No
SUMMARY Would delete the code section prohibiting the issuance
or placement into circulation, as money, anything other than the
lawful money of the United States.
EXISTING FEDERAL LAW
1. Prohibits the manufacture of counterfeit United States
currency or the alteration of genuine currency to increase
its value (18 USC Section 471).
EXISTING LAW
1. Prohibits a corporation, flexible purpose corporation,
association, or individual from issuing or putting into
circulation, as money, anything but the lawful money of the
United States.
COMMENTS
1. Purpose: This bill is intended to delete a code section the
author believes to be unnecessary.
2. Background: The concept contained in Corporations Code
Section 107 originates with California's first Constitution,
adopted in 1849. That constitution prohibited the creation
and issuance of paper to be used as money by any bank - an
attempt to ensure that only the federal government could
issue lawful currency. During a series of revisions to
California's Constitution in the early 1970s, the
prohibition against placing currencies other than lawful
money of the United States into circulation was placed in
the Corporations Code. It has remained there ever since,
essentially unchanged.
3. Discussion: Although it appears that no state department or
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agency has ever initiated an enforcement action for a
violation of Corporations Code Section 107, this bill's
author is concerned that Corporations Code Section 107 may
restrict the development and use of alternate currencies.
Alternative currencies include virtual currencies such as
Bitcoin, Ripple, Peercoin, Primecoin, and others, and
community currencies, such as Davis Dollars, Sonoma County
Community Cash, Bay Bucks, and others.
Virtual currencies are unique, typically encrypted computer
files that can be converted to or from a government-backed
currency to purchase goods and services from merchants that
accept virtual currencies. Virtual currency is accepted as
currency by some businesses, exchanged for cash by others,
and can also be purchased as an investment. Bitcoin is
perhaps the most well-known of virtual currencies, and
representative of some of the pitfalls of owning cyber cash.
In February 2014, Mt. Gox, the largest and best-known
Bitcoin exchange, announced that several hundred million
dollars in Bitcoin had been hacked and stolen. Within a
week of the announcement, Mt. Gox had declared bankruptcy.
A similar fate befell a much smaller Bitcoin exchange called
FlexCoin, which shut down after hackers stole $600,000 in
Bitcoin from its servers. Although the currency survived
the bankruptcies of these exchanges, some have pointed to
Bitcoin users' vulnerability as support for predictions that
Bitcoin is too fragile to survive long-term.
Community currencies are essentially vouchers or cash
equivalents. They are purchased for cash, sometimes at a
discount (i.e., $5 buys you $10 in community cash) and
sometimes at face value ($5 in US currency buys you $5 in
community currency). Typically, community currency is used
as a way to encourage purchases at local merchants; because
the currency is only accepted by merchants within the
community currency network.
4. What Does California's Financial Regulator Think?
California's Department of Business Oversight (DBO) is in
the process of determining whether alternative currency
exchanges fit into a traditional currency regulatory
framework. DBO is, however, concerned about the risks that
certain alternative currencies can pose.
In April, 2014, DBO issued a consumer advisory, warning
Californians of the risks of virtual currencies, also known
AB 129 (Dickinson), Page 3
as crypto-currencies, virtual money, or digital cash. In
its consumer advisory, DBO characterized virtual currency
transactions as high-risk, due to the vulnerability of cyber
attacks, and observed that because virtual currency
exchanges are unregulated, consumers have little recourse to
recover lost funds. Unlike deposits at insured banks and
credit unions, there is no virtual currency deposit
insurance.
DBO's consumer advisory also lists the following risks:
a. There are few, if any, consumer protections without
licensing. Virtual currencies are not regulated by any
state in the United States, nor by the federal
government.
b. Virtual currency is difficult to recover, if stolen.
If a virtual currency is stored on an electronic device
that is stolen, lost, or destroyed, there may be no way
for the owner to recover the currency stored on the lost,
stolen, or destroyed device.
c. Virtual currency represents an emerging technology,
which is evolving rapidly. A currency accepted today may
be obsolete tomorrow.
d. The value of virtual currency can fluctuate widely.
Between March 2013 and March 2014, a single Bitcoin sold
for as low as $100 and as high as $1,200.
e. Virtual currencies carry with them uncertain tax
implications. Under a recent Internal Revenue Service
ruling, all virtual currencies will be treated as
property for tax purposes, and any value gains must be
declared and will be taxed as a capital gain.
f. Virtual currencies have been associated with
criminal enterprises, including illegal drug
transactions, arms trading, money laundering, and other
criminal activity. To the extent a virtual currency
exchange is shut down by law enforcement, users of that
virtual currency risk losing their investments.
5. Is This Bill Premature? Given the numerous risks associated
with alternative currencies, it may be premature to delete
the provision of California law which appears to prohibit
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them. However, since it appears that neither DBO nor the
Attorney General have ever used Section 107 to sanction any
issuers of either virtual or community currency, its
deletion could be characterized as a simple codification of
the state's policy toward the issuers and users of these
currencies.
6. Summary of Arguments in Support: The author states, "The
creation of a currency to undermine the U.S. dollar is not
the same threat it was in the 18th century. Federal law is
sufficient to prohibit and punish those actions, such as
counterfeiting, that actually undermine U.S. currency."
7. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102