Gavin Newsom’s Difficult Crypto Timing

Governor Gavin Newsom is one of the Democratic Party’s most prominent promoters and defenders of blockchain and crypto technology. But Newsom’s recent efforts to boost the sector and stave off new regulation at the state level have suffered from awkward timing.

In May, Newsom issued an order seeking to advance blockchain research, spur innovation and explore how the technology can be used in government. Days later, two prominent cryptocurrencies imploded and the crypto markets collapsed. Less than two months later, The Celsius networkone of the largest cryptocurrency exchanges, declared bankruptcy, affecting more than 48,000 Californians with assets worth $650 million.

After the Celsius debacle, a new state-level effort to regulate the industry surged through both chambers of the California legislature, passing on August 30 with just six dissenting votes.

Three weeks later, Newsom vetoed the bill, claim that it was “premature” for the state to move forward without considering “imminent federal regulation.”

Newsom’s unfortunate timing soon struck again. In the months since his veto, crypto exchange FTX has filed for bankruptcy, former FTX CEO Sam Bankman-Fried (one supporter of Newsom’s order) is charged with several federal crimesand crypto prices have fell further. Despite Newsom’s expectations, federal legislation regulates the nascent, but volatile, crypto industry remains in limbo.

Newsom has not expressed regret for the veto. In an interview, he said his executive order had not gone “as far as many in the industry would have liked,” noting that California had taken a different approach than New York, which has pursued particularly strict crypto regulation, as well as Wyoming, which has such a relaxed regime that it has been described as “Delaware of digital assets.”

“I think California’s approach was a sober approach,” Newsom said. “We tried to … look at this through the prism, long-term, of how this is going to fundamentally change things, especially in the financial sector. Blockchain in particular is something that I see just becoming more and more dominant in our lives.”

In Sacramento, however, lawmakers and advocates who pushed California’s last attempt to regulate blockchain and crypto aren’t convinced the state has struck the right balance, and are gearing up to try again.

“During the last legislative session, the industry expressed concerns about the costs of complying with fair and reasonable rules,” said Assemblyman Tim Grayson, chairman of the Banking and Finance Committee and author of AB 2269, the bill Newsom vetoed. “As we now know, the cost of doing nothing is that much higher: real people get hurt.

“I appreciate the industry stakeholders who have already come to me in good faith to work toward policies that promote responsible innovation while protecting consumers,” Grayson added.

Industry stakeholders have been eager to weigh in in the past. payment processors Block Inc., Paypal and Stripe; financial giants Fidelity and JP Morgan Chase; non-functional token marketplace OpenSea; crypto financial services firm Blockchain.com; crypto exchange Coinbase; software giant Salesforce; and trade groups including the Electronic Transactions Assn., TechNet and the Blockchain Advocacy Coalition spent more than $400,000 combined lobbying the Assembly, the state Senate, the executive branch and Newsom himself between April 1 and the end of August, according to the California lobbying agency.

All of these organizations lobbied on the crypto regulation bill Newsom vetoed. In an opposition letter to Grayson, the bill’s author, the Blockchain Advocacy Coalition wrote that the bill needed “greater clarity and flexibility” to prevent potential “stifling of a nascent but promising industry.” The coalition also objected to “vague definitions” of digital asset terms and “burdensome registration requirements.” Others in the cryptocurrency industry saw the bill as a job killer that would drive innovation out of California and undermine the Newsoms verdict.

Any new legislative effort to regulate the industry is likely to be met with another setback for Sacramento’s top lobbyists, warned Robert Herrell, executive director of the Consumer Federation of California, a nonprofit advocacy group that was a big supporter of the bill Newsom vetoed.

“[Big Tech companies] have almost unlimited resources, and they constantly seek favors with elected officials at all levels, Herrell said. “It gives them access that consumers don’t have. None of the people left with the bag after Celsius [and FTX] went under has that kind of access.”

Salesforce lobbied Newsom directly on NFTs and blockchain technology, according to the report the company’s lobbying activities. On May 18, Salesforce gave Newsom a $130 dinner, the lobbying report shows. The report does not say whether the lobbying in question occurred during the dinner, but a Salesforce spokesperson said it did not. Marc Benioff, the billionaire CEO of Salesforce, is a close friend of Newsom and the godfather of the governor’s oldest son.

Newsom views NFTs and blockchains separately from cryptocurrencies and does not recall crypto being discussed at the Salesforce dinner, he told The Times.

“I didn’t even know they had any interest in that area, Salesforce in particular, so that’s news to me,” Newsom said. “I know so many people from Salesforce, including Marc Benioff. I was just with Marc and we didn’t have a conversation about crypto.”

The bill Newsom vetoed would have required cryptocurrency exchanges to disclose their assets and financial stability, temporarily banned a category of cryptocurrency called unbacked or “algo” stablecoins and required companies that trade in cryptoassets or manage clients’ money to be licensed with the California Department of Financial Protection and Innovation by January 1, 2025.

Newsom said in his veto statement that his administration “conducted extensive research and outreach to gather input on approaches that balance the benefits and risks to consumers.”

But Newsom and his top aides did not meet with the Consumer Federation of California, Herrell said.

Herrell was proud that he was able to build a broad coalition of “strange bedfellows” to support the crypto regulation bill, he said. “We worked behind our backs to build that coalition,” Herrell said. “The events of the last few months have just confirmed what many of us already knew, which is that this is a Wild West marketplace in crypto. It lacks basic basic rules of the road and basic basic consumer protections.”

Newsom’s veto indicated he was counting on federal action to enact those driving rules. But with Bankman-Fried — the main force pushing for regulatory change in Washington — faced with federal indictments, and Republicans set to take control of the House of Representatives, congressional action on crypto regulation appears unlikely in the short term.

In retrospect, Newsom’s veto of crypto regulation in California “looks pretty bad,” the rep said. Brad Sherman (D-Northridge), one of the leading anti-crypto voices in Congress.

“In general, we don’t like people getting scammed, and the Securities and Exchange Commission is moving slowly,” Sherman, who wants crypto to be banned, told The Times. “Congress is an immobilized mess, and state legislatures can step in and at least make sure that when you invest in something really bad, you don’t get ripped off. If you’re going to keep other people’s money, you have to be regulated and audited and bound.”

Newsom appears to have swung a bit in the wake of the FTX crisis. Last month, his office issued one management report which looked at the ramifications of his crypto executive order. The report found that people who have historically been underserved by the traditional banking industry “have fallen victim to hacks, scams, fraud and product collapses.” It also cited three major risks involved in the crypto market: fraud, misinformation, and privacy and security.

The California legislature is moving forward. Grayson has already introduced one new bill, AB 39which would force all companies involved in money transfers — a definition that would include crypto companies — to register with state financial regulators.

State Sen. Monique Limón (D-Goleta), chair of the California Senate Banking and Financial Institutions Committee, appears poised to take up a new version of the bill Newsom vetoed — or move on.

“If all crypto companies followed the consumer protection provisions of AB 2269, I am sure that California consumers and retail investors would be exposed to fewer risks in this area,” Limón told The Times. “I look forward to working with Chairman Grayson as he leads legislative efforts that prioritize California consumers in the upcoming legislative session.”

Times staff writer Taryn Luna contributed to this report.