New California digital currency bill is a step backwards

The California Legislature has released a new version of AB 1326 [PDF], and it’s bad news for anyone who loves Bitcoin and blockchain technology. In the past we expressed our support for the California bill, but the new version is completely different than the bill we helped craft and once supported. We have grave concerns about the new language. Worst of all, with the legislative session ending on August 31, there will be little chance to discuss that language or alter it to be less damaging to our community. Nonetheless, here are our concerns:

No clarity for businesses still wondering about California Money Transmission Law

The bill seeks to create regulatory clarity for businesses who have long been in a sort of regulatory limbo when it comes to money transmission law in California. The Department of Business Oversight (DBO, the regulator who enforces money transmission law and would also enforce this bill if passed) has refused to grant digital currency businesses money transmission licenses and has also refused to issue an authoritative statement saying that such businesses do not need to license. The new bill is silent on the question of money transmission licensing—preserving that uncertainty—and instead sets up a new and separate enrollment scheme with which businesses will also have to comply.

Enrollment is the same as licensing, make no mistake

The bill is framed as an “enrollment” scheme rather than a license. While that sounds pleasant, the substance is the same: all parties engaged in covered activities in California or with California customers must enroll. Enrollment costs $5,000 and failure to enroll can result in fines of up to $25,000 per offence. The DBO can levy fines or revoke one’s enrollment without judicial review. If you are not allowed to do X unless you get Y from the state, then—”enrollment” branding aside—you might as well call Y a state license to do X.

Almost everyone might need to enroll

The bill has a loose definition of “digital currency business” and can easily be interpreted to mandate “enrollment” of several parties beyond the exchanges and hosted wallet providers who we can all agree present genuine consumer protection risks to customers. The bill would cover multi-sig and key-recovery providers who do not have sufficient keys to transact. It could* cover those who run full-nodes, those who mine digital currencies, and those who participate in off-chain payment channels like the lightning network. It would cover those who develop new digital currencies and “issue” new tokens, or companies that help build scaling solutions like sidechains. It could even cover a host of activities that constitute nothing beyond developing and running free and open source software on an internet connected computer.

Permission required to innovate, develop, code, or network

These non-custodial participants develop and provide fundamental infrastructure to cryptocurrency networks. Without these services and technologies, the network as a whole is less secure and less capable of providing real improvements in speed and efficiency over traditional payments system. Customers of businesses using these networks will, as a result, be harmed by an “enrollment” process that chills these innovations. Restricting the ability of Californians to participate in these activities without first enrolling in a regulatory program reduces the ability of Californians to learn about these new technologies, experiment with them, and innovate. An “enrollment” scheme for merely running software is antithetical to the permissive and inclusive culture of innovation for which California has become globally renowned.

In short, we are disappointed in the latest evolution of AB 1326. None of these problems were present in the last version of the bill. We are also wary of the short amount of time remaining in the legislative session.

We are in contact with the state legislature and are providing them with detailed analyses of the new bill language. We hope that our advice will be heeded and the bill will be amended to cover only those parties who, as custodians of consumer funds, take on a position of trust, and that once covered by this bill they will be exempt from money transmission law. If we can’t achieve these changes in short order, we’ll have to work together to oppose this new anti-innovation bill.

* In an earlier version of this post we said “would” cover. “Could” is more accurate becuase the bill as currently drafted is contradictory on this question. We are heartened that in the exemptions section an effort has been made to exempt those who provide connectivity or computing power to the network, e.g. miners or those running full nodes. However, this exemption is confounded by a definition of “transmitting” that appears to have no target other than these exempted parties. We can think of no entity that “transmits” but does not also store credentials (an activity already covered in the defintion of “storing”) other than, perhaps, miners, full-nodes, lightning nodes, and internet service providers. So either the definition covers only parties who are intended to be exempted or it covers no one. There are rules of statutory interpretation that forbid interpreting a passage of law to mean effectively nothing (called the rule against surplusage) so we are wary of a section that appears to have no added meaning and could be interpreted to trump the exemptions we’ve argued in favor of with respect to some non-custodial entities like miners and full-nodes. Thanks to John Light for bringing this issue to our attention.