BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 1326 (Dababneh) - Virtual currency ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: August 18, 2015 |Policy Vote: B. & F.I. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 24, 2015 |Consultant: Jolie Onodera | | | | ----------------------------------------------------------------- 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 ? *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 ? 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 ? 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 ? 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. -- END --