BILL ANALYSIS Ó
AB 1326
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Date of Hearing: May 13, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
1326 (Dababneh) - As Amended April 20, 2015
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|Policy |Banking and Finance |Vote:|8 - 2 |
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Urgency: No State Mandated Local Program: YesReimbursable:
No
SUMMARY:
This bill creates a licensing and regulatory regime for entities
engaged in the business of virtual or digital currency with the
Department of Business Oversight (DBO). In summary, this bill:
1)Broadly defines "virtual currency" to include any digital unit
used as a medium of exchange or a form of digitally stored
value, or is incorporated into payment system technology,
whether traded through a centralized administrator or fully
decentralized. The bill exempts virtual currencies used
exclusively within online gaming platforms or customer rewards
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programs that cannot be redeemed or converted into fiat
currency.
2)Defines "virtual currency business" as storing, holding,
maintaining custody, or controlling virtual currency on behalf
of others, or providing version or exchange services into
other currency, whether fiat or virtual, or other value. The
bill exempts federal, state, and municipal government
entities; certain state, federal, and foreign banks and credit
unions; licensed money transmitters; and merchants and
consumers in the ordinary course of purchases and sales of
goods and services, and their agents.
3)Requires an applicant to pay the Commissioner of DBO
(Commissioner) the following nonrefundable fees: $5,000
initial application fee; $3,500 application fee for licensure
and approval to acquire control of a licensee; $2,500 annual
renewal license fee; and $125 annual license fee for each
branch office.
4)Allows the Commissioner to levy assessments each fiscal year,
on a pro rata basis, against licensees in an amount sufficient
to meet the Commissioner's expenses in administering this
section and provide a reasonable reserve for contingencies.
5)Authorizes the Commissioner to establish capital requirements
for licensees; requires licensees to exercise reasonable
oversight of its agents, keep records of agent reviews, and
include contractual compliance requirements for any authorized
agents.
6)Requires licensees to file annual audit reports with the
Commissioner within 90 days of the end of each fiscal year,
and quarterly financial statements, verified by 2 principal
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officers, within 45 days of the end of each fiscal quarter.
7)Authorizes the Commissioner to examine the business and any
branch office of any licensee to ascertain compliance,
requires licensees to furnish to the Commissioner, upon
request, any or all accounts, books, and other records; and
requires licensees to maintain any records as required by the
Commissioner for a minimum of 3 years.
8)Requires licensees to report to the Commissioner within 5
days: any bankruptcy petition or other proceeding for
insolvency, dissolution, or reorganization; any proceeding to
revoke or suspend its virtual currency business license in
another jurisdiction; any cancellation or impairment of bond
or trust accounts; or any felony charges against a director or
executive.
9)Authorizes the Commissioner to issue formal and informal
guidance on compliance with the licensing regime, and make
that advice publicly accessible online.
10)Provides the Commissioner with broad authority to issue
orders and enforce virtual currency rules against licensees
and nonlicensees, including revocation of licenses under
specified circumstances and assessing civil penalties against
violators; and creates felonies for certain unlicensed
activities and intentional misrepresentation of activities.
11)Requires licensees to make certain disclosures to consumers;
establishes regulatory rule-making authority with the
Commissioner to implement the requirements of the licensing
regime.
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FISCAL EFFECT:
Estimated annual GF administrative costs to DBO of approximately
$3.3 million to establish, manage, and enforce the licensing
regime, eventually offset by application, renewal, and location
fees as well as pro rata assessments to offset administrative
costs.
COMMENTS:
1)Purpose. According to the author, this bill is designed to
ensure entities that manage virtual currency or offer virtual
currency exchange are operated in a sound manner and protect
consumers' virtual currency from potential loss. This bill
also provides regulatory certainty for virtual currency
businesses, especially those that have applied for money
transmission licenses or remain unsure where their business
model fits into existing regulatory regimes.
2)Bitcoin, Briefly. The best known virtual currency is Bitcoin,
though it is neither the first nor the only example. Bitcoins
is a decentralized, digital currency that allows users to
transact directly, without an intermediary. Transactions are
encrypted to preserve integrity and pseudonymous, and all
transactions are recorded and verified in a public ledger
known as the block chain. The block chain and its integrity
are maintained by thousands of independent users known as
miners, who offer computational power to verify and record
transactions. Miners are rewarded for this effort with
newly-created bitcoins. This core system has proven robust
during its six years of operation, with no successful hacking
attempts to date.
A number of companies offer bitcoin management and credential
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storage applications for consumers, merchants, and traders,
the most consumer-facing of which are known as digital or
bitcoin wallets. Digital wallets hold the cryptographic key
credentials needed to transact in bitcoins, and are essential
intermediaries in any bitcoin transaction. Bitcoin managers
may also offer currency exchange services with a number of
different fiat currencies. A number of high-profile attacks
on bitcoin intermediaries have recently drawn the attention of
regulators with respect to the overall security of transacting
in digital currencies. While these attacks have not
compromised the integrity of the bitcoin system itself, they
have resulted in a number of bitcoin thefts (accomplished by
accessing the cryptographic keys) and disruptions to
intermediary activity.
3)Other Regulation Efforts. Following the first issue of
regulations by the New York State Department of Banking on
virtual currencies, the Conference of State Banking
Supervisors formed a task force to examine state regulation of
payment systems and seek consistent regulation among states
for certain areas. The task force engaged with a number of
industry participants, state and federal regulators, and other
stakeholders, and recommended that activities involving third
party control of virtual currency, including transmitting,
exchanging, holding, or otherwise controlling virtual
currency, should be subject to state licensure and
supervision. Some industry participants believe AB 1326 could
serve as a model for regulation in other states.
The US Department of the Treasury's Financial Crimes
Enforcement Network (FinCEN) also issued interpretive guidance
on the application of the federal Bank Secrecy Act to users,
administrators, and exchangers of virtual currencies. As part
of the guidance, FinCEN concluded virtual currencies do not
have legal tender status in any jurisdiction, and are not
"real currencies" for purposes of the Act, meaning that pure
exchangers of virtual currency for fiat currency are not
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subject to foreign exchange dealer regulations. However, the
FinCEN guidance did clarify that businesses engaged in
accepting and transmitting virtual currency and/or buying and
selling virtual currency may be "money transmitters" under
current regulations, and subject to the reporting and
recordkeeping rules that apply to money services businesses.
4)Of Silk and Coin. The Silk Road case drew international
attention to bitcoin and its potential to facilitate illicit
activity. Silk Road was an online black market for trading in
illegal drugs that utilized the anonymizing software Tor in
conjunction with bitcoin to facilitate anonymous sales and
purchases. Bitcoin transactions are pseudonymous in that
transactions are not recorded by name. Transactions are
recorded in a distributed, public ledger, however, and can be
traced to individuals and computers, unlike traditional cash.
Use of anonymizing software, which disguises the identity of a
computer and/or user, allows a person to transact with
effective anonymity.
It is the combination of Tor and bitcoin that made Silk Road
possible. Cash remains a far more common means of transacting
in illicit activity than digital or virtual currencies. As
noted above, standard bitcoin transactions can ultimately be
traced to individuals and computers, and bitcoin's protection
against duplication arguably makes it more stable than
traditional cash. However, certain intermediaries that manage
and facilitate digital currency transactions may have
significant vulnerabilities, and this bill is intended to form
a regulatory framework to mitigate those problems.
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Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081