BILL ANALYSIS Ó
AB 1326
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 1326
(Dababneh) - As Amended April 20, 2015
SUBJECT: Virtual currency
SUMMARY: Requires the licensing of entities engaged in the
business of virtual currency by the Department of Business
Oversight (DBO). Specifically, this bill:
1)Defines "virtual currency" as any type of digital unit that is
used as a medium of exchange or a form of digitally stored
value or that is incorporated into payment system technology.
Virtual currency shall be broadly construed to include digital
units of exchange that (1) have a centralized repository or
administrator, (2) are decentralized and have no centralized
repository or administrator, or (3) may be created or obtained
by computing or manufacturing effort. Virtual currency shall
not be construed to include digital units that are used solely
within online gaming platforms with no market or application
outside of those gaming platforms, nor shall virtual currency
be construed to include digital units that are used
exclusively as part of a customer affinity or rewards program,
and can be applied solely as payment redeemed for goods,
services, or for purchases with the issuer or other designated
merchants, but cannot be converted into, or redeemed for, fiat
currency.
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2)Defines "virtual currency business" as the conduct of either
of the following types of activities involving a California
resident:
a) Storing, holding, or maintaining custody or control of
virtual currency on behalf of others; or
b) Providing conversion or exchange services of fiat
currency into virtual currency or the conversion or
exchange of virtual currency into fiat currency or other
value, or the conversion or exchange of one form of virtual
currency into another form of virtual currency.
3)Provides for the following exemptions:
a) The United States or a department, agency, or
instrumentality thereof, including any federal reserve bank
and any federal home loan bank;
b) Money transmission by the United States Postal Service
or by a contractor on behalf of the United States Postal
Service;
c) A state, city, county, city and county, or any other
governmental agency or governmental subdivision of a state;
d) A commercial bank or industrial bank, the deposits of
which are insured by the Federal Deposit Insurance
Corporation (FDIC) or its successor, or any foreign (other
nation) bank that is licensed under state law or that is
authorized under federal law to maintain a federal agency
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or federal branch office in this state; a trust company
licensed pursuant to Section 1042 or a national association
authorized under federal law to engage in a trust banking
business; an association or federal association, as defined
in Section 5102, the deposits of which are insured by the
FDIC or its successor; and any federally or state chartered
credit union, with an office in this state, the member
accounts of which are insured or guaranteed as provided in
Section 14858;
e) An entity licensed as a money transmitter under the
Money Transmission Act;
f) A merchant or consumer that utilizes virtual currency
solely for the purchase or sale of goods or services; or
g) A transaction in which the recipient of virtual currency
is an agent of the payee pursuant to a preexisting written
contract and delivery of the virtual currency to the agent
satisfies the payor's obligation to the payee. "Agent" has
the same meaning as that term as defined in Section 2295 of
the Civil Code. "Payee" means the provider of goods or
services, who is owed payment of money or other monetary
value from the payor for the goods or services. "Payor"
means the recipient of goods or services, who owes payment
of money or monetary value to the payee for the goods or
services.
4)Requires an applicant for a license to pay the commissioner of
DBO (commissioner) a nonrefundable application fee of five
thousand dollars ($5,000).
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5)Provides that an applicant for a license shall do so in a form
and in a medium prescribed by the commissioner by order or
regulation.
6)Allows for the following licensing fees:
a) A nonrefundable application fee for filing an
application for licensure and approval to acquire control
of a licensee is three thousand five hundred dollars
($3,500);
b) A license renewal fee of two thousand five hundred
dollars ($2,500); and
c) A licensee shall pay annually on or before July 1, one
hundred twenty-five dollars ($125) for each licensee branch
office in this state.
7)Requires that each licensee shall maintain at all times such
capital as the commissioner determines is sufficient to ensure
the safety and soundness of the licensee and maintain consumer
protection and its ongoing operations.
8)Specifies that a licensee shall not appoint or continue any
person as agent, unless the licensee and the person have made
a written contract that requires the agent to operate in full
compliance with this division.
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9)Provides that an agent shall not provide any virtual currency
business outside the scope of activity permissible under the
written contract between the agent and the licensee.
10)Requires each licensee to exercise reasonable supervision
over its agents to ensure compliance with applicable laws,
rules, and regulations with regard to the virtual currency
business.
11)Prohibits a licensee from appointing any person as an agent
unless it has conducted a review of the proposed agent's
fitness to act as an agent and has determined that the
proposed agent and any persons who control the proposed agent
are of good character and sound financial standing.
12)Requires a licensee to maintain records of this review for
each agent while the agent is providing any virtual currency
business on behalf of the licensee, and for three years after
the relationship with the agent has terminated.
13)Prohibits a person, including an agent, from providing any
virtual currency business on behalf of a person not licensed
or not exempt from licensure under this division.
14)Specifies that a person that engages in that activity
provides virtual currency business to the same extent as if
the person was a licensee and shall be jointly and severally
liable with the unlicensed or nonexempt person.
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15)Allows the commissioner at any time and from time to time
examine the business and any branch office, within or outside
this state, of any licensee in order to ascertain whether that
business is being conducted in a lawful manner and whether all
virtual currency held or exchanged is properly accounted for.
16)Requires the directors, officers, and employees of any
licensee being examined by the commissioner shall exhibit to
the commissioner, on request, any or all of the licensee's
accounts, books, correspondence, memoranda, papers, and other
records and shall otherwise facilitate the examination so far
as it may be in their power to do so.
17)Requires a licensee to file a report with the commissioner
within five business days after the licensee has reason to
know of any occurrence of the following events:
a) The filing of a petition by or against the licensee
under the United States Bankruptcy Code (11 U.S.C. Secs.
101-110, incl.) for bankruptcy or reorganization;
b) The filing of a petition by or against the licensee for
receivership, the commencement of any other judicial or
administrative proceeding for its dissolution or
reorganization, or the making of a general assignment for
the benefit of its creditors;
c) The commencement of a proceeding to revoke or suspend
its virtual currency business license in a state or country
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in which the licensee engages in such business or is
licensed to engage in such business;
d) The cancellation or other impairment of the licensee's
bond or trust account as required by subdivision (b) of
Section 26008; or
e) A charge or conviction of the licensee or of an
executive officer, manager, director, or person in control
of the licensee for a felony.
18)Requires a licensee to maintain any records as required by
the commissioner for determining its compliance with this
division for at least three years.
19)Allows a licensee to surrender its license by filing with the
commissioner the license and a report with any information as
the commissioner requires. The voluntary surrender of the
license shall become effective at the time and upon the
conditions as the commissioner specifies by order.
20)Gives authority to the commissioner to prepare written
decisions, opinion letters, and other formal written guidance
to be issued to persons seeking clarification regarding the
requirements of this division.
21)Requires the commissioner to make public on the
commissioner's Internet Web site all written decisions,
opinion letters, and other formal written guidance issued to
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persons seeking clarification regarding the requirements of
this division. The commissioner may, at his or her discretion
or upon request by an applicant or licensee, redact
proprietary or other confidential information regarding an
applicant or licensee from any decision, letter, or other
written guidance issued in connection with an applicant or
licensee.
22)Allows the commissioner to offer informal guidance to any
prospective applicant for a license under this division,
regarding the conditions of licensure that may be applied to
that person. The commissioner shall inform any applicant that
requests that guidance of the licensing requirements that will
be required of that applicant, based on the information
provided by the applicant concerning its plan to conduct
business under this division, and the factors used to make
that determination.
23)Gives the commissioner authority, if the commissioner deems
it necessary for the general welfare of the public, to
exercise any power set forth in this division with respect to
a virtual currency business, regardless of whether an
application for a license has been filed with the
commissioner, a license has been issued, or, if issued, the
license has been surrendered, suspended, or revoked.
24)States that if it appears to the commissioner that a licensee
is violating or failing to comply with this division, the
commissioner may direct the licensee to comply with the law by
an order issued under the commissioner's official seal, or if
it appears to the commissioner that any licensee is conducting
its business in an unsafe or injurious manner, the
commissioner may in like manner direct it to discontinue the
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unsafe or injurious practices. The order shall require the
licensee to show cause before the commissioner, at a time and
place to be fixed by the commissioner, as to why the order
should not be observed.
25)Provides that if, upon any hearing the commissioner finds
that the licensee is violating or failing to comply with any
law of this state or is conducting its business in an unsafe
or injurious manner, the commissioner may make a final order
directing it to comply with the law or to discontinue the
unsafe or injurious practices. A licensee shall comply with
the final order unless, within 10 days after the issuance of
the order, its enforcement is restrained in a proceeding
brought by the licensee.
26)Allows the commissioner to issue an order suspending or
revoking a license, or taking possession of and placing a
licensee in receivership, if after notice and an opportunity
for hearing, the commissioner finds any of the following:
a) The licensee does not cooperate with an examination or
investigation by the commissioner;
b) The licensee engages in fraud, intentional
misrepresentation, or gross negligence;
c) The competence, experience, character, or general
fitness of the licensee, or any director, officer,
employee, or person in control of a licensee, indicates
that it is not in the public interest to permit the person
to provide virtual currency services;
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d) The licensee engages in an unsafe or unsound practice;
e) The licensee is insolvent, suspends payment of its
obligations, or makes a general assignment for the benefit
of its creditors;
f) The licensee has applied for an adjudication of
bankruptcy, reorganization, arrangement, or other relief
under any bankruptcy, reorganization, insolvency, or
moratorium law, or any person has applied for any such
relief under that law against the licensee and the licensee
has by any affirmative act approved of or consented to the
action or the relief has been granted; or,
g) Any fact or condition exists that, if it had existed at
the time when the licensee applied for its license, would
have been grounds for denying the application;
27)In determining whether a licensee is engaging in an unsafe or
unsound practice, the commissioner may consider the size and
condition of the licensee's provision of virtual currency
services, the magnitude of the loss, the gravity of the
violation, and the previous conduct of the person involved.
28)Allows the commissioner to assess a civil penalty against a
person that violates this division or a regulation adopted or
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an order issued under this division in an amount not to exceed
one thousand dollars ($1,000) for each violation or, in the
case of a continuing violation, one thousand dollars ($1,000)
for each day or part thereof during which the violation
continues, plus this state's costs and expenses for the
investigation and prosecution of the matter, including
reasonable attorney's fees.
29)Specifies that a person that engages in unlicensed activity
or intentionally makes a false statement, misrepresentation,
or false certification in a record filed or required to be
maintained under this division or that intentionally makes a
false entry or omits a material entry in such a record is
guilty of a felony.
30)Allows the commissioner, by order or regulation grant
exemptions from this section in cases where the commissioner
finds that the requirements of this section are not necessary
or may be duplicative.
31)Requires a licensee, within 90 days after the end of each
fiscal year, or within any extended time as the commissioner
may prescribe, file with the commissioner an audit report for
the fiscal year.
32)Specifies that each licensee shall, not more than 45 days
after the end of each calendar year quarter, or within a
longer period as the commissioner may by regulation or order
specify, file with the commissioner a report containing all of
the following:
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a) Financial statements, including balance sheet, income
statement, statement of changes in shareholders' equity,
and statement of cashflows, for, or as of the end of, that
calendar year quarter, verified by two of the licensee's
principal officers. The verification shall state that each
of the officers making the verification has a personal
knowledge of the matters in the report and that each of
them believes that each statement in the report is true;
and,
b) Other information as the commissioner may by regulation
or order require.
33)Allows the commissioner to levy an assessment each fiscal
year, on a pro rata basis, on those licensees that at any time
during the preceding calendar year engaged in this state in
the virtual currency business in an amount that is, in his or
her judgment, sufficient to meet the commissioner's expenses
in administering the provisions of this division and to
provide a reasonable reserve for contingencies.
34)Requires a licensee to disclose to consumers the following
disclosure in a form and manner prescribed by the
commissioner:
"Once submitted to the network, a virtual currency transaction
will be unconfirmed for a period of time (usually less than
one hour, but up to one day or more) pending sufficient
confirmation of the transaction by the network. A transaction
is not complete while it is in a pending state. Virtual
currency associated with transactions that are in a pending
state will be designated accordingly, and will not be included
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in your account balance or be available to conduct
transactions.
The risk of loss in trading or holding virtual currency can be
substantial. You should therefore carefully consider whether
trading or holding virtual currency is suitable for you in
light of your financial condition. In considering whether to
trade or hold virtual currency, you should be aware that the
price or value of virtual currency can change rapidly,
decrease, and potentially even fall to zero.
(Insert company name) is licensed by the Department of
Business Oversight to do business in California. If you have
complaints with respect to any aspect of the virtual currency
business conducted by (company name), you may contact the
California Department of Business Oversight at its toll-free
telephone number, 1-800-622-0620, by email at
consumer.services@dbo.ca.gov, or by mail at the Department of
Business Oversight, Consumer Services, 1515 K Street, Suite
200, Sacramento, CA 95814."
EXISTING LAW: Regulates the transmission of money under the
money transmission act (Financial Code, Section 2000-2175)
FISCAL EFFECT: Unknown
COMMENTS:
The author has introduced this bill to ensure that entities that
store virtual currency or offer the exchange of virtual currency
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with consumers are operated in a safe and sound manner. AB 1326
will protect consumers that utilize virtual currency services by
ensuring that these businesses are able to protect consumer's
virtual currency from potential loss. Additionally, this bill
will provide regulatory certainty as many companies try to
engage in the virtual currency business have sought out money
transmission licenses only to be denied, or are even unsure if
their business model fits into existing licensing structures for
other financial services entities.
The New York State Department of Banking was the first
regulatory agency to issue regulations concerning virtual
currency. This launched nationwide efforts to look at whether
the virtual currency business should be regulated. The
Conference of State Banking Supervisors (CSBS) formed the CSBS
Emerging Payments Task Force ("Task Force") to examine the
intersection between state supervision and payments
developments, and to identify areas for consistent regulatory
approaches among states. This effort includes an assessment of
virtual currency activities and outreach with a broad range of
stakeholders. After engaging with industry participants, state
and federal regulators, and other stakeholders, CSBS recommended
that activities involving third party control of virtual
currency, including for the purposes of transmitting,
exchanging, holding, or otherwise controlling virtual currency,
should be subject to state licensure and supervision.
Headlines concerning virtual currency have been dominated by
Bitcoin with some of this attention resulting from negative
publicity. The high profile Silk Road case in which federal law
enforcement officials arrested the operator of an online illegal
drug market place that facilitated the sale of drugs and other
illegal goods through acceptance of Bitcoins. Bitcoins were
used because it is a decentralized currency allowing users to be
pseudonymous to some extent, even though every Bitcoin
transaction is logged. Bitcoin is not the first, nor the only
virtual currency. Numerous models of virtual currency have
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sprouted up over the last decade, and this growth has inspired
additional questions by government officials and policy makers.
Bitcoin has received its share of negative attention from its
wild price fluctuations, awareness against Bitcoin "Wallets" (as
the individual software applications that manage bitcoin
holdings) to being credited with being the currency of choice
for criminal activity. As to the latter attribution, cash money
is still the dominant and preferred source of anonymous payment
for illegal activities. Some of the attention, specifically in
relation to the risk associated with storing virtual currency
has raised the attention of state regulators across the country.
Even though the core program that runs bitcoin has resisted six
years of hacking attempts, the successful attacks on associated
businesses have created the impression that bitcoin isn't a safe
way to store money. Bitcoins exist purely as entries in an
accounting system-a transparent public ledger known as the
"blockchain" that records balances and transfers among special
bitcoin "addresses." With bitcoin, the balances held by every
user of the monetary system are instead recorded on a widely
distributed, publicly displayed ledger that is kept up-to-date
by thousands of independently owned, competing computers known
as "miners."
What does a real world transaction look like such as buying a
cup of coffee at your local coffee shop? If you pay with a
credit card, the transaction seems simple enough: You swipe your
card, you grab your cup, and you leave. The financial system is
just getting started with you and the coffee shop. Before the
store actually gets paid and your bank balance falls, more than
a half-dozen institutions-such as a billing processor, the card
association your bank, the coffee shop's bank, a payment
processor, the clearinghouse network managed by the regional
Federal Reserve Banks-will have shared part of your account
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information or otherwise intervened in the flow of money. If
all goes well, your bank will confirm your identity and good
credit and send payment to the coffee shop's bank two or three
days later. For this privilege, the coffee shop pays a fee of
between 2% and 3%.
Now let's pay in Bitcoin. If you don't already have bitcoins,
you will need to buy some from one of a host of online exchanges
and brokerages, using a simple transfer from your regular bank
account. You will then assign the bitcoins to a wallet, which
functions like an online account. Once inside the coffee shop,
you will open your wallet's smartphone app and hold its QR code
reader up to the coffee shop's device. This allows your embedded
secret password to unlock a bitcoin address and publicly informs
the bitcoin computer network that you are transferring $1.75
worth of bitcoin (currently about 0.0075 bitcoin) to the coffee
shop's address. This takes just seconds, and then you walk off
with your coffee. Next, in contrast to the pay with
credit/debit system, your transaction is immediately broadcast
to the world (in alphanumeric data that can't be traced to you
personally). Your information is then gathered up by bitcoin
"miners," the computers that maintain the system and are
compensated, roughly every 10 minutes, for their work confirming
transactions. The computer that competes successfully to
package the data from your coffee purchase adds that information
to the blockchain ledger, which prompts all the other miners to
investigate the underlying transaction. Once your bona fides are
verified, the updated blockchain is considered legitimate, and
the miners update their records accordingly. It takes from 10
minutes to an hour for this software-driven network of computers
to formally confirm a transfer from your blockchain address to
that of the coffee shop-compared with a two- to three-day wait
for the settlement of a credit-card transaction. Some new
digital currencies are able to finalize transactions within
seconds. There are almost zero fees, and the personal
information of users isn't divulged. This bitcoin feature
especially appeals to privacy advocates: Nobody learns where you
buy coffee. The advantages of digital currency are far more
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visible in emerging markets. It allows migrant workers, for
example, to bypass fees that often run to 10% or more for the
international payment services that they use to send money home
to their families. Although many companies now accept bitcoin
(the latest and biggest being Microsoft Corp.), global usage of
the digital currency averaged just $50 million a day in 2014.
Over that same period, Visa and MasterCard processed some $32
billion a day. The market capitalization for BitCoin is almost
at $4 billion with virtual currency Ripple the next largest at
over $340 million.
FinCEN Guidance on Virtual Currencies
FinCEN issued interpretive guidance earlier this year to clarify
how the Bank Secrecy Act (BSA) and FinCEN regulations apply to
users, administrators and exchangers of virtual currencies.
Under the regulatory framework, virtual currency is defined as
having some but not all of the attributes of "real currency" and
therefore, virtual currency does not have legal tender status in
any jurisdiction. Specifically, the FinCEN guidance addresses
convertible virtual currency which either has a real currency
equivalent value or serves as a substitute for real currency.
The roles of persons (including legal entities) involved in
virtual currency transactions are defined by FinCEN as follows:
User: A person who obtains virtual currency to purchase
goods or services
Exchanger: A person engaged as a business in the
exchange of virtual currency for real currency, funds or
other virtual currency
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Administrator: A person engaged as a business in
issuing into circulation a virtual currency and who has the
authority to redeem and withdraw from circulation such
virtual currency
A person, or legal entity, may act in more than one of these
capacities. Further, it is important to note that "obtaining"
virtual currency covers much more than the scenario of a "user"
who merely purchases virtual currency. Depending on the model
of the particular currency, a party could "obtain" virtual
currency through various acts including earning, harvesting,
mining, creating, auto-generating, manufacturing or purchasing.
The threshold issue is whether actions will subject a person or
legal entity to BSA's registration, reporting and recordkeeping
regulations that apply to money services businesses (MSBs). A
user who obtains convertible virtual currency and uses it to
purchase real or virtual goods or services is not subject to MSB
compliance because such activity does not meet the definition of
"money transmission services" and the user would not be a "money
transmitter."
However, an administrator or exchanger engages in money
transmission services and, as a result, is a "money transmitter"
under FinCEN definitions by (1) accepting and transmitting
convertible virtual currency or (2) buying or selling
convertible virtual currency. As a money transmitter, the
administrator or exchanger would generally be subject to MSB
reporting and recordkeeping.
Further, the FinCEN guidance expressly addresses the category of
de-centralized virtual currency - the Bitcoin model - and states
that "a person is an exchanger and a money transmitter if the
person accepts such de-centralized convertible virtual currency
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from one person and transmits it to another person as part of
the acceptance and transfer of currency, funds, or other value
that substitutes for currency."
In the area of foreign exchange, accepting real currency in
exchange for virtual currency is not subject to FinCEN
regulations applicable to "dealers in foreign exchange" since a
forex transaction involves exchanging the currency of two
countries and virtual currency does not constitute legal tender
as a currency of a country.
The author's office has been meeting with various stakeholders
and will continue to work out the various details of this
legislation as it moves forward. Some key issues that still
need to be resolved:
1)Further strengthen and clarify definition of "virtual currency
business."
2)Clarify the factors that will be used to determine
capitalization requirements.
3)Specify clear bonding and security amounts and factors used to
make that determination.
4)Examine issues relating to start-up companies.
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Previous Legislation.
AB 129 (Dickinson), chapter 74, statutes of 2014 clarified
California law to ensure that alternative currency, including
virtual currency would not be potentially deemed illegal tender.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file.
Opposition
None on file.
Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081
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