California feels, rather than licensing virtual currency businesses, it should enroll them in a program to help the state learn more about the technology.
Last year Bill 1326 was introduced to license virtual currency businesses (the Initial Bill) but it was discontinued. The Initial Bill has since been revised and re-submitted to the legislature (see here amended text) (Revised Bill).
The Initial Bill aimed to devise a specific regime for virtual currency outside of standard money remittance licensing. This involved the regulator setting a discretionary level of capitalisation, prescriptive reporting and audit requirements.
The main difference between the Initial and Revised Bill is the intended purpose of the legislation; one is a licensing regime and the other devised to promote fact-gathering.
This overt slant towards observing or learning more before regulating is in-keeping with a non-interventionist trend by regulators within the virtual currency sector.
The EU Commission is to set up a task-force to learn about virtual currency businesses. The key difference between the EU task-force is that the Californian Digital Currency Business Enrollment Program (CDCBEP) is compulsory.
So in some ways you could view the CDCBEP as a regulatory Sandbox for VC businesses; the requirements on VC businesses are light touch and, in return for not overburdening start-ups, the regulator gets a front-seat to observe and learn about the technology, opportunities, risks without the burden of having to regulate the entities.
The Commissioner of Business Oversight (CBO) will have their own budget to conduct their virtual currency research work. The enrollment fees of USD5k per enrollment and an annual fee of USD2.5k will be added to the budget for the CDCBEP and this budget must be spent “for the purposes of the program“.
One area to be clear about is that the process of enrollment should not be considered trivial. There is still an entry criteria, ongoing requirements to adhere to by the enrollees.
Indeed the Commissioner can refuse an enrollment if the applicant and or related parties, in its view, is/are not of good character. Also, the applicant has to provide fingerprints and all changes of control will require the Commissioner’s approval.
Further, some of the vestiges from the Initial Bill surrounding consumer disclosures found their way into the final text. Virtual Currency businesses will have to provide receipts for each virtual currency transaction and the VC business should provide a clear disclosure that it is not licensed by the Commissioner.
Although the Revised Bill does not prescribe the content of audits, the Commissioner has a free-hand on the questions it may want to ask a VC business and the VC business will need to be forthcoming.
Removal of a restriction
Another almost self-evident but important point is that the Initial and Revised Bill both sought to remove from the Money Transmitter Act the prohibition of “a corporation, social purpose corporation, association, or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States“. With this prohibition explicitly removed, are we now likely to see after this Bill comes into effect, a flurry of new issues of digital currencies emanating from California or even foreign companies issuing their digital currencies from California?