California’s Push For Regulatory Clarity On Crypto Assets & Potential DFPI Enforcement

Fort Lauderdale, Fla. (May 10, 2022) – In an
effort to promote regulatory clarity and establish a
“comprehensive, thoughtful, and harmonized regulatory and
business environment for crypto assets,” California Governor
Gavin Newsom issued California Executive Order N-9-22 on May 4,
2022 (the Order). California is currently the largest hub in the
United States for crypto and digital asset related companies and
home to two of the largest cryptocurrency exchanges in the world.
The executive order is noteworthy because it is among one of the
first state-led efforts to push for regulatory clarity and may
serve as a framework for other states.

Concurrent with the federal strategy articulated in President
Biden’s Executive Order No. 14067, issued on March 9, 2022
(“Ensuring Responsible Development of Digital Assets”),
California’s Order directs state agencies to concentrate on
four critical areas:

1. Collecting input from crypto and blockchain stakeholders;
2. Creating a regulatory framework with respect to crypto-related
   assets that is “harmonized” at the federal and state
   level;
3. Exploring and establishing public service use cases; and
4. Building research and workforce pipelines, led by the
   governor’s Council for Postsecondary Education.

The Order also requires that certain state agencies provide a
report to the governor’s office within 60 days of the federal
publication with respect to the “report on the future of money
and payment systems” outlined in section 4 of the federal
Exec. Order No. 14067.

Enforcement Provisions

The Order has a heavy emphasis on consumer protection, as well
as monitoring and implementing solutions for potentially negative
consequences associated with crypto assets, such as energy
consumption and environmental impact. To protect consumers,
California’s Department of Financial Protection and Innovation
(DFPI) is also being directed for the first time to initiate
enforcement actions as appropriate to:

• stop violations of the California Consumer Financial Protection
  Law (CCFPL);
• enhance collection and review of consumer complaints related to
  crypto assets and financial products and services;
• work with crypto companies to remedy complaints; and
• consult with appropriate law enforcement agencies regarding
  criminal activity.

Previously, the DFPI has only published filed consumer
complaints and issued advisory opinions with respect to
cryptocurrency and digital assets.

The Order does not provide any detail on what violations of the
CCFPL may be at issue or what crypto-related companies should be on
the lookout for. The Order does state that consumer protection
principles shall be published and the DFPI’s expectations of
California’s state-chartered banks and credit unions as related
to crypto-related assets are to be published by March 31, 2023. The
California Order, in addition to laws and regulations promulgated
in New York and Illinois, is among the first major efforts to
address the issues surrounding the intersection of digital assets,
cryptocurrencies, and banking.

Identifying New Crypto Opportunities

Finally, the Order encourages members of the governor’s
Council for Postsecondary Education to identify opportunities to
create a research and workforce environment that can explore and
power blockchain tech and crypto assets. This is to be achieved
primarily through exposing students to opportunities in emerging
industries, creating a pipeline of talent. The Order also
emphasizes the generation of basic and applied research to continue
leading on future generations of blockchain tech.

Individuals and businesses with ongoing concerns related to
cryptocurrencies and or digital assets in the State of California
are encouraged to submit public commentary regarding proposed
regulations to the DFPI by June 3, 2022.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.