BILL ANALYSIS Ó
AB 1326
Page 1
ASSEMBLY THIRD READING
AB
1326 (Dababneh)
As Amended June 1, 2015
Majority vote
-------------------------------------------------------------------
|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+----------------------+--------------------|
|Banking |8-2 |Dababneh, Achadjian, |Hadley, Kim |
| | |Brown, Chau, Gatto, | |
| | |Low, | |
| | | | |
| | | | |
| | |Ridley-Thomas, Mark | |
| | |Stone | |
| | | | |
|----------------+------+----------------------+--------------------|
|Appropriations |12-5 |Gomez, Bonta, |Bigelow, Chang, |
| | |Calderon, Daly, |Gallagher, Jones, |
| | |Eggman, Eduardo |Wagner |
| | |Garcia, Gordon, | |
| | |Holden, Quirk, | |
| | |Rendon, Weber, Wood | |
| | | | |
| | | | |
-------------------------------------------------------------------
SUMMARY: Requires the licensing of entities engaged in the
AB 1326
Page 2
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. Virtual currency does not 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.
2)Defines "virtual currency business" as the conduct of either of
the following types of activities involving a California
resident:
a) Maintaining full 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)Defines "fiat currency" as government-issued currency that is
designated as legal tender through government decree,
regulation, or law that customarily refers to paper money and
coin that is circulated and used and accepted as money.
4)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;
AB 1326
Page 3
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 or
federal branch office in this state; a trust company licensed
pursuant to Financial Code 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 Financial Code 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 Financial Code 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;
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 Civil Code
Section 2295. "Payee" means the provider of goods or
AB 1326
Page 4
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;
h) A person or entity developing, distributing, or servicing
a virtual currency network software;
i) A person or entity contributing software, connectivity, or
computing power to a virtual currency network; or,
j) A person or entity providing data storage or cyber
security services for a licensed virtual currency business.
5)Requires an applicant for a license to pay the commissioner of
DBO (commissioner) a nonrefundable application fee of $5,000.
6)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.
7)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 $3,500;
b) A license renewal fee of $2,500; and
c) A licensee shall pay annually on or before July 1, $125
for each licensee branch office in this state.
AB 1326
Page 5
8)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.
9)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.
10)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.
11)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.
12)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.
13)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.
14)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.
15)Specifies that a person that engages in that activity provides
AB 1326
Page 6
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.
16)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.
17)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.
18)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 United States Code
Sections 101 to 110, inclusive) 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 in
which the licensee engages in such business or is licensed to
AB 1326
Page 7
engage in such business;
d) The cancellation or other impairment of the licensee's
bond or trust account as required by Financial Code Section
26008(b); 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.
19)Requires a licensee to maintain any records as required by the
commissioner for determining its compliance with this division
for at least three years.
20)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.
21)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.
22)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 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.
AB 1326
Page 8
23)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.
24)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.
25)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 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.
26)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,
AB 1326
Page 9
its enforcement is restrained in a proceeding brought by the
licensee.
27)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;
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,
AB 1326
Page 10
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;
28)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.
29)Allows the commissioner to assess a civil penalty against a
person that violates this division or a regulation adopted or an
order issued under this division in an amount not to exceed
$1,000 for each violation or, in the case of a continuing
violation, $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.
30)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.
31)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.
32)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.
AB 1326
Page 11
33)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:
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.
34)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.
35)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
in your account balance or be available to conduct
AB 1326
Page 12
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 Sections 2000 to 2175)
FISCAL EFFECT: According to the Assembly Appropriations
Committee, estimated annual General Fund 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:
AB 1326
Page 13
The author has introduced this bill to ensure that entities that
store virtual currency or offer the exchange of virtual currency
with consumers are operated in a safe and sound manner. This bill
will protect consumers that utilize virtual currency services by
ensuring that these businesses are able to protect consumer's
virtual currency from potential loss. Many companies operating in
the virtual currency space have sought out regulatory and
statutory certainty regard their operations. This bill will
provide this certainty by establishing a clear regulatory
framework that mirrors other types of financial services
regulation.
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.
Recently amendments provide greater clarity and attempt to ensure
continued innovation. These amendments address questions raised
in the Assembly Banking and Finance Committee on April 27, 2015,
and clarify the following:
AB 1326
Page 14
1)Revise definition of "virtual currency" to remove ambiguous and
redundant terms.
2)Revise definition of "virtual currency business" as having full
custody and control of virtual currency on behalf of others.
3)Exempt from licensing a person or entity that develops,
distributes virtual currency network software, provides computer
power or provides data storage of cyber security services..
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.
Analysis Prepared by:
Mark Farouk / B. & F. / (916) 319-3081 FN:
0000797