California Gov. Gavin Newsom’s surprise veto of a cryptocurrency regulation bill looks like a boon to consumers and creators alike. Unfortunately, his rationale for rejecting it is antithetical to promoting currency competition: Newsom is rolling out the welcome mat for even more expansive federal regulation, and anyone with a stake in the crypto market should be on guard.
A.B. 2269, sponsored by some of Newsom’s fellow Democrats, soared through the California Assembly with unanimous approval. When the governor blocked it at the end of September, he explained that he felt the bill was “premature”—not because it would compromise the potential of the industry it targets, but because it could impede looming federal regulation.
As written, the bill would already strike a fatal blow to the California crypto market and send devastating shock waves throughout the crypto space. Akin to New York’s famed BitLicense law, it would, as policy group Blockchain Association notes, “effectively outlaw” crypto businesses in California in two ways.
First, the bill would have forced all crypto exchanges—platforms where cryptocurrency tokens can be bought, sold, swapped, sent, or received—to apply for and obtain state-issued licenses in order to operate in California. That would strangle small exchanges and startups unable to navigate a costly and cumbersome waiting game. It would also choke consumers’ access to the latest platforms and apps, which are usually the first to carry the newest tokens. These volatile assets often get scooped up by mainstream exchanges like CoinBase only after they’ve already skyrocketed in value from their launch price.
Cutting smaller platforms’ ability to reach California’s 40 million residents—and blocking those residents from what is often the most lucrative stage of trading—also cuts off creators’ and current traders’ access to 40 million residents’ worth of potential buy-in.
Second, the bill would have banned all businesses not licensed by the California Department of Financial Protection and Innovation (DFPI)—essentially, all nonbanks—from dealing in stablecoins.
Among their many purposes, stablecoins can act as a sort of middlemen through which exchanges and developers convert tokens and transfer information. Their value is pegged to stable currencies, such as the U.S. dollar, making them just as stable as their “pegs.” For example, if a crypto business holds U.S. dollar assets on reserve, those tend to come in the form of the stablecoin USDC, the digital U.S. dollar token. Because they don’t require a credit card or a place to store physical currency, stablecoins are more accessible—and, in many parts of the world, more secure—than their “pegs.” For that reason, they’ve become a critical means through which nontraditional financial entities extend access to communities underserved by brick-and-mortar banks.
By outlawing all nonbank stablecoin issuers from trafficking in the state of California, the bill effectively bans nonbank businesses from conducting crypto transactions with California consumers. It would also strike a blow to Californians’ privacy: Under A.B. 2269’s provisions, entities that could afford the cost and confusion of obtaining and maintaining a DFPI license would be required to keep records of all California client activity for five years.
Justifying his veto in a letter to the bill’s supporters, Newsom paid lip service to calls for looser regulation: “A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases,” he wrote. In a rare nod to budgetary restraint, the typically profligate governor added that the bill would demand a hefty loan from the state’s general fund for the first several years of implementation.
So far, so good. But Newsom also declared it “premature to lock a licensing structure in statute without considering…forthcoming federal actions” and promised to collaborate with state policy makers “to achieve the appropriate regulatory clarity once federal regulations come into sharper focus.” In other words, this apparent patience could signal heftier federal legislation down the line.
A patchwork of state regulations would stifle the creative spiral that characterizes the crypto market. But with regulation backed by the full force of the federal government, the damage could be lethal. Behind the jargon and platitudes, Newsom is saying that his veto is a stopgap measure. He isn’t trying to protect crypto from overbearing controls; he’s clearing the way for even harsher controls down the line.
Any new rules of the crypto market should protect entrepreneurs and investors from overzealous oversight, not subject them to it. And Californians should be wary of anyone who rejects a regulation because it isn’t bureaucratic enough.
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