Significant developments in the regulation of virtual currency in California

California Digital Financial Assets Law (DFAL)

AB 39, known as the California Digital Financial Assets Law (DFAL), establishes a comprehensive licensing and supervision regime for “digital financial asset business activity.” Specifically, entities engaging in, or holding themselves out as engaging in, such activities with or on behalf of a California resident must obtain a license from the California Department of Financial Protection and Innovation (the Department.)

Effective July 1, 2025, entities subject to the DFAL must be licensed or have a pending license application awaiting approval. The application process parallels the California money transmission statute, but includes certain requirements that are more extensive, particularly in the area of required policies and procedures. Also similar to the money transmission statute, the DFAL is primarily focused on customer protection and requires licensees to maintain a surety bond, maintain sufficient capital and liquidity to ensure the financial soundness of the entity, and own certain assets of not less than the aggregate amount of all outstanding liabilities owed to customers. Licensees must also file annual and event-driven reports and maintain various enumerated records. Finally, licensees are subject to various disclosure and notice requirements. 

The DFAL has several distinct aspects. First, it imposes additional requirements on covered digital financial asset exchanges. Obligations for these covered exchanges include several enumerated requirements prior to listing or offering a particular digital financial asset, as well as using reasonable diligence to ensure best execution for residents considering prevailing market conditions. In addition, the DFAL includes specific provisions and restrictions for licensees who engage in activities involving stablecoins, requiring both issuer licensing/regulation and the full backing of stablecoins.

Digital financial asset transaction kiosks law (SB 401)

Takeaways

The enactment of the DFAL and SB 401 signifies a considerable expansion in California's regulation of virtual currency-related activities. Market participants are encouraged to review and assess the applicability and impact of these laws on their operations, and determine the need for compliance and licensing under the laws. It is also advisable to consider engaging with the Department during the rulemaking process, and, for those considering licensing under the DFAL, to consult with legal and regulatory experts to prepare for the application and licensing process.

Please see our client alert for a more in-depth discussion on the DFAL and SB 401.