BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                            Senator Steven Glazer, Chair
                                2015 - 2016  Regular 

          Bill No:             AB 1326        Hearing Date:    August 15,  
          2015
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          |Author:    |Dababneh                                             |
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          |Version:   |August 8, 2016    Amended                            |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Eileen Newhall                                       |
          |           |                                                     |
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                             Subject:  Virtual currency


           SUMMARY       This bill, until January 1, 2022, creates the Digital  
          Currency Business Enrollment Program (DCBEP; the Program),  
          administered by the Department of Business Oversight (DBO), as  
          specified.
          
           DESCRIPTION
             
            1.  Deletes the code section that prohibits any corporation,  
              special purpose corporation, association, or individual from  
              putting into circulation, as money, anything but the lawful  
              money of the United States.

           2.  Establishes, until January 1, 2022, the DCBEP, and states  
              the intention of the Legislature that the DCBEP enable DBO  
              to identify all of the businesses providing digital currency  
              services in the state; enable businesses to provide digital  
              currency services in the state in a lawful and transparent  
              manner; enable DBO to gather from businesses providing  
              digital currency services any information helpful to  
              determining whether and how the industry should be licensed  
              and regulated in the future; and ensure that customers  
              receive appropriate risk disclosures and information about  
              digital currency and digital currency-related services.

           3.  Prohibits any person from engaging or offering to engage in  
              any digital currency business in this state unless that  







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              person is enrolled in the DBCEP, and prohibits any enrollee  
              from conducting any digital currency business through an  
              agent or agency arrangement, if the agent is not an  
              enrollee.

           4.  Defines "digital currency" as any digital representation of  
              value that can be digitally traded and is used to facilitate  
              the sale, purchase, and exchange of goods, services, or  
              other digital representations of value among its users.   
              Provides that digital currency does not include fiat  
              currency, e-money, or currency, the value of which is fixed  
              by its issuer to the value of a fiat currency.  Defines  
              "fiat currency" as government-issued currency that is  
              designated as legal tender or lawful money.  Defines  
              "e-money" as a digital representation of fiat currency used  
              to electronically transfer value denominated in fiat  
              currency.

           5.  Defines "digital currency business" as the business of  
              offering or providing the service of storing, transmitting,  
              exchanging, or issuing digital currency.  Provides that  
              digital currency business does not include any of the  
              following:

               a.     Transmitting digital currency for nonfinancial  
                 purposes, when the amount transferred is no more than a  
                 nominal amount.

               b.     Online games or gaming platforms whose digital  
                 currency has no market or application outside of those  
                 games or gaming platforms, cannot be converted into or  
                 redeemed for fiat currency or digital currency, and are  
                 not redeemable for real-world goods, services, discounts,  
                 or purchases.

               c.     Customer affinity or rewards programs whose digital  
                 currency can be redeemed for goods, services, or  
                 purchases with the issuer or other designated merchants,  
                 but which cannot be converted into or redeemed for fiat  
                 currency or digital currency that is not part of the  
                 customer affinity or rewards program.

               d.     Issuance of a credit card voucher, letter of credit,  
                 or any value that is redeemable only by the issuer for  








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                 goods or services provided by the issuer or its  
                 affiliate, except to the extent required by applicable  
                 law to be redeemable in cash for its cash value.

               e.     Developing, distributing, or servicing digital  
                 currency network software.

               f.     Contributing software, connectivity, or computing  
                 power to a digital currency network.

               g.     Providing data storage or cybersecurity services for  
                 an enrolled digital currency business, if the data  
                 storage or cybersecurity services do not store digital  
                 currency.

           6.  Requires each person seeking enrollment in the Program to  
              pay to the Commissioner of DBO (commissioner) a  
              nonrefundable fee of up to $5,000; provide specified  
              information about its business, officers, and employees; and  
              subject its executive officer, manager, director, or any  
              other person in control of the applicant to a background  
              check.  Requires the commissioner to permit an applicant to  
              enroll in the DBCEP unless it appears to the commissioner  
              that the applicant; the directors or officers of the  
              applicant; any person that controls the applicant; or the  
              directors or officers of any person that controls the  
              applicant are not of good character.  Requires enrollees to  
              notify the commissioner, as soon as practicable, when there  
              is a change in any of the information submitted in their  
              applications for enrollment.  Enrollees are required to pay  
              a fee of $2,500 annually to the commissioner to maintain  
              enrollment in the DBCEP.  

           7.  Requires enrollees to include the following statement on  
              all of their advertising:  "Our digital currency business in  
              California is conducted pursuant to the Digital Currency  
              Business Enrollment Program that is administered by the  
              Department of Business Oversight ("DBO").  However, neither  
              the DBO nor any other government agency has reviewed the  
              safety and soundness of our business or the digital  
              currencies in which we transact.  For more information about  
              the Enrollment Program, visit [www.dbo.ca.gov/dc]."   
              Enrollees are required to maintain all advertising and  
              marketing material for examination by the commissioner and  








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              are prohibited from making any false, misleading, or  
              deceptive representations or omissions in these materials.  

           8.  Requires enrollees to provide, at a minimum, all of the  
              following disclosures in writing, in English and in any  
              other language that may be spoken by the majority of the  
              customers of the enrollee, before entering into an initial  
              transaction for, on behalf of, or with a customer:

               a.     Unlike traditional financial institutions, neither  
                 DBO nor any other government agency has licensed,  
                 sanctioned, endorsed, or otherwise reviewed the  
                 operations of the enrollee or reviewed the enrollee for  
                 safety or soundness.

               b.     Unlike some other financial institutions, accounts  
                 and value balances are not covered by Federal Deposit  
                 Insurance Corporation guarantees or Securities Investor  
                 Protection Corporation protections.

               c.     The customer may not be protected if the enrollee  
                 becomes insolvent.

               d.     Digital currency is not legal tender and is not  
                 backed by the government.

               e.     Legislative and regulatory changes or actions at the  
                 state, federal, or international level may adversely  
                 affect the use, transfer, exchange, or value of digital  
                 currency.

               f.     Transactions in digital currency generally are  
                 irreversible and, accordingly, losses due to fraudulent  
                 or accidental transactions may not be recoverable.

               g.     Some digital currency transactions are deemed  
                 completed when recorded on a centralized ledger, which is  
                 not necessarily the date or time that the customer  
                 initiates the transaction.

               h.     The value of digital currency is usually derived  
                 from the continued willingness of market participants to  
                 exchange fiat currency for digital currency, which may  
                 result in the potential for permanent and total loss of  








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                 value of a particular digital currency, should the market  
                 for that digital currency disappear.

               i.     There is no assurance that a person who accepts a  
                 digital currency as payment today will continue to do so  
                 in the future.

               j.     The volatility and unpredictability of the price of  
                 digital currency relative to fiat currency may result in  
                 significant loss or tax liability over a short period of  
                 time.

               aa.    The nature of digital currency may lead to an  
                 increased risk of fraud or cyberattack.

               bb.    Any technological difficulties experienced by the  
                 enrollee may prevent the access or use of a customer's  
                 digital currency.

               cc.    Any bond or trust account for the benefit of  
                 customers may not be sufficient to fully cover all losses  
                 incurred by customers.

           9.  Requires enrollees to disclose all relevant general terms  
              and conditions associated with their products, services, and  
              activities, when opening an account for a new customer and  
              before entering into an initial transaction for, on behalf  
              of, or with that customer.  This information, which must be  
              provided in writing, in English and in any other language  
              that may be spoken by the majority of the customers of the  
              enrollee, must include all of the following, at a minimum:

               a.     The customer's liability for unauthorized digital  
                 currency transactions.

               b.     The customer's right to stop payment of a  
                 preauthorized digital currency transfer and the procedure  
                 to initiate a stop-payment order.

               c.     The enrollee's liability to the customer under any  
                 applicable federal or state laws, rules, or regulations.

               d.     The circumstances under which the enrollee will,  
                 absent a court or government order, disclose information  








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                 concerning the customer's account to third parties.

               e.     The customer's right to receive periodic account  
                 statements and valuations from the enrollee; right to  
                 receive a receipt, trade ticket, or other evidence of a  
                 transaction; and right to prior notice of a change in the  
                 enrollee's rules or policies.

               f.     The following statement:  "The digital currency  
                 business of [Enrollee's legal name] in California is  
                 conducted pursuant to the Digital Currency Business  
                 Enrollment Program that is administered by the Department  
                 of Business Oversight ("DBO").  [Enrollee's legal name]  
                 conducts digital currency business in California under  
                 the names (s) [a listing of all trade names enrollee does  
                 business under in California].  If you have complaints  
                 with respect to any aspect of the digital currency  
                 business conducted by [Enrollee's legal name], you may  
                 contact the Department of Business Oversight at its  
                 toll-free telephone number, 1-800-622-0620, by e-mail 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.  For more  
                 information about the Digital Currency Business  
                 Enrollment Program visit: [www.dbo.ca.gov/dc]."

           10. Requires enrollees to disclose all of the following, at a  
              minimum, prior to each transaction in digital currency for,  
              on behalf of, or with a customer.  This information must be  
              provided in writing, in English and in any other language  
              that may be spoken by the majority of the customers of the  
              enrollee: 

               a.     The amount of the transaction.

               b.     Any fees, expenses, and charges borne by the  
                 customer, including applicable exchange rates.

               c.     The type and nature of the digital currency  
                 transaction.

               d.     A warning if the transaction, once executed, cannot  
                 be reversed.









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           11. Requires enrollees to provide customers a receipt  
              containing, at a minimum, all of the information listed  
              immediately below, when they accept digital currency or fiat  
              currency from a customer.  Enrollees must file their receipt  
              forms with the commissioner prior to their first use, and  
              may not use a receipt form that has been found by the  
              commissioner to be out of compliance with the requirements  
              of the DCBEP.  Receipts must include all of the following,  
              at a minimum:

               a.     The name and contact information of the enrollee,  
                 including a telephone number and California mailing  
                 address established by the enrollee to answer questions  
                 and register complaints.

               b.     The type, value, date, and precise time of the  
                 transaction.

               c.     The fee charged.

               d.     The exchange rate, if applicable.

               e.     A statement of the liability of the enrollee for  
                 nondelivery or delayed delivery.

               f.     A statement of the refund policy of the enrollee.   

           12. Provides that all disclosures and receipts may be provided  
              electronically.  Disclosures must be provided in a minimum  
              10-point font, while receipts must be provided in a minimum  
              8-point font, unless they are provided via text message or  
              mobile phone.  Enrollees are required to ensure that all  
              required disclosures are acknowledged as received by  
              customers.

           13. Requires enrollees to provide to the commissioner any or  
              all of their accounts, books, and records, upon request;  
              file an annual audit report with the commissioner, as  
              specified; and file an annual report with the commissioner,  
              providing the relevant information the commissioner  
              reasonably requires concerning the business and operations  
              conducted by the enrollee during the preceding calendar  
              year.  Authorizes the commissioner to require enrollees and  
              their agents to provide additional information through  








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              surveys, investigations, questionnaires, and other  
              information-gathering efforts.  

           14. Provides that failure to provide required disclosures  
              subjects an enrollee to a fine of $100 per violation.   
              Failure to make required reports subjects an enrollee to a  
              fine of up to $100 per day for every day up to the tenth  
              day.  Beginning on the eleventh day, the commissioner is  
              authorized to disenroll an enrollee that fails to make a  
              required report.

           15. Requires the commissioner to annually prepare and make  
              available to the public a report on the state of the digital  
              currency business industry, using the information submitted  
              to him or her by enrollees.  

           16. Gives the commissioner the power to disenroll an enrollee  
              for failure to comply with the provisions of the DCBEP,  
              subject to relevant provisions of the Administrative  
              Procedures Act, as specified.  

           17. Gives the commissioner the following enforcement powers,  
              subject to relevant provisions of the Administrative  
              Procedures Act, against entities that are not enrolled, but  
              which are acting in a manner that requires enrollment:   
              desist and refrain authority; ability to bring an action in  
              superior court to enjoin acts or practices or to enforce  
              compliance with the Program; and ability to request that the  
              court appoint a receiver, monitor, conservator, or other  
              designated fiduciary to exercise any or all of the powers of  
              the defendant's controlling persons, petition a court for  
              ancillary relief; and include in its civil action a claim  
              for civil penalties, not to exceed $25,000 for each  
              violation.  

           18. Clarifies that an enrollee, which is a money services  
              business pursuant to federal Bank Secrecy Act regulations,  
              must comply with those regulations, and grants the  
              commissioner authority to examine enrollees and their agents  
              to ascertain compliance with those federal rules.

           19. Provides that the Money Transmission Act (MTA) does not  
              apply to any form of value that qualifies as digital  
              currency under the DCBEP.








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           EXISTING LAW
           

           20. Provides for the 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).


           21. Prohibits any corporation, special purpose corporation,  
              association, or individual from putting into circulation, as  
              money, anything but the lawful money of the United States  
              (Corporations Code Section 107).


           COMMENTS
         
          1.  Purpose:   AB 1326 is sponsored by the author to provide  
              California's financial regulator with a sense for the size  
              and scope of the digital currency industry in California,  
              use that information to develop a regulatory framework  
              appropriate to the industry, and provide protections for  
              persons who use digital currency service providers.  This  
              bill's author is seeking to strike a balance between  
              consumer protection and innovation by providing for  
              oversight from DBO without requiring enrollees to adhere to  
              the same requirements they would under a full-fledged  
              licensing program.

           2.  Senate Rule 29.10 Hearing:   AB 1326 is back before this  
              committee pursuant to Senate Rule 29.10(b), following Senate  
              Floor amendments taken on August 8, 2016.  An earlier  
              version of AB 1326 was heard and passed by this committee on  
              a 7-0 vote in July, 2015.  However, because DBO was not  
              authorized to provide official input on the measure at the  
              time of that July, 2015 hearing, this committee passed AB  
              1326 with an expectation that the bill would be returned to  
              the committee, once DBO's input had been received and  
              amended into the bill.  The August 8, 2016 amendments  
              reflect technical assistance provided to this bill's author  








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              by DBO.  

          Pursuant to Senate Rule 29.10(b), this Committee may take only  
              one of the following three actions on AB 1326:  a) hold the  
              bill in committee, b) return the bill to the Senate Floor  
              for consideration, or c) re-refer the bill to the Senate  
              Appropriations Committee.  If this committee wishes to ask  
              this bill's author to accept amendments, it must obtain a  
              commitment from the author to take those amendments in the  
              Senate Appropriations Committee or on the Senate Floor.  

           3.  Differences Between the Current and Prior Versions of AB  
              1326:   The version of AB 1326 that passed this Committee  
              last July would have created a permanent licensing scheme  
              for virtual currency providers.  The current version of AB  
              1326 creates a registration program, effective for five  
              years, that is intended to provide baseline consumer  
              protections, while allowing DBO to gather information about  
              the digital currency industry that can be used to inform a  
              future digital currency provider licensing scheme.  Other  
              key differences:  the two bills contain different  
              definitions, different scopes, different consumer  
              protections, and different enforcement mechanisms.  

           4.  Recent Hack:  As the myriad disclosures required by this bill  
              help illustrate, there are many potential risks of investing  
              in virtual (aka, digital) currency.  The most recent,  
              high-profile example of these risks is illustrated by the  
              August 2, 2016 disclosure by bitcoin exchange Bitfinex that  
              hackers stole over $60 million worth of bitcoin from its  
              systems.  Although Bitfinex has not yet decided how these  
              losses will be allocated, the exchange is "leaning towards a  
              socialized loss scenario among bitcoin balances and active  
              loans" (i.e., users of its products will likely shoulder at  
              least some of the loss).  

          The Bitfinex hack not only helps to illustrate some of the  
              dangers of placing one's trust in virtual currency service  
              providers, but also illustrates the challenges faced by  
              those who seek to regulate virtual currency businesses.   
              Consumer protection is at the core of all regulatory  
              schemes, but, to date, the components of a successful  
              virtual currency regulatory scheme have proven illusory.   
              Not only is it unclear how best to safeguard virtual  








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              currency (at the time of the hack, Bitfinex was using a  
              method of security that many view as a gold standard for  
                         virtual currency security), but it is also unclear whether  
              regulatory action taken to date is protecting or harming  
              consumers.    

          For example, some have questioned whether regulatory action  
              taken by the federal Commodity Futures Trading Commission  
              (CFTC) against Bitfinex may have weakened Bitfinex'  
              security.  Last year, Bitfinex moved from cold storage of  
              its bitcoin accounts, where private keys are kept offline,  
              to multisignature security, an online form of security which  
              requires two or more different signatures to release funds  
              from a bitcoin wallet.   According to press reports, the  
              move was made in large part to placate the CFTC, which had  
              fined Bitfinex $75,000 for failing to register as a futures  
              commission merchant.  According to a recent article in  
              American Banker, "The situation is complex and turns on  
              whether the CFTC inadvertently pushed Bitfinex to adopt a  
              weaker security system than it had been using.  If so, the  
              story is a stark reminder of how legacy regulatory models  
              are an awkward fit for emerging technologies.  However,  
              several security experts said the way the exchange chose to  
              use the new system was significantly flawed." ("Did  
              Regulatory Meddling Cause Bitfinex Hack?," by Lalita Clozel  
              and Tanaya Macheel, August 3, 2016).  

           5.  Efforts by Other Regulators to Regulate Digital Currency:    
              The CFTC's involvement in the Bitfinex case is just one  
              example of many actions taken by regulators in the virtual  
              currency arena.  

          In March, 2013, the federal Financial Crimes Enforcement Network  
              (FinCEN) issued guidance to address the extent to which a  
              person's conduct related to convertible virtual currency  
              brings them within the Bank Secrecy Act's (BSA's) definition  
              of a money transmitter and triggers a requirement to  
              register with FinCEN as a money services business (MSB).   
              Every MSB is required to have an anti money-laundering  
              program in place and has the obligation to file a Suspicious  
              Activity Report with FinCEN whenever a transaction they  
              facilitate is "suspicious," as defined, and in an amount of  
              $2,000 or more.  









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          According to FinCEN, to the extent a user creates or "mines" a  
              convertible virtual currency solely for a user's own  
              purposes, the user is not a money transmitter under the BSA.  
               Further, a company purchasing and selling convertible  
              virtual currency as an investment exclusively for the  
              company's benefit is also not a money transmitter.  However,  
              the administrator of a centralized repository of convertible  
              virtual currency is a money transmitter and must register as  
              an MSB to the extent that it allows transfers of value  
              between persons or from one location to another.   
              Additionally, any exchanger that uses its access to the  
              convertible virtual currency services provided by the  
              administrator to accept and transmit the convertible virtual  
              currency on behalf of others, including transfers intended  
              to pay a third party for virtual goods and services, is also  
              a money transmitter and must register as an MSB.  

          In June, 2015, New York became the first state in the country to  
              finalize rules for the licensure of virtual currency  
              companies.  However, 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  
              stopped serving customers based in New York, because they  
              cannot afford to operate under New York's regulatory regime.  
               

              The Conference of State Bank Supervisors, an association of  
              state financial regulators, has also addressed the  
              regulation of virtual currency.  In September, 2015, CSBS  
              issued a final version of its state regulatory framework for  
              virtual currency activities  
              (  https://www.csbs.org/regulatory/ep/Documents/CSBS-Model-Regu 
              latory-Framework(September%2015%202015).pdf)  .  CSBS'  
              framework envisions a licensing scheme, rather than the  
              registration scheme contained in this bill.  The nine  
              components of CSBS' regulatory framework include licensing  
              requirements; a mechanism for states to share state  
              licensing and enforcement data with one another; financial  
              strength and stability requirements; consumer protection;  
              cybersecurity; general regulatory compliance, regulatory  
              compliance specific to BSA and anti-money laundering rules;  
              recordkeeping and financial reporting; and regulatory  
              supervision.  As of the date this analysis was prepared,  








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              CSBS had not responded to a request for information  
              regarding which states, if any, had moved to adopt its  
              regulatory framework.   

              Finally, the National Conference of Commissioners on Uniform  
              State Laws issued a draft "Regulation of Virtual Currency  
              Business Act" in July, 2016  
              (  http://www.uniformlaws.org/shared/docs/regulation%20of%20vir 
              tual%20currencies/2016AM_VirtualCurrencyBusinesses_Draft.pdf  ) 
              .  This model law is much more detailed than CSBS' model  
              framework, but remains in draft form and will likely undergo  
              future revision, before it is finalized.  To date, no states  
              have moved to adopt it.  

           6.  Summary of Arguments in Support:   None received.

           7.  Summary of Arguments in Opposition:    

               a.     Consumers Union (CU) and the National Consumer Law  
                 Center (NCLC) sent a joint letter of opposition, urging  
                 the Legislature to adopt a licensing regime with strong  
                 consumer protections, rather than the enrollment program  
                 this bill contemplates.  The bill "sets a worrying  
                 precedent, allowing financial services businesses to  
                 operate in California without even the barest safety and  
                 soundness requirements.  Moreover, the enrollment program  
                 envisioned by AB 1326 creates rather than alleviates  
                 consumer confusion about the risks of virtual currencies,  
                 and compounds the regulatory confusion for businesses."   
                 Many of the businesses that are being built around or on  
                 virtual currency protocols are acting as financial  
                 intermediaries, accepting consumers' value with the  
                 promise of storing, transmitting, or exchanging it.   
                 Whenever businesses come between consumers and their  
                 value, businesses must be accountable, and basic consumer  
                 protections must be in place, regardless of the  
                 technology used.  Safety and soundness requirements are  
                 fundamental to the financial services ecosystem.  The  
                 bill's failure to ensure safety and soundness leaves  
                 consumers vulnerable to a loss of value that is  
                 unacceptable.  

               CU and the NCLC are also concerned about the bill's  
                 requirement that consumers be informed that enrollees are  








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                 participating in a program administered by DBO but told  
                 that neither DBO nor any other government agency has  
                 reviewed the safety and soundness of their business or  
                 the digital currencies in which they transact.  These  
                 seemingly contradictory statements create the illusion of  
                 a government imprimatur where none exists.  "The problem  
                 that disclosure of 'enrolled' status creates is  
                 compounded when viewed against the vast differences in  
                 state regulation.  For example, such a disclosure may  
                 lead consumers to believe that enrollment is similar to  
                 being licensed in a state such as New York, when exactly  
                 the opposite is true."  

               b.     Coin Center is an independent nonprofit research and  
                 advocacy center focused on public policy issues affecting  
                 decentralized digital currencies.  Coin Center's  
                 opposition is based on four definitions in the bill,  
                 which it believes must be changed.  The terms  
                 "transmitting," "issuing," and "exchanging" should be  
                 struck from the definition of digital currency business,  
                 in part to remove confusion over what is and is not  
                 covered by the bill, and in part to narrow the bill to  
                 those entities which pose a potential risk to consumers.   
                 For example, the definition of transmitting appears to  
                 include the very same network providers that are granted  
                 an exemption by the bill.  Issuing digital currency is  
                 "trivially easy" but does not endanger customers until  
                 and unless the issuer holds and secures value on behalf  
                 of customers.  Exchanging may also cover  
                 innovation-critical activities that do not present a risk  
                 to California consumers.  While custodial exchanges of  
                 digital currency may warrant enrollment, automated  
                 protocols of exchange, such as sidechains and cross-chain  
                 atomic swaps do not.  

               Coin Center also believes that the definition of "storing"  
                 should be modified to provide that custody or control of  
                 digital currency means having sufficient access to a  
                 customer's digital currency credentials to execute a  
                 digital currency transaction on behalf of the customer or  
                 to prevent indefinitely the customer from executing a  
                 transaction in the customer's own digital currency  the  
                 ability to execute a digital currency transaction on  
                 behalf of a customer, or the ability to prevent a  








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                 customer from effecting a desired transaction of such  
                 digital currency  .    

               c.     The Electronic Frontier Foundation (EFF) is a  
                 nonprofit organization with over 25,000 members that  
                 works to protect the interests of technology creators and  
                 users.  EFF opposes AB 1326, out of concern that the bill  
                 will harm consumers by limiting Californians' access to  
                 novel digital currencies and discourage innovation in a  
                 burgeoning industry.  "Further, while the bill purports  
                 to have a light regulatory touch - it is portrayed as an  
                 enrollment pilot program for digital currency businesses  
                 - it places unduly burdensome requirements on businesses  
                 and provides DBO with nearly unfettered regulatory  
                 discretion to pick winners in the digital currency  
                 industry.  Neither EFF nor anyone else from the tech or  
                 digital currency community was invited to participate in  
                 drafting the current language....AB 1326 is ill suited  
                 for the industry it seeks to regulate."  

               "Government must tolerate some level of consumer risk so  
                 that the industry can innovate.  The Internet that we all  
                 enjoy today would not exist if it had been regulated in  
                 the manner of AB 1326.  Further, the absence of  
                 government regulation does not necessarily mean that  
                 consumers are without legal recourse in the event of  
                 fraud or financial loss.  EFF thus continues to believe  
                 that the time is not yet ripe to regulate digital  
                 currencies, at least not as aggressively as AB 1326  
                 envisions."

               In its letter of opposition, EFF identifies the following  
                 specific concerns:  

                   i.             AB 1326's vague definitions apply so  
                    broadly that the bill will regulate the entire  
                    internet industry.  For example, the definition of  
                    "transmitting" would apply to any digital currency  
                    user who transmits currency to another person or third  
                    party.  The mere transmission of digital currency, by  
                    itself, does not pose a risk to consumers.  Even if  
                    there were legitimate concerns regarding the risks of  
                    digital currency transmission, the regulation should  
                    be limited to circumstances in which the party  








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                    transmitting the digital currency has the unilateral  
                    ability to prevent the transaction.

                   AB 1326's application to issuers of virtual currency  
                    will subject anyone that creates a new digital  
                    currency to regulation the moment they mint anything,  
                    even before anyone uses or exchanges the currency, and  
                    thus even when the issuer poses no risk to consumers.   
                    "It is trivially easy for anyone to download the open  
                    source software behind Bitcoin, modify it, and create  
                    an entirely new currency.  Hobbyists and innovators do  
                    this all the time...This definitional problem is  
                    exacerbated by the fact that the bill contains no  
                    start-up exemption or provisional license for new  
                    businesses"

                   AB 1326's definition of storing could subject cloud  
                    services to regulation.  By defining "storing" as  
                    having access to a customer's digital currency  
                    credentials, a host of services such as Google Drive,  
                    Amazon Web Services, and any other service that a  
                    consumer uses to save his or her digital currency  
                    passwords or credentials is covered.  

                   ii.            AB 1326's carve-out for video game  
                    digital currencies will not work as intended, because  
                    independent markets for many game currencies exist  
                    outside the confines of the games.  Although these  
                    markets are often outside the direct control of the  
                    games' creators, the game makers will be subject to  
                    this bill's provisions.

                   iii.           AB 1326 contains no start-up exemption  
                    or provisional license for new businesses.  The bill  
                    provides no space for tinkerers and new entrants and  
                    will therefore kill digital currency innovation in  
                    California.  Because the bill requires any entity  
                    subject to its broad definitions to register before  
                    undertaking those activities, and because of the  
                    costly nature of the application fee, renewal fee,  
                    background checks, and the auditing and reporting  
                    requirements, the bill places unreasonably high  
                    demands on start-ups.  EFF would like to see an  
                    exemption added for start-ups, academics, and  








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                    hobbyists.

                   iv.            Finally, AB 1326 gives DBO almost  
                    unilateral authority to pick the entities that will be  
                    allowed to conduct digital currency business in  
                    California.  The bill gives DBO authority to deny  
                    enrollment to any person DBO determines is "not of  
                    good character;" discretion to dis-enroll an entity  
                    for, among other things, failing to respond to an  
                    inquiry to DBO's liking; and unreviewable authority to  
                    find that an entity was engaged in a digital currency  
                    business without enrolling, if that entity does not  
                    respond to a DBO order within 30 days.  Because DBO's  
                    decision to deny enrollment or dis-enroll an entity  
                    would effectively shut down the business in the state,  
                    DBO has a veto over the types of digital currencies  
                    developed.  
               
          8.  Amendments:   Because of the very short time between the  
              August 8, 2015 amendments to this bill and this committee  
              hearing, there was insufficient time for the author to  
              address all of the outstanding concerns raised about the  
              bill.  The amendments listed below represent a subset of  
              those that will likely be necessary.  Because this Committee  
              is precluded from amending the bill, the amendments below  
              will need to be taken either in the Senate Appropriations  
              Committee or on the Senate Floor.  The author may opt to  
              augment those changes with additional amendments, once he  
              concludes his negotiations with interested parties regarding  
              their concerns.  

               a.     The author is proposing to revise the definition of  
                 digital currency business to exclude entities that issue  
                 digital currency.  The inclusion of issuers in the  
                 definition has been criticized as thwarting research and  
                 innovation into new digital currencies by requiring  
                 enrollment before someone develops a new digital  
                 currency.  

               b.     The author is also proposing to exclude  
                 federally-insured depository institutions from the list  
                 of entities that may be subject to this bill and to  
                 strike one of the required disclosures (the one informing  
                 customers that the nature of digital currency may lead to  








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                 an increased risk of fraud or cyberattack).

               c.     This bill requires all disclosures and receipts to  
                 be provided "in writing in English and in any other  
                 language that may be spoken by the majority of the  
                 customers of the enrollee."  It is unclear how enrollees  
                 will be expected to ascertain which language(s) are  
                 spoken by their customers, particularly when nearly all  
                 of the interactions between enrollees and their customers  
                 will occur online.  

               The author has agreed to amend his bill to require  
                 enrollees to provide their disclosures and receipts in  
                 English; additionally provide translated versions of  
                 these disclosures and receipts in one of the five foreign  
                 languages listed in Civil Code Section 1632, upon request  
                 by a customer; and inform customers of their right to  
                 request translated disclosures and receipts.  

               d.     As drafted, this bill includes a considerable amount  
                 of detail regarding the information that applicants must  
                 include in their applications for enrollment.  The bill  
                 also requires every enrollee to notify DBO whenever any  
                 of the information in its application for enrollment  
                 changes.  From both an administrative flexibility and a  
                 regulatory compliance standpoint, it may be preferable to  
                 reduce the amount of detail in the bill regarding what  
                 must be submitted with one's application, and instead  
                 provide DBO with greater discretion to clarify the  
                 contents of its enrollee application form through  
                 regulation.  

               As just one example of why this may be preferable:  The  
                 bill currently requires each applicant for enrollment to  
                 provide DBO with the number of people it employs, and to  
                 list each employee's title and work responsibilities.   
                 DBO staff expects that each enrollee will notify the  
                 department each time it hires or fires an employee,  
                 changes an employee's title, or modifies an employee's  
                 work responsibilities.   If, after this bill is enacted,  
                 DBO determines that requiring such detailed employment  
                 information is unnecessary, it will require future  
                 legislation to scale back the level of required  
                 reporting.  If, instead, this level of detail is required  








          AB 1326 (Dababneh)                                      Page 19  
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                 through regulation, it becomes a relatively  
                 straightforward exercise to modify the regulations to  
                 eliminate it.

               e.     As summarized above in "This bill" numbers 8, 9, and  
                 10, this bill requires enrollees to provide customers and  
                 prospective customers with a significant number of  
                 disclosures - so many disclosures, in fact, that the  
                 impact of the individual warnings contained in those  
                 disclosures may be lost due to their sheer volume.   
                 Because virtually all of the disclosures required to be  
                 provided by enrollees to customers prior to each  
                 transaction (see This bill number 10) is virtually  
                 identical to the information required to be provided to  
                 customers in their receipts, an amendment is suggested to  
                 delete the requirement to provide certain, specified  
                 disclosures prior to each transaction, and, instead  
                 require that information to be provided in customer  
                 receipts.  This amendment is intended to help consumers  
                 by eliminating duplicative notifications and avoiding  
                 disclosure overload. 

               f.     This bill provides DBO with far greater enforcement  
                 authority over entities that are not enrolled in the  
                 DCBEP than it does over entities that are enrolled.  The  
                 disparate enforcement power is intended to act as an  
                 incentive to encourage entities to enroll.  However, it  
                 may deprive some enrollees' customers of valuable  
                 consumer protections.  Although steep monetary penalties  
                 may be appropriate for entities that knowingly operate in  
                 California without seeking enrollment, amendments are  
                 suggested to provide DBO with the same level of  
                 enforcement authority against enrollees that this bill  
                 provides it against entities that are not enrolled, but  
                 should be.  

               g.     This bill's requirements related to disclosures and  
                 receipts would benefit from clarification and additional  
                 consumer protections.  For example, a requirement should  
                 be added to ensure that all disclosures and receipts are  
                 made available to customers in a format that allows them  
                 to be printed.  It would also be helpful to clarify  
                 whether required disclosures may be provided via text  
                 message or mobile phone, as is allowed for receipts.   








          AB 1326 (Dababneh)                                      Page 20  
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                 Finally, unless there is clear rationale allowing a  
                 smaller minimum type size on receipts than on  
                 disclosures, both documents should be provided to  
                                                       customers in minimum 10-point type to ensure their  
                 readability.

               h.     This bill requires enrollees to maintain all  
                 advertising and marketing materials, but fails to specify  
                 for how long this material must be maintained.  The bill  
                 also requires enrollees to make their books, records,  
                 correspondence, and related documents available to the  
                 commissioner upon request, but does not expressly require  
                 enrollees to maintain these documents, nor does it  
                 specify for how long these documents must be maintained.   
                 The author is proposing a three-year records retention  
                 requirement.

               i.     A delayed operative date of at least six months, and  
                 possibly up to one year, would be useful to allow DBO to  
                 develop application forms and promulgate necessary  
                 regulations, before digital currency businesses are  
                 required to register with the department.

               j.     There are a handful of typographical errors that  
                 require correction, as follows:

               Page 30, line 19, after "currency," add a comma and the  
                 word "the"

               Page 32, line 39, after site, insert:  address

               Page 33, line 33, strike "and" and insert:  or

        
          9.  Prior and Related Legislation:   

               a.     AB 129 (Dababneh), Chapter 74, Statues of 2014:   
                 Deleted the provision which prohibited any individual or  
                 entity from issuing or putting into circulation, as  
                 money, anything but the lawful money of the United  
                 States.  

               b.     SB 1301 (DeSaulnier), Chapter 694, Statutes of 2014:  
                  Enacted the Social Purpose Corporations Act, and  








          AB 1326 (Dababneh)                                      Page 21  
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                 mistakenly re-added the provision of law that prohibits  
                 any individual or entity from issuing or putting into  
                 circulation, as money, anything but the lawful money of  
                 the United States.  
           
          LIST OF REGISTERED SUPPORT/OPPOSITION
            
          Support
           
          None received
           
          Opposition
               
          Coin Center
          Consumers Union
          Electronic Frontier Foundation
          National Consumer Law Center


                                      -- END --