BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 1326 (Dababneh) - Virtual currency
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|Version: August 18, 2015 |Policy Vote: B. & F.I. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: August 24, 2015 |Consultant: Jolie Onodera |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: AB 1326 would establish a framework for the licensing
and regulation of virtual currency businesses, as defined, by
the Department of Business Oversight (DBO), effective July 1,
2016.
Fiscal
Impact: First-year and ongoing costs of $3.5 million (Special
Fund*) to establish, manage, and enforce the licensing and
regulatory regime, estimated to be offset in whole or in part by
application renewal, and location fees as well as pro rata
assessments to offset administrative costs. First-year costs are
potentially not fully covered by licensing fees given the
estimated number of applications, and could be borne by the
General Fund. The DBO anticipates ongoing costs will be fully
offset by the application, renewal, and location fees, as well
as the pro rata assessment authority provided for in this
measure.
AB 1326 (Dababneh) Page 1 of
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*Financial Institutions Fund
Background: Existing law pursuant to the Money Transmission Act (MTA)
prohibits a person from engaging in the business of money
transmission in this state, or advertising, soliciting, or
holding itself out as providing money transmission in this
state, unless the person is licensed by the Commission of
Business Oversight or exempt from licensure under the Act.
(Financial Code §§ 2000-2176.)
As explained in the Senate Committee on Banking and Financial
Institutions analysis dated July 15, 2015: "Virtual currency,
also called digital currency, has been defined by several
different financial authorities. One of the most comprehensive
definitions was developed by the European Banking Authority
(EBA) in 2014. In its Opinion on Virtual Currencies, issued July
4, 2014, the EBA defined virtual currency as a digital
representation of value that is neither issued by a central bank
or a public authority, nor necessarily attached to a fiat
currency, but is accepted by natural or legal persons as a means
of payment and can be transferred, stored or traded
electronically."
Bitcoin is perhaps the most well-known among virtual currencies,
but other virtual currencies exist, including Ripple, Stellar,
Litecoin, Darkcoin, Peercoin, Primecoin, Dogecoin, and others.
Increasing numbers of companies are offering services that
support the use of virtual currencies (e.g., Coinbase, Circle,
BitGo, Bitnet, Blockstream, Chain.com, Gem, Mirror, Xapo, and
others). This bill establishes a regulatory framework intended
to cover certain companies that offer services which support the
use of virtual currencies; it does not purport to regulate the
developers of existing or new virtual currencies.
Proposed
Law: This bill would establish the Virtual Currency Act, a
framework for the licensing and regulation of virtual currency
businesses, as defined, by the DBO, effective July 1, 2016. In
summary, this bill:
Provides that a licensee under the MTA, who wishes to
engage in a virtual currency business without a virtual
AB 1326 (Dababneh) Page 2 of
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currency license, must seek permission to do so from the
Commissioner of Business Oversight (commissioner).
Authorizes the commissioner to approve such requests, as
specified, and clarifies that the commissioner may require a
licensee granted such approval to increase its surety bond
or amount of eligible securities above those required under
the MTA, or impose any additional conditions on the
authorization, as specified.
Authorizes a licensee in good standing under the Virtual
Currency Act to apply to the commissioner to convert its
license into a MTA license, as specified.
Creates a new division under the Financial Code to regulate
virtual currency businesses, effective July 1, 2016, as
follows:
o Defines "virtual currency" as any type of digital
unit that is used as a medium of exchange or a form of
digitally stored value.
o Provides that digital units used or redeemed for
specified purposes are not considered virtual currency.
o Defines "virtual currency business" as maintaining
full custody or control of virtual currency in California
on behalf of others.
Prohibits a person from engaging in any virtual currency
business in California unless that person is licensed or
otherwise exempt under the bill's provisions.
Establishes specified exemptions from licensure including
any federal department or agency, state and local
governments, depository institutions, and licensed money
transmitters.
Authorizes the commissioner to approve additional
exemptions, as specified, and requires DBO to post on its
website a list of all persons or transactions exempted by
the commissioner, and the provisions from which they are
exempt.
Requires a non-refundable application fee for licensure of
$5,000.
Requires a non-refundable application fee of $3,500 for
licensure and approval to acquire control of a licensee.
Requires an annual licensure renewal fee of $2,500, and an
additional $125 for each licensee branch office in this
state.
Requires licensees to pay $75 per hour for each DBO
examiner engaged in an examination of a licensee, as
specified.
AB 1326 (Dababneh) Page 3 of
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Authorizes the commissioner to examine the business and
branch office of each licensee at any time and from time to
time, to ascertain whether the business is being conducted
in a lawful manner and whether all virtual currency held or
exchanged is properly accounted for. Provides the
commissioner with broad authority to bring enforcement
action against a licensee or a person required to be
licensed, who does not hold such a license.
Authorizes the commissioner to assess a civil penalty for
violations of the virtual currency law of up to $1,000 per
violation, or in the case of a continuing violation, $1000
per day while the violation continues.
Requires each licensee to annually submit an audit report
to the commissioner, as specified.
Requires each licensee to file an annual report with the
commissioner, as specified, and requires the DBO to annually
prepare a report consolidating the annual reports from
licensees for publication on the DBO website.
Authorizes the commissioner to levy fees and assessments on
licensees sufficient to cover the commissioner's costs to
administer the virtual currency law and provide a reasonable
reserve for contingencies.
In lieu of the $5,000 non-refundable application fee,
authorizes a person or entity conducting virtual currency
business with less than $1 million in outstanding
obligations, as specified, to pay an application fee of $500
to apply for and be granted a provisional virtual currency
license. Grants the commissioner full discretion to
prescribe the terms and conditions applicable to a
provisional licensee and to suspend or revoke a provisional
license, as specified. Exempts a provisions licensee from
various requirements of the Virtual Currency Act, and
provides that a provisional license is effective for two
years and may be renewed for a $500 renewal fee.
Repeals Section 107 of the Corporations Code, which was
enacted under AB 129 (2014), but was inadvertently chaptered
out by the subsequent enactment of SB 1301 (2014).
Related
Legislation: AB 129 (Dababneh) Chapter 74/2014 repealed
Corporations Code § 107, which prohibited a corporation,
flexible purpose corporation, association, or individual from
issuing or placing into circulation, as money, anything other
AB 1326 (Dababneh) Page 4 of
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than the lawful money of the United States.
SB 1301 (DeSaulnier) Chapter 694/2014, among its provisions,
renamed "flexible purpose corporations" as "social purpose
corporations ," thereby chaptering out the provisions of AB 129.
Staff
Comments: The DBO has indicated estimated first-year and
ongoing costs of $3.5 million to fulfill the obligations
associated with licensing and examining virtual currency
businesses. This cost estimate includes 22 positions, including
one Deputy Commissioner of Virtual Currency, three Financial
Institutions Managers, eight Senior Financial Institutions
Examiners, eight Financial Institutions Examiners, one Associate
Government Program Analyst, and one staff services analyst, as
well as the associated operating expenses for these positions.
It is anticipated that approximately 75 virtual currency
companies will seek licensure with the Department, with 40
applications in the first year and 35 the next, with far fewer
applicants in subsequent years. Initial workload of the DBO will
focus on processing the applications of prospective licensees
(typically a six-month process), followed by licensee
examinations.
The DBO anticipates the cost of oversight of these companies
will be fully offset by the application, renewal, and location
fees, as well as the pro rata assessment authority (to offset
costs of overseeing virtual currency licensees) provided by the
bill.
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