Schrödinger’s Bitlicense: in California, crypto license rules are murky, but a bill may change that

Do California state regulators permit cryptocurrency-related businesses to operate? Depending who you ask, the answer may vary. 

This uncertainty infuses a series of controversies over a bill that seeks to implement a licensing program for cryptocurrency businesses in The Golden State. The proposal has been vehemently opposed by the Aquarian Advocacy Group (TAAG) as reminiscent of the notorious New York Bitlicense, while at the same time regarded by Coin Center as “the best way available to end the uncertainty in the state.”

Unlike some U.S. states, in California, cryptocurrency firms like Coinbase currently do not need money transmitter licenses (MTLs) to conduct business. MTLs are usually issued on a state-by-state basis to firms that want to provide money transfer services. According to TAAG, several companies have asked California state regulators whether they needed to apply for licenses and were told they did not. To some, this is a clear enough indication that the state condones cryptocurrency business activities, so to propose a bill that specifically asks the California regulators to sanction crypto businesses seems contradictory, according to TAAG.

“It's like me saying, I really want a surfing license, but California won’t give me a surfing license because there is no surfing license. But I really want a surfing license. Therefore I am going to go to the state government, and lobby for a bill that requires me to pay an enormous fee in exchange for the hope that California would give me a surfing license,” said Miller.  

However, proponents of the bill may think differently. Although California has not clamped down on any crypto-businesses, it hasn't publicly acknowledged the legal operation of any, either. Therefore, companies may be trapped in a Schrödinger's Cat situation, with no certainty on whether the government will clamp down on them and if so, when.

“The regulators refuse to give them [crypto firms] licenses, but also refuse to say publicly that crypto companies don't require a license to operate legally. These companies can operate with California customers, but they are taking a guess that the regulator isn't going to come out and arrest them for operating without a license,” said Coin Center research director Peter Van Valkenburgh.   

Whether crypto firms in California are traversing the regulatory gray area may still be up for debate. There are, however, other worries surrounding the bill. For one, the bill is considered by TAAG as an equivalent to the notoriously stringent “Bitlicense,” which is required in New York. First introduced in 2015, Bitlicenses have been criticized by many as a burden to cryptocurrency businesses and regarded as "an absolute failure" by some, due to the small number of firms that actually receive them.

However, in a recently published blog post, Coin Center executive director Jerry Brito stated that "there is no comparison" between the California bill and Bitlicense. Instead, the bill provides a "reasonable alternative to the Bitlicense...for states who were determined to craft new licensing legislation for cryptocurrency businesses," wrote Brito. 

Under the bill's proposed licensing structure, a company operating without a license will be fined up to $50,000 per day. In addition, firms are also responsible for covering the costs incurred during the application and inspection processes. Although the bill exempts some smaller firms from these requirements, TAAG executive director Margaux Avedisian thinks that this process is still onerous and "not doable for a lot of startups," said Avedisian.  

In addition, the bill requires firms to turn over user information and transaction records to state regulators, who may share the information with foreign agencies if necessary. 

To be clear, crypto companies holding the federal-level “money services business” (MSB) licenses are already required to submit KYC information to the Financial Crimes Enforcement Network (FinCEN). However, according to TAAG political consultant Bryan Miller, “the California bill goes much further than that.” 

“It says you have to keep the identity of the parties involved in the transactions for five years, turn over any details that the state regulator requires and then they are encouraged to turn over to other states and even foreign regulators,” said Miller.

Meanwhile, supporters of the bill believe it provides some much-needed clarity on what kind of crypto businesses should be regulated, and that it represents a unified model for other states to follow, according to Van Valkenburgh.

"As a market participant with a national customer base, a uniform set of regulatory standards either across all U.S. states or a single regulation at the federal level would help ensure market growth in this innovative area of finance," said Dhawal Sharma, general counsel for crypto prime brokerage firm Tagomi, which is currently operating in California without an MTL. 

The bill, sponsored by State Assembly Majority Leader Ian Calderon, is on the docket for consideration by the California State Assembly when it returns from recess in January. It has received the support of the American Bar Association and the Uniform Law Commission, in addition to Coin Center. 

“To be clear, we at Coin Center don’t love state licensing, it's generally speaking not a great idea. It would be much better to have a single license you get from the federal government and then you wouldn’t need to get state licenses because getting 50-some licenses is just silly.”