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 ----------------------------------------------------------------- |Author: |Dababneh | |-----------+-----------------------------------------------------| |Version: |August 8, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- 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 AB 1326 (Dababneh) Page 2 of ? 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 AB 1326 (Dababneh) Page 3 of ? 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 AB 1326 (Dababneh) Page 4 of ? 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 AB 1326 (Dababneh) Page 5 of ? 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 AB 1326 (Dababneh) Page 6 of ? 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. AB 1326 (Dababneh) Page 7 of ? 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 AB 1326 (Dababneh) Page 8 of ? 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. AB 1326 (Dababneh) Page 9 of ? 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 AB 1326 (Dababneh) Page 10 of ? 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 AB 1326 (Dababneh) Page 11 of ? 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. AB 1326 (Dababneh) Page 12 of ? 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, AB 1326 (Dababneh) Page 13 of ? 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 AB 1326 (Dababneh) Page 14 of ? 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 currencythe ability to execute a digital currency transaction on behalf of a customer, or the ability to prevent a AB 1326 (Dababneh) Page 15 of ? 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 AB 1326 (Dababneh) Page 16 of ? 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 AB 1326 (Dababneh) Page 17 of ? 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 AB 1326 (Dababneh) Page 18 of ? 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 of ? 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 of ? 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 of ? 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 --