California invites comments on the new Digital Financial Assets Law

Published Date
Dec 5, 2023
On November 20, 2023, the California Department of Financial Protection and Innovation (the Department) issued an invitation for public comments (the Invitation) on potential rulemaking related to the newly enacted Digital Financial Assets Law (DFAL). The DFAL, which was signed into law on October 13, 2023, establishes a comprehensive licensing and supervision regime for “digital financial asset business activity” in California. Please see our client alert for a more in-depth discussion on the DFAL.

The Invitation presents an invaluable opportunity for those affected by the DFAL to contribute their thoughts, insights, and concerns, and potentially influence various aspects of the regulatory framework that may govern digital financial asset business activities in California.

The Invitation sets out a series of topics and related questions, each designed to elicit constructive feedback from the commenters. First, it seeks comments on several questions related to the DFAL’s license application process, including the information that should be required as part of the application. It also addresses aspects of the application fee and related investigation costs that should be clarified through rulemaking.

Next, the Invitation seeks comments related to certain of the DFAL’s customer protection-related requirements, including those related to maintaining a surety bond, as well as sufficient capital and liquidity. As to the capital requirement, the DFAL requires that a licensee maintain capital and liquidity in an amount and form as the Department determines sufficient to ensure the licensee’s financial integrity. The DFAL sets forth nine (9) factors that the Department may consider when determining the minimum capital amount, including the composition of the licensee’s total assets and liabilities, regulated activity volume, the types of products or services offered, and arrangements for customer protection in the event of insolvency. The Department seeks feedback on the sufficiency of the enumerated factors and whether additional factors are needed (and if so, what those should be).

Finally, the Invitation invites comments on various facets of the stablecoin approval process. Notably, the DFAL dictates that a licensee may only engage in regulated activities with a stablecoin if the stablecoin issuer is licensed under the DFAL (or is a regulated bank or trust company) and fully backs the stablecoin. The exception to this is when the Department has approved the stablecoin in accordance with the DFAL. The Department is seeking insights into, among other things, the factors it should weigh when approving a stablecoin, as well as the conditions and restrictions it may impose on a stablecoin issuer or a licensee as a condition of approval of the stablecoin.

The DFAL will have significant implications for the digital asset industry, industry participants, and their customers. It is therefore important for market participants to actively participate in the rulemaking and implementation process by sharing their insights, perspectives, and concerns with the Department prior to the conclusion of the comment period on January 12, 2024.

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This content was originally published by Allen & Overy before the A&O Shearman merger