The Digital Financial Assets Law seemed like a legislative slam dunk in California for critics of the crypto industry.
But strong bipartisan support — it passed 71-0 in the state assembly and 31-6 in the Senate — wasn’t enough to convince Gov. Gavin Newsom that requiring crypto companies to register with the state’s Department of Financial Protection and Innovation is the smart path for California.
After months of “extensive research and outreach,” Newsom said Friday, he came to the conclusion that “a more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm.”
With debates over how to regulate digital assets underway in D.C., he also argued that “it is premature to lock a licensing structure in statute without considering … forthcoming federal actions.”
The bill’s proponents blasted the veto.
“Crypto Bros 1, Consumers 0,” the Consumer Federation of California, the bill’s sponsor, said in a statement.
“Strong bipartisan majorities in the Legislature and a broad coalition of support apparently aren't as important as the opposition of some rich crypto bros and big tech,” executive director Robert Herrell said.
Assemblymember Tim Grayson, who introduced the bill, denounced the crypto market for being as “underregulated at best and deliberately rigged against everyday consumers at worst,” arguing that “a financial market cannot be considered healthy if there are no guardrails in place to protect consumers from scams and bad actors.”
The crypto industry, on the other hand, was ecstatic.
Jake Chervinsky, the Blockchain Association’s head of policy, said in a tweet that Newsom “deserves serious respect for making the right call,” adding that what the California governor did “takes guts, & he did it for all the right reasons.”
Katherine Dowling, general counsel and chief compliance officer at Bitwise, agreed, saying, “The veto is 100% the right decision and his reasoning is spot on.“
“The bill would have been harmful to current crypto businesses and innovation in the state of California,” she told Protocol. “We need collaboration and discourse to establish clear, purpose-built regulations, not a patchwork quilt of potentially competing and conflicting regulations.”
The crypto industry had warned that California could end up repeating the mistakes of New York, where a controversial licensing requirement for crypto companies ended up driving major companies like Kraken out of the state.
“There’s always a risk that overregulating any new industry stifles innovation in a way that even the regulator may come to regret,” Omid Malekan, who teaches blockchain and cryptocurrencies at Columbia Business School, told Protocol. “This is particularly true for crypto because it is a global industry.”
Miles Jennings, general counsel for crypto at Andreessen Horowitz, praised Newsom for demonstrating “a strong show of support for the Web3 industry,” adding in a tweet, “He’s given us a great opportunity to help CA lead Web3.”
But it’s not clear if Newsom’s move signals an indefinite laissez-faire regime in the Golden State.
Newsom actually offered a more nuanced explanation for the veto. He noted that he shared the bill’s “intent to protect Californians from potential financial harm while providing clear rules for crypto-businesses operating in this state.”
He cited financial reasons for rejecting the plan, saying “standing up a new regulatory program is a costly undertaking, and this bill would require a loan from the general fund in the tens of millions of dollars for the first several years.”
Suzanne Martindale, head of California’s Division of Consumer Financial Protection, had also cited the challenges of setting up a new licensing structure, saying in a June interview with Protocol that the DFPI would have to “pivot quite substantially to implement a new licensing program that may indeed override some of the work that we were contemplating doing on the regulatory and administrative level.”
The DFPI had no comment on Newsom’s veto. But in her earlier interview, Martindale had suggested that a new licensing program, besides being potentially expensive and complicated, may not even be necessary.
She said existing state law already gave the state “broad definitional jurisdiction over financial products and services.”
“Starting at the high level, I am not someone who says, ‘Oh, there’s a new technology involved. Therefore, we need entirely new laws,’” she said. But California regulators, she stressed, “know we need to act … We are getting complaints where people are just straight-up being defrauded,” she added.
Marc Fagel, the SEC’s former regional San Francisco director, said the Newsom veto highlights the dilemma faced by states in figuring out how to deal with crypto.
“Crypto is proving a difficult high-wire act for legislators and regulators,” he told Protocol. “I suspect they’re all trying to balance well-justified concerns about crypto’s legitimacy and hazards with the political risks of regulating something which is proving popular and lucrative. And as usual, it falls on enforcement bodies to clean up the messes.”
