California’s crypto rules: Newsom vetoes licenses

Is crypto golden in California?

California gave crypto a gift — then followed it up with a warning.

Crypto scored a huge victory after Governor Gavin Newsom vetoed a bill that would have required digital asset companies to obtain a state license. But three days later, the Golden State sent a strong message to crypto companies that there are rules for companies handling customers’ money, and that regulators will go after anyone who ignores them.

Suddenly, Newsom is seen as a champion of crypto. The crypto license proposal enjoyed overwhelming support in the California legislature. Newsom shot it down, quickly gaining praise in the crypto boom.

• Getting crypto companies to get licenses was a popular idea in the wake of a market crash that saw consumers lose their savings. That is why the Blockchain Association’s Jake Chervinsky praised Newsom’s “courage” for vetoing the bill, which the industry warned would cause more problems than it solved.
• Chamber of Progress CEO Adam Kovacevich said the veto gives California “a chance to take a less rushed, more inclusive approach to developing crypto regulations,” adding that “there’s a huge opportunity in the next few years for California and other states to get crypto regulation. Right.”
• Miles Jenningsgeneral counsel of a16z crypto, celebrated Newsom’s “strong support for the Web3 industry,” declaring, “He has given us a great opportunity to help CA lead Web3. Time to make it happen!”

Within days, California’s economic watchdog fired a warning shot. Any hopes that the Newsom veto meant that crypto would generally have an easier time in California were dashed considerably with news that a state regulator had joined a multi-state offensive against a popular and lucrative segment of the crypto industry.

• The California Department of Financial Protection and Innovation joined New York and six other states in taking legal action against crypto lender Nexo, which they accused of allowing consumers to deposit crypto assets in exchange for interest rates as high as 36% without registering the products as securities and provide important information to customers.
• DFPI Commissioner Clothilde Hewlett said the “aggressive enforcement action against unregistered interest-bearing cryptocurrency accounts” is aimed at enforcing “investor protections under the law, including adequate disclosure of the risks involved.”
• New York Attorney General Letitia James, whose office accused Nexo of misleading investors, said: “Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms.”

In vetoing the licensing bill, Newsom said “a more flexible approach is needed to ensure regulatory oversight.” The state’s main financial regulator just sent the message that they don’t need a licensing law to go after bad actors in crypto.

—Benjamin Pimentel (e-mail | twitter)

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