California consumer protection body eyes regulating digital currencies

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Non-profit advocacy group The Consumer Federation of California (CFC) has sponsored a bill seeking to establish a new licensing regime for digital currency service providers operating in the state.

The bill was introduced on the house floor by Assemblymember Timothy Grayson at the end of January. Aimed at preventing losses for Californian digital asset investors, the Digital Financial Assets Law will require virtual currency companies to seek a license with the California Department of Financial Protection and Innovation (DFPI).

“It’s clear that licensure is the next natural step for this industry,” Grayson said. “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 is CFC’s second attempt at launching a licensing regime for the virtual currency industry following the vetoing of the first bill by Governor Gavin Newsom. In a press statement, the CFC notes that the proposed legislation makes several salient modifications regarding the powers of the DFPI while making the financial regulator’s ability clear and transparent.

The bill is expected to have its first hearing in April, and if it scales through all the legislative hurdles, it will come into effect on January 1, 2025. With the support of the Senate Democratic Caucus Chair and Chair of the Senate Committee on Banking and Financial Institutions, the CFC remains optimistic that the bill will not suffer the same fate as its predecessor.

“The bankruptcies and scams of the past year only bolster our collective interest in ensuring basic and foundational consumer protections in this marketplace, which has up to now looked like the Wild West in terms of ‘anything goes’ behavior by key players in the cryptocurrency industry,” said Robert Herrel, CFC’s executive director.

California has been grappling with its own fair share of bad actors

The DFPI, California’s leading financial watchdog, has been working around the clock to crack down on the activities of bad actors in the space. In July 2022, the regulator announced that it was investigating digital asset lenders BlockFi and Voyager Digital for breaching extant rules on unregistered securities.

“Crypto-interest account providers are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance,” said the DFPI.

The regulator heightened the intensity of its crackdown after flagging 17 virtual currency websites for defrauding thousands of residents. The DFPI’s move was accompanied by warnings urging citizens to exercise caution before investing in virtual currency investment schemes as losses exceeded over $1 million.

Watch: Law & Order – Regulatory Compliance for Blockchain & Digital Assets