California Bill Would Regulate Digital Financial Assets, But Leaves Status Under Securities Laws Unanswered

In June, I reported that Assemblymember Grayson had gutted and amended AB 2269 to establish a "Digital Financial Assets Law" to be administered by the Department of Financial Protection & Innovation.   The bill was amended earlier this week to, among other things, extend the deadline for licensing to January 1, 2025.  If enacted, the DFAL would prohibit any person from engaging in "digital financial asset business activity", or holding itself out as being able to engage in "digital financial asset business activity", with or on behalf of a resident (as defined) of California.   The bill defines a "digital financial asset, with certain exceptions, as a "digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender" and "digital financial asset business activity" as any of the following:

• Exchanging, transferring, or storing a digital financial asset or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor.

• Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.

• Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:

  • A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.

  • Legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.

Currently, there is no consensus among industry participants, practitioners, and regulators on the status of digital/crypto financial assets under federal and state securities laws.  It is therefore noteworthy that AB 2269 would not apply to "the exchange, transfer, or storage of a digital financial asset or to digital financial asset administration to the extent the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) govern the activity".   The great unanswered question, therefore, will be whether a particular digital financial asset is or is not a security.   Even if a particular digital financial asset is a security, what does it mean for an activity to be governed by these securities laws?  If transaction is exempt, or not subject to, registration/qualification, is it nevertheless "governed by" these laws because it is subject to their anti-fraud provisions?