BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1326|
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THIRD READING
Bill No: AB 1326
Author: Dababneh (D)
Amended: 8/18/15 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 7/15/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE APPROPRIATIONS COMMITTEE: 6-1, 8/27/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza
NOES: Nielsen
ASSEMBLY FLOOR: 55-22, 6/3/15 - See last page for vote
SUBJECT: Virtual currency
SOURCE: Author
DIGEST: This bill establishes a framework for the licensing
and regulation of virtual currency businesses by the Department
of Business Oversight (DBO), effective July 1, 2016.
ANALYSIS: Existing law provides for the Money Transmission
Act (MTA), administered by DBO (Division 1.2 of the Financial
Code), which establishes a framework for the licensing and
regulation of money transmitters, as specified (Financial Code
Sections 2000 et seq.). The MTA defines money transmission as
selling or issuing payment instruments, selling or issuing
stored value, or receiving money for transmission (Financial
Code Section 2003).
This bill:
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1)Creates a new division under the Financial Code to regulate
virtual currency businesses, effective July 1, 2016 (Division
11), as follows:
a) Defines virtual currency as any type of digital unit
that is used as a medium of exchange or a form of digitally
stored value.
b) Provides that virtual currency does not include any of
the following:
i) Digital units that are used solely within online
gaming platforms, with no market or application outside
of those gaming platforms.
ii) Digital units that are used exclusively as part of a
consumer affinity or rewards program.
iii) Digital units that can be redeemed for goods,
services, or for purchases with the issuer or other
designated merchants, but cannot be converted into, or
redeemed for fiat currency. Fiat currency is defined as
government-issued currency that is designated as legal
tender through government decree, regulation, or law,
that customarily refers to paper money and coin and is
circulated, used, and accepted as money.
c) Defines virtual currency business as maintaining full
custody or control of virtual currency in California on
behalf of others.
d) Prohibits a person from engaging in any virtual currency
business in California unless that person is licensed under
Division 11 of the Financial Code or is exempt from
licensure under that division, as specified.
e) Requires virtual currency business licensees to provide
a specified disclosure to consumers informing them of the
potential risks of virtual currency and instructing them on
how to file complaints with DBO. Additionally requires
licensees to provide receipts to consumers upon completion
of virtual currency transactions, as specified.
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f) Requires licensees to maintain levels of capital that
the Commissioner of DBO (commissioner) determines are
sufficient to ensure the safety and soundness of the
licensees, and to maintain consumer protection and their
ongoing operations. Additionally requires licensees to
maintain bonds or trust accounts in United States dollars
for the benefit of their consumers, in forms and amounts
specified by the commissioner.
g) Authorizes the commissioner to examine the business and
branch office of each licensee, whether in California or
outside the state, 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.
h) Requires each licensee to submit an annual report
regarding its business and operations, as specified, and to
submit an annual audit report to the commissioner, prepared
by an independent certified public accountant or
independent public accountant, as specified.
i) 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.
j) Authorizes, in lieu of many of the aforementioned
requirements, a person or entity conducting virtual
currency business with less than $1 million in outstanding
obligations, whose business model represents no or low risk
to consumers, as determined by the commissioner, 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. Provides that a provisional license is
effective for two years and may be renewed by the
commissioner. Requires a provisional licensee to notify
the commissioner within 15 days after it surpasses the $1
million threshold and to apply for a virtual currency
license within 30 days following that notice.
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2)Provides that an MTA licensee who wishes to engage in a
virtual currency business without a virtual currency license
must seek permission to do so from the 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.
3)Authorizes a licensee in good standing under the virtual
currency law to apply to the commissioner to convert its
license into a MTA license, as specified.
Background
Definition. 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"
(http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+O
pinion+on+Virtual+Currencies.pdf).
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.
Other state regulations. In June, 2015, New York became the
first state in the country to finalize rules for virtual
currency companies. New York defines virtual currency as "any
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type of digital unit that is used as a medium of exchange or a
form of digitally stored value" and states that the term should
be broadly construed to include digital units of exchange that
have a centralized repository or administrator, are
decentralized and have no centralized repository or
administrator, or may be created or obtained by computing or
manufacturing effort.
New York defines "virtual currency business activity" as the
conduct of any one of the following types of activities
involving New York or a New York resident: 1) receiving virtual
currency for transmission or transmitting virtual currency,
except where the transaction is undertaken for non-financial
purposes and does not involve the transfer of more than a
nominal amount of virtual currency; 2) storing, holding, or
maintaining custody or control of virtual currency on behalf of
others; 3) buying and selling virtual currency as a customer
business; 4) performing exchange services as a customer
business; or 5) controlling, administering, or issuing a virtual
currency. All entities that engage in virtual currency business
activity and are not covered by an exemption from New York's
virtual currency rules are required to obtain a BitLicense from
the New York Department of Financial Services.
Because of the expansive definitions and limited exemptions
contained in New York's rules, those rules have been criticized
by many virtual currency businesses. Several virtual currency
businesses have indicated they will be forced to suspend
business to customers based in New York, because they cannot
afford to operate under New York's regulatory regime.
Comments
Regulation of an emerging industry. AB 1326 is intended to
ensure that entities which store virtual currency or offer
consumers the opportunity to exchange their virtual currency for
fiat currency are operated in a safe and sound manner. It is
also intended to provide regulatory certainty to companies who
are engaging in or planning to engage in virtual currency
businesses.
Many within the virtual currency industry want California to
lead the nation in enacting a law which encourages innovation
and allows startups to be established and grown without undue
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regulatory interference. They point to New York's rules as
problematic for their industry and want California to enact an
alternative regulatory framework to which other states can look
when crafting their own laws. Others would prefer that
California give the virtual currency industry more time to
evolve before deciding whether to regulate it.
Unresolved issues. A variety of interested parties have
expressed strong opinions regarding a variety of issues
addressed by this bill. Two issues remain extremely
contentious.
First, there is no consensus to date regarding the way in which
"virtual currency business" should be defined. At present, this
bill defines virtual currency business as "maintaining full
custody or control of virtual currency in California on behalf
of others." While most industry participants believe that this
bill's definition is vastly superior to the very broad
definition used by New York, some have criticized this bill's
definition as being too vague. For example, the term "full
custody and control" can be a challenging concept to interpret
when applied to a virtual currency business that offers a
virtual currency wallet which requires multiple parties to
independently approve a withdrawal before it can be authorized.
Some suggest that no single entity has full control over the
wallet in this situation, because multiple parties must
independently agree to a withdrawal before it can be made.
Others counter that all of the entities in this situation have
full control, because each can independently prevent a
withdrawal by failing to authorize it. Clarification of this
bill's definition of virtual currency business, either in
statute or through regulation, will be critical if this bill
becomes law.
Another issue of great importance to the regulated community,
whose details remain the subject of controversy, is the
availability and nature of a regulatory framework specifically
directed toward start-ups. Colloquially, industry members argue
that two programmers tinkering with code in a basement should
not be regulated in the same manner as a multi-million dollar
company with thousands of customers. To address this concern,
the July 6th amendments added language authorizing the
commissioner to award provisional licenses to small businesses
determined by the commissioner to pose low or no risk to
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consumers. The July 6th amendments give the commissioner sole
control to determine which rules will apply to each provisional
license holder. The expectation is that businesses awarded
provisional licenses will be able to operate under a less
expensive and less restrictive regulatory scheme than larger or
riskier businesses, although the details of the regulatory
scheme(s) applicable to provisional licensees will be left to
the commissioner to decide.
Although one might suspect that most industry participants would
welcome the availability of a less costly, less restrictive
license for certain start-ups, several small businesses reached
out to the author's office, requesting an even less restrictive
regulatory scheme than the one added to this bill on July 6th.
These businesses would prefer registration to licensure and
would prefer to substitute a set of best practices applicable to
all registrants for the business-specific rules that AB 1326
authorizes the commissioner to apply.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, 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.
*Financial Institutions Fund
SUPPORT: (Verified8/27/15)
Coinbase
Coin Center
Electronic Transactions Association
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OPPOSITION: (Verified8/27/15)
Electronic Frontier Foundation
The Copia Institute
ARGUMENTS IN SUPPORT: Coin Center is a nonprofit research
and advocacy center focused on public policy issues affecting
decentralized digital currencies, such as Bitcoin. The
organization supports AB 1326, because this bill acknowledges
that virtual currency businesses may have business models that
do not involve money transmission and should not be required to
hold money transmission licenses. "Decentralized digital
currencies, such as Bitcoin, are an exciting new innovation with
a great many potential uses - from simple value transfer, to
property title and copyright ownership recordation, identity
management, and even the creation of self-executing contracts.
Some uses of digital currency technology look exactly like money
transmission, an activity that requires licensing in California
as in almost every other state. However, many other possible
uses of the technology have little or nothing to do with money
transmission and pose little or no risk to consumers. A smart
approach to regulating digital currency businesses would
distinguish between these possible uses and only require
licensing for those who engage in activities that are truly like
traditional money transmission. AB 1326 - better than any other
legislative proposal we have seen - accomplishes this. As a
result, it preserves important consumer protections while not
saddling cutting-edge innovation with unjustified regulatory
burdens."
Coinbase is the world's leading Bitcoin service provider. "We
believe AB 1326 brings greater regulatory certainty for digital
currency businesses, provides necessary protections for
consumers, and creates a nurturing environment for small
startups to build their businesses in the Golden State.
Moreover, it eliminates a regulatory 'grey zone' that currently
exists for our industry and gives businesses greater clarity.
As a California based company, we are happy to see the state
leading the nation in creating policy that will foster
technological innovation and economic growth."
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Coinbase is particularly supportive of the provisional licensing
that AB 1326 authorizes. Provisional licensing "provides small
digital currency startups or those with limited consumer
exposure the ability to start and operate their businesses with
an unencumbered runway. This section provides these businesses
a low barrier to entry by means of registration, self-certified
compliance with risk based performance standards, and a low fee.
From there, they can focus on building and growing solutions
for consumers and not worry about overly burdensome regulations
and related expenses. While Coinbase would not be eligible for
this licensing due to our relative size, we strongly support the
inclusion and believe it's extremely important to the overall
health of the ecosystem. This provision will help seed the next
round of the nation's most groundbreaking and innovative
technologies companies, and make California one of the nation's
most attractive places for digital currency businesses to grow
and thrive."
ARGUMENTS IN OPPOSITION:The Copia Institute, a Silicon
Valley-based think tank, writes, "At this stage of the game,
creating licensing regimes and putting permission barriers on
innovation is very, very premature. Everyone is still figuring
out just what the blockchain is good for, and it's a long and
varied list... We should be very wary about deciding to put
layers of government bureaucracy on things that can be
accomplished in the code itself....Silicon Valley was built on
permissionless innovation, especially on the internet. Saddling
new core infrastructure like Bitcoin and the blockchain with a
permission-based framework sets the wrong tone entirely, and
virtually ensures that Silicon Valley won't be home to the
leading innovators in this new and exciting space."
The Electronic Frontier Foundation opposes AB 1326 on the
grounds that this bill is premature, technically inaccurate in
spots, and will do more harm than good. "Virtual currencies are
still developing, and this bill threatens to both stunt the
growth of this innovative industry and hamper the enthusiasm
driving consumer interest. Also, privacy and free speech are
central issues in the virtual currency space, which the bill
fails to adequately consider."
ASSEMBLY FLOOR: 55-22, 6/3/15
AYES: Alejo, Bloom, Bonilla, Bonta, Brown, Burke, Calderon,
Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd,
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Page 10
Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández,
Holden, Irwin, Jones-Sawyer, Lackey, Levine, Linder, Lopez,
Low, Mathis, McCarty, Medina, Mullin, Nazarian, O'Donnell,
Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas,
Santiago, Mark Stone, Ting, Weber, Wilk, Williams, Wood,
Atkins
NOES: Achadjian, Baker, Bigelow, Brough, Chang, Chávez, Dahle,
Beth Gaines, Gallagher, Grove, Hadley, Harper, Jones, Kim,
Maienschein, Mayes, Melendez, Obernolte, Olsen, Patterson,
Steinorth, Wagner
NO VOTE RECORDED: Travis Allen, Thurmond, Waldron
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
8/30/15 19:27:49
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