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.
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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
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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
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