Crypto Kiosks, Licensing Are Targets for California Lawmakers

The cryptocurrency sector could be the subject of new regulation in California, and industry lobbyists are pushing back to ensure their businesses can still operate under new proposed scrutiny.

The Golden State, home to nearly a quarter of the blockchain companies in North America, is trying to regulate the sector after last year’s collapse of the FTX exchange and other turmoil in the cryptocurrency market. With no looming federal action, state legislators want to put in a basic regulatory framework.

Some California lawmakers are already eyeing other aspects of the diverse industry that have yet to face regulation, from non-fungible tokens, or NFTs, to decentralized autonomous organizations, orDAO. Those more complicated bills and topics, however, won’t be revisited until next year.

“That (legislative activity) really is opening up the conversation moving from a reactive space to leadership in terms of how we’re talking about what to do in California,” said Charles Belle, executive director of the Blockchain Advocacy Coalition, a California-focused policy group supporting blockchain, which is how cryptocurrencies transactions are recorded. “These are great questions to have.”

Licensing Bill Sees Some Changes

The main legislative focus is to replicate New York’s crypto licensing system with their own state measure (A.B. 39) that is awaiting an Assembly floor vote. The bill is likely to easily sail through as many lawmakers share the sentiment that consumers need to be protected with licensing and documentation requirements that allow more oversight.

“It’s clear that licensure is the next natural step for this industry,” said Assemblymember Timothy Grayson (D), author of the bill and chair of the Assembly Committee on Banking and Finance. “And it is equally clear that until we take that step, Californians will continue to be vulnerable to prevalent and preventable financial scams.”

The bill’s biggest hurdle is Gov. Gavin Newsom (D), who vetoed a substantially similar bill last year and has advocated for innovation in the blockchain space. Officials in his administration previously saidthat the state Department of Financial Protection and Innovation is already working on a foundation for a regulatory framework as agency staff have concerns over costly and administrative burdens the bill would impose on the department.

Lawmakers expressed frustration with what they perceived as a slow response by the department at a February informational hearing. The department, according to a spokesperson, missed a promise in March to issue crypto guidelines for banks and credit unions because it’s been preoccupied with recent prominent bank failures.

Grayson in the meantime has been streamlining requirements in his bill to make it easier for both the department and applicants to adhere to the proposal. He removed, for instance, a 24/7 customer service requirement and the need for certain disclosures to consumers.

But industry groups contend the revisions are not enough, arguing that it would duplicate the onerous and long licensing process of New York.

The Crypto Council for Innovation, which represents companies like Coinbase Global Inc. and Gemini Trust Co. LLC, asked Grayson to include concrete timelines for the application process to be approved, as well as a narrower definition on what activities require licensure. Industry groups have voiced concerns with the measure’s conditional ban on stablecoins, whose values are tied to currencies such as the U.S. dollar or commodities like gold. The collapse of a stablecoin in 2022 resulted in a domino-effect among several other crypto firms.

“The question is whether California has the ability to absorb these series of applications. How long does it take for them to absorb? It takes time,” said Belle. “That takes money, right? Smaller companies don’t have the resources to wait a year for those profits to occur. You’re just going to leave.”

Kiosk Crackdown

Lawmakers also want to protect Californians from crypto kiosks—ATM-like machines where one can buy or exchange cryptocurrency—under legislation by state Sen. Monique Limón (D), who chairs the Senate Banking and Financial Institutions Committee. Kiosk operators would have to provide a list of kiosk locations to the Department of Financial Protection and Innovation and detailed receipts to consumers under her bill (S.B. 401).

More importantly, the measure would put caps on the fees a kiosk can charge and on the amount a consumer can exchange. Fees would not be able to exceed $5 or 2% of the transaction value. A state resident wouldn’t be able to buy or get more than $1,000 per day from a kiosk under the bill.

Consumer advocates argue the limits would serve as a good safeguard for the state’s 3,500 kiosks, which they claim attract less technologically savvy people into a risky sector. They allege the kiosks have been used for scams and other fraudulent activity.

Crypto groups argue the limits under the bill would pose a serious threat to the existence of the industry, which relies on kiosks as an important way for customers to access and partake in the digital economy. The bill’s limits would push operators out of business, they contend, because they would not be able to make profit from the machines.

Limón has said she’s willing to consider more flexibility around the limits in her bill, which the Senate passed on Wednesday.

Delayed For Next Year

Other minor bills are also advancing, such as a measure that would expand the definition of money laundering to include illegal actions via blockchain technology (A.B. 76) and legislation that would possibly lead to blockchain training at state community colleges (S.B. 711). Both are awaiting floor votes in their respective chambers.

Lawmakers will revisit the topic of digital assets next year, regardless of whether the licensing bill passes or not. That includes a measure by Assemblymember Evan Low (D) that would regulate NFTs (A.B. 1336) and put disclosure requirements around the tool used to record digital ownership. Another bill by Assemblymember Matt Haney (D) would give legal standing to DAOs—groups of investors who contribute money into a shared crypto bank account and collectively decide how to spend or invest it—to help prop up the sector (A.B. 1229).

Those measures were sidelined until next year to give lawmakers and staff more time to understand and fully analyze their impact.

“We look forward to educating and gathering more information and continuing the legislative process early next year,” said Nate Allbee, a spokesperson for Haney’s office.

To contact the reporter on this story: Titus Wu in Sacramento, Calif. at twu@bloombergindustry.com

To contact the editors responsible for this story: Bill Swindell at bswindell@bloombergindustry.com; Stephanie Gleason at sgleason@bloombergindustry.com