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Sponsor of California’s Bitcoin bill responds to critics, here’s our take

Opposition to California's proposed digital currency bill is misguided. Here's why. 

California Assemblymember Matt Dababneh, sponsor of the state’s proposed digital currency legislation (AB 1326), has issued a statement excoriating the Electronic Frontier Foundation  for their opposition to his legislation. Coin Center has been transparent from the start when it comes to AB 1326: while the bill began its life unfriendly to Bitcoin and blockchain innovation, it has evolved into a model for sound regulation in this sector, even if it can still be improved. The EFF, silent during the legislation’s early progression, has recently taken a strong position against the bill.

We often find ourselves aligned with the EFF, fellow advocates for permissionless innovation, free speech, and a firm line in the sand with respect to government efforts to compromise encryption standards. That said, we’ve been disappointed with their reluctance to take a cautious and well-researched approach to Bitcoin and its regulation.

EFF’s early opposition to AB 1326 seemed blind to the underlying law that would apply should the bill not pass: state money transmission regulation. They’ve made statements suggesting that there is no immediate danger of the the Department of Business Oversight (DBO, the agency that manages money transmission licensing in California) applying this existing law to Bitcoin companies:

“If your fear is that the DBO or some other agency is just going to walk all over this territory in the interim, they don’t work that fast.”

But they’ve already done so in the past, and Dababneh’s recent remarks should dampen EFF’s optimism that policymakers aren’t in a hurry to enact consumer protection regulation:  

EFF claims that it’s too early to regulate virtual currency. In the last several years consumers have lost over half a billion dollars in virtual currency scams and data hacking. What exactly is the dollar amount necessary for consumers to lose for it to be appropriate to regulate companies that hold virtual currency?

Dababneh, his colleagues in the legislature, and the DBO are, in fact, ready to regulate. The only question is how. Should AB 1326 fail—a failure the EFF has advocated for—then the background law of money transmission will be the controlling law. The DBO will be at liberty to demand that any Bitcoin startup must get a license, just as PayPal, Square, Venmo, or Western Union have always been obliged to do. That licensing law makes no clear exemption for pure software developers, no exemption for miners, no tailored definition to exclude minority key-holders in a multisig transaction—because that law was written long before multisig existed. It is, in short, an old and broadly drafted law. It’s exactly the sort of law that fails to provide innovators with any certainty as to their compliance obligations, while simultaneously unchaining regulators to assume jurisdiction over any company they wish to target.

AB 1326, on the other hand, is carefully tailored to offer guidance to Bitcoin innovators and even exclude many activities from regulation altogether. It’s a welcome foil to legacy money transmission law and even to New York’s BitLicense, the first state-level effort to craft digital currency consumer protection regulation.

Everywhere where the BitLicense overreaches or fails for vagueness, AB 1326 offers an improved approach. The Bitlicense uses a four-pronged, metaphor-laden definition of virtual currency business in order to specify who must be licensed; AB 1326 clearly and succinctly states that only those maintaining full custody or control of bitcoins on behalf of others need license. The Bitlicense offers no guidance as to when a lighter-touch, provisional license will be granted to small start-ups; AB 1326 specifies a one million dollar threshold. The BitLicense never clearly exempts miners or developers of cryptocurrencies; AB 1326 clearly exempts those who contribute computing power, connectivity, or software to these networks. The BitLicense has state-level anti-money laundering recordkeeping and reporting requirements, while AB 1326 is silent with regard to these matters leaving that authority to the Federal government and FinCEN where it rightly and traditionally belongs.              

Coin Center can vouch for Assemblymember Dababneh’s assertion that he has been receptive to those of us in the Bitcoin community who have engaged with him to improve the bill. He says that “Every suggestion they have provided has led to a direct change to AB 1326 or we have otherwise resolved their concerns,” and you’ll certainly find in AB 1236 many of the exemptions we’ve called for in Coin Center’s model state framework, including those that help protect software developers, miners, as well as key innovations like sidechains, which might have been regulated under the original draft’s exchange and conversion language that is now removed.

And as Dababneh notes, “If EFF had more familiarity with California’s financial laws, they would know that the creation of a start-up license for small companies is unprecedented.  Not only is this innovation-friendly provision a first for California, it will establish a model for states to use nationwide.” This is the kind of startup on-ramp Coin Center has been advocating for since our first filing in the BitLicense proceeding.

Perhaps the claim from EFF we’ve been most confused by is that AB 1326 is not a problem “for large, established Bitcoin companies,” but is trouble “for all the other creators, innovators and developers in the virtual currency space[.]” By “large” we assume EFF means relatively large, because even the most well-capitalized Bitcoin companies are tiny in the financial services space and even the “FinTech” space. But more to the point, who are these small innovators and how exactly would AB 1326 harm them?

Like Assemblymember Dababneh, we too have met with diverse individuals and companies in the space—large and small—to ensure that AB 1326 not repeat the mistakes made in New York, and not stifle the innovation that thrives in a permissionless landscape. And our colleagues, supporters, and friends have widely applauded the bill’s evolution. To this day we don’t know which small companies EFF claims to be sticking up for. And we can’t imagine that such resistance would be wise, given the unfortunate reality that regulation under existing money transmission law would be less forgiving, less clear, and less comprehensible — particularly to a garage innovator without access to expensive legal representation and counsel. Even Coinbase, one of the largest players in the space had to recently cease all operations in Wyoming because the banking regulator there applied the existing legacy money transmission law without any modifications, exactly the outcome that EFF is advocating for in California by opposing AB 1326.

It can be cathartic to yell and protest, to take the firm though unpragmatic position. Be there no mistake, were we in a world without existing money transmission law, a world where Bitcoin businesses weren’t already regulated, we’d count EFF as our closest ally in this fight. But we are not in that world, and EFF needs to wake up to that reality.

Aggressive opposition to AB 1326 is tantamount to advocating that Bitcoin be regulated under the same antiquated laws that have made the online payments space a wasteland in the otherwise vibrant landscape of the Internet. The new electronic frontier is the blockchain, and it would be a shame if it was saddled with antiquated law simply because a knee-jerk reaction destroyed the opportunity for democratic compromise.

Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permisionless blockchain technologies.