Will Other States Follow in California’s Footsteps Regarding Cryptocurrency Regulation?
June 06, 2022
By Jasmine Floyd
California is starting to put regulations in place regarding cryptocurrency. And some attorneys predict it is only a matter of time before federal and state legislatures do the same.
Attorney Angelica D. Zolnierowicz believes regulatory clarity from the federal government is key.
“At the federal level, agencies such as the U.S. Treasury Department and the U.S. Security and Exchange Commission are at the forefront of said regulation and enforcement policies. Other important are the Department of Justice, Financial Crimes Enforcement Network [or] FinCen, and the Commodity Futures Trading Commission [or] CFTF,” Zolnierowicz said.
State governments are becoming increasingly involved in regulating cryptocurrency, Zolnierowicz said.
“As of now cryptocurrency and blockchain are at the forefront as states continue to issue opinions, letters and guidance from their state financial regulatory agencies concerning crypto. … In New York, there is ongoing concern focused on the state’s attempt to enact BitLicense laws, which would create many hurdles for crypto, and essentially lead to the exodus of virtual currency from the state,” Zolnierowicz said. “At the present time, there are pending proposals on this matter and the presence and status of crypto remains uncertain. At the other end of the spectrum, are states like Wyoming, which accept the adoption of crypto and legally recognize crypto companies but require said crypto companies to follow certain regulations and registration requirements. Furthermore, Wyoming enacted a series of regulations that essentially exempted “utility tokens” from state securities regulations and virtual currencies—crypto—from state money transmission laws.”
California Gov. Gavin Newsom signed an executive order in May. According to Zolnierowicz, most of the startups for crypto blockchain are coming out of California. So it’s in California’s best interest to recognize the importance of this technology and coordinate with the federal government to come to a “meeting of the minds” in developing an approach to cryptocurrency and crypto assets.
“The potential of fraud is possible, and investigation of crypto by the federal government will continue to be on the rise. Now, the DOJ has instituted a specialized crypto enforcement team, and prosecution of bad actors and those not in line with federal regulations and crypt offenders will be prosecuted with the support of the FBI’s new crypto investigation team,” Zolnierowicz said. “Companies that deal with the crypto assets must follow certain license state requirements that they need to go and uphold in order to be official. Therefore, the protection and oversight will come from this state individually.”
Miami Pathman Schermer Tandy real estate, banking and finance partner Ross Kulberg said potential regulation could affect the already-volatile market for some cryptocurrencies in the short term.
“Long term, the regulations should have the goal of protecting consumers and investors into these markets,” Kulberg said. “We are closely monitoring the evolving status of cryptocurrency. While we do not currently settle transactions using cryptocurrency, we will be ready to act if payments via cryptocurrencies become more commonplace, trusted, and secure.”
During this time Farella Braun + Martel partner Aviva Gilbert in San Francisco, California, doesn’t believe we’re in a period without regulation. Instead, industries are waiting for state and federal agencies to more firmly determine—and communicate—how they plan on applying existing regulations to conduct in the crypto and blockchain space.
“Non-fungible tokens or NFTs are a good example of this. We are still waiting for the SEC to actually issue guidance, though we have been getting a few tidbits from commissioners and cases on what we might expect,” Gilbert said. “The California orderdid have a few interesting points worth highlighting, however, such as anticipating that traditional, chartered banks and credit unions are going to be involved in holding or accounting for cryptocurrency assets. The California order is also clear that the state is trying to figure out how to use blockchain in government applications and public sector innovation. I think both of those areas are worth watching, in this relatively early enforcement stage.”
Gilbert, along with Holland & Knight partner and shareholder Josias Dewey, agree that potential litigation is already on the rise. Dewey said litigation will continue to arise from both agency enforcement actions as well as private class actions.
“Without action by Congress, future regulation may also be the subject of challenges around whether agency action fell within the scope of its authority from Congress,” Dewey said. “Recent lawsuits filed against decentralized autonomous organizations or DAOs will test new theories of liability around DAOs, including whether they are properly treated as general partnerships; and hence, whether all of the DAO holders are jointly and severally liable for the acts and omissions of a DAO.”
According to Dewey, much of the “regulation” of crypto is through enforcement actions brought by federal agencies, such as the SEC.
“The cost to defend these actions can be significant. There is also the risk of significant reputational harm involved in being the subject of such an action, in addition to the disruption to one’s business,” Dewey said. “Thus, while innovative crypto protocols often want to push the limits of regulated activity, they should be cautious and seek the advice of counsel. Navigating through these areas of regulated activity without knowledgeable counsel is a minefield.”
Sidley Austin partner, Hardy Callcott in San Francisco, California addresses steps attorneys and clients should be taking.
“The biggest set of issues in the U.S. is figuring out which tokens are and aren’t securities, since they are subject to different types of regulatory schemes. People have spent a lot of time and attention on that issue. The SEC had said Bitcoin was not a security, but it’s hard to know,” Callcott said. “The Commodity Futures Trading Commission has stated they think a lot of digital assets are commodities and not securities. The uncertain regulatory in the U.S. has had the effect of driving a lot of crypto initiatives offshore. People are developing exchanges and products and services outside of the states since they can’t get enough regulatory certainty in the U.S.”
Callcott advises it would be good to have one central regulator with one set of standards which everyone can go to, and know what is and isn’t permitted in the U.S.
Callcott said, “Unfortunately I don’t think it’s going to be easier for any states to solve this until there’s more certainty at the federal level if there will be continued pressure for the most innovative development to be happening outside of the U.S. with places like Korea, Hong Kong, Singapore and Switzerland.”