California's governor issued an executive order requiring state agencies, led by the Department of Financial Protection and Innovation, to create a "transparent" regulatory framework for blockchain technologies and digital assets.
On May 4, 2022, California's governor issued Executive Order N-9-22 ("California EO"), requiring California's Department of Financial Protection and Innovation ("DFPI") "to develop a comprehensive regulatory approach to crypto assets harmonized with the direction of federal regulations and guidance." The order frames California's goal for this regulatory framework as "creat[ing] a transparent and consistent business environment for companies operating in blockchain … that harmonizes federal and California laws, balances the benefits and risks of consumers, and incorporates California's values, such as equity, inclusivity, and environmental protection." The order also acknowledges California's goal of "remaining the premiere global location for responsible crypto asset companies to start and grow" as a priority. At the same time, the order's emphasis on consumer protection demonstrates California's concern that digital assets pose unique risks to consumers and require careful examination.
The California EO contemplates collaboration and consultation with federal regulators, consistent with the federal strategy articulated in the White House's executive order on ensuring responsible development of digital assets. To that end, the California EO requires various state agencies to collaborate on a report that makes recommendations for "[c]reating a regulatory approach to crypto assets harmonized between federal and state authorities, led by DFPI," and includes input from a broad range of stakeholders, as well as "relevant state agencies regarding … the relationship of crypto assets to priorities in energy, climate, and preventing criminal activity."
The California EO specifically directs the DFPI to, among other things:
- Engage with federal agencies and other state financial regulators to promote a common approach that increases the reach of DFPI's consumer protection efforts and reduces unnecessary burdens, if any, on companies seeking to operate nationwide;
- Exercise its authority under the California Consumer Financial Protection Law ("CCFPL") to develop guidance and, as appropriate, regulatory clarity and supervision of private entities offering crypto asset-related financial products and services in conjunction with California stakeholders; and
- Initiate enforcement actions for violations of the CCFPL, enhance its collection and review of consumer complaints regarding crypto asset-related financial products and services, work with companies offering such products and services to remedy complaints, and consult with appropriate law enforcement agencies regarding criminal activity.
Also relevant, in 2018, California passed legislation directed at consumer privacy and cybersecurity, creating a new regulatory framework, which may have unique state-level implications.
We will continue to monitor developments and counsel with clients as more concrete steps are taken in this process.