California’s recent legislation is set to dramatically change the regulatory landscape for cryptocurrency businesses in the state. Passed in 2023 and set to come into effect in July 2025, the Digital Financial Assets Law is aimed at formalizing California’s approach to crypto companies, imposing stringent licensing requirements and oversight.
Although the law is designed to encourage innovation and development in the crypto sector while protecting consumers, there are concerns about how particularly smaller crypto businesses will be able to adapt to the new legal framework.
The law is set to introduce regulatory requirements for crypto businesses that are operating in California. All crypto-related companies will be required to obtain a license from the state, which adds layers of compliance around record-keeping, assessment of risk factors, and disclosure.
The law also sets out the definitions of digital assets, covering virtual currencies, crypto, and even assets used in online platforms.
For example, the new rules extend to the exchange or transfer of digital financial assets in gaming ecosystems. This is likely to affect sectors like online casinos, where in-game assets have real-world value. Under the law, companies engaging in such activities will have to comply with operational guidelines to maintain transparency.
This includes platforms like a no KYC casinos, where users can gamble without undergoing identity verification processes. These platforms often allow gambling with cryptocurrencies and have gained a lot of popularity due to the privacy they offer. But under the new law, strict record-keeping and licensing can clash with the main selling point of no KYC casinos: anonymity.
The Digital and Financial Assets Law is also set to pose a challenge to cryptocurrency exchanges. These services will have to evaluate whether a cryptocurrency will be classified as a security. This area remains uncertain due to the changing nature of digital assets.
Crypto exchanges will also have to monitor and mitigate risks like cybersecurity threats and price manipulation. This adds to the complexity of complying with the new legislation.
Rather interestingly, exchanges that have received a BitLicence from the New York Department of Financial Services before January 1, 2023, will be exempt from this legislation and will receive a conditional license. This provides some leeway for established platforms, however, smaller exchanges or new platforms will struggle to overcome the regulatory hurdles and costs of compliance.
There are also concerns about the authority that is granted to the Department of Financial Protection and Innovation (DFPI) by the new law. The DFPI will be granted the power to enforce the law by investigating any company that it considers to be engaging in crypto-related business dealings, even if the company is still being developed.
Critics are arguing that this broad power will prevent innovation in the crypto sector and also result in crypto businesses setting up shop outside of California.
The law aims to protect consumers, but it could result in a cautious regulatory environment. The state government will have to strike a balance between regulation and innovation, as the impact of this legislation will shape the future of crypto businesses in the state.
