First Look

California's virtual currency license bill: Bad for innovation and business

California’s AB 1326 is ill-conceived and, if passed, will have serious and damaging consequences.

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Credit: David R. Tribble "Coins-9626" by Loadmaster (David R. Tribble)

There are good laws, bad laws, and, all too often, naive laws. Oh, and there are also bad, naive laws such as California’s AB 1326 which would:

… prohibit a person from engaging in any virtual currency business, as defined, in this state unless the person is licensed by the Commissioner of Business Oversight or is exempt from the licensure requirement, as provided … “Virtual currency business” means maintaining full custody or control of virtual currency in this state on behalf of others.

Yep, the bill is, as you can begin to see, dangerously vague (e.g. “any virtual currency business” and “full custody or control of virtual currency”) misses the fact that the currency is actually virtual so the meaning of “full” would eventually result in endless legal arm wrestling costing millions and stifling innovation because of uncertainty.

The bill is also designed to collect a lot of detailed information that far exceeds anything reasonable (unless the licensee were to also cover licensing for, say, building a nuclear power plant) and sets a very high and nonrefundable application fee of $5,000 and an annual license renewal fee of $2,500.

You can see the profoundly naive underpinnings of this proposed law in the original wording of SECTION 1. Section 107 of the Corporations Code which was repealed:

107. No corporation, social purpose corporation, association, or individual shall issue or put in circulation, as money, anything but the lawful money of the United States.

As the Electronic Frontier Foundation points out:

The regulation is premature; digital currency is an industry in its infancy.

While we sympathize with the ideals behind the legislation—protecting consumers—we fear this bill will have unintended long-term consequences that hurt consumers more than it helps. We don’t know what the future of cryptocurrencies will look like, but this legislation locks in a burdensome regulation before we know either where the technology is headed or what its likely uses will be.

The EFF also argues that “[having] different regulations for cryptocurrencies in every state will create confusion for consumers” and “[the] bill could chill virtual currency innovation in California.” In other words, California’s AB 1326 would create a terrible precedent and stifle innovation in California for little discernible benefit.

As the EFF suggests: “If you are in California, please speak out against this bill.

As written AB 1326 has all the hallmarks of a bad, naive law and if you’re in another state, watch out, your government will watch what happens in California and should the bill pass here, your state could be next.

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