California’s BitLicence

California are in the midst of fine tuning A.B. 1326, a regulatory framework on virtual currency introduced by Assembly member Matthew Dababneh on Feb. 27 2015. The regulation is similar to that of New York’s controversial BitLicense, it aims to protect consumers within the digital currency industry.

“This bill would require each licensee to maintain at all times such capital as the commissioner determines, subject to specified factors, is sufficient to ensure the safety and soundness of the licensee, its ongoing operations, and maintain consumer protection.”
— – Bill AB 1326

In a similar reaction to the BitLicence, many in the industry are concerned this law may place unreasonable constraints on innovation. The Electronic Frontier Foundation (EFF), a California based nonprofit organization defending civil liberties in the digital world, have been highly critical of the new regulation.

“We have philosophical issues with A.B. 1326—both the type of regulatory scheme it’s proposing as well as the timing of this regulation in relation to the development of new virtual currency technologies—and we also have concerns about how the bill is technically written.”
— –The Electronic Frontier Foundation (EFF)

The EFF was founded in 1990, in an effort to spearhead user privacy, free expression, grass roots activism, innovation through impact litigation and technological development. “We work to ensure that rights and freedoms are enhanced and protected as our use of technology grows.”

In an article on the organisation’s website, they outline their points of contention with the proposed bill. “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.”

“California consumers might not benefit from ground breaking new developments in the virtual currency space, as a complicated and burdensome regulatory process scares off potential innovators. This would be at odds with a state that has long been a haven for innovation and experimentation, and which currently has a thriving community of virtual currency enthusiasts and companies.”
— – EFF

California is home to Silicon Valley, which hosts many technological innovators, including Google, Facebook and Twitter. San Francisco is also home to some of the bitcoin industry’s most promising startups, if gauged by recent funding announcements, 21 Inc. recently raised $116 million, Coinbase $75 million, and Ripple Labs $28 million.

While there is a range of well funded bitcoin startups in California, there are fears that the introduction of A.B. 1326 will inhibit innovation due to substantial costs. Much like New Yorks BitLicense, applications for a licence in California would incur a non-refundable $5000. If the regulation comes into effect, there could be $10,000 in fees for applying to operate in California and New York. If all 50 states enacted similar frameworks, a business would have to take into consideration $250,000 merely to apply for nation wide licensing.

“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.”
— – EFF

The current wording of the act does provide some relief for small businesses, with less than one million dollars in outstanding obligations, “whose business model, as determined by the commissioner, represents low or no risk to consumers.” Those who qualify may register for a provisional licence, with a $500 fee.

According to the EFF this provision is not specific enough. “The commissioner has an amazing amount of discretion with the provisional license, just as he does with the primary virtual currency license, so it’s ambiguous who will even qualify for a provisional license and how it will operate.”

The application also requires extensive information about an applying company’s business plan, structure, history, and funding. More contentiously, applications must contain information about controlling actors within the company structure. EFF states that there are, “a range of problems inherent in this type of data collection.”

“Alot of this data simply isn’t relevant to whether a virtual currency is well-run and protecting consumers. The rule requires applications to include convictions for nonviolent drug offenses, peaceful protests, or reckless driving. Being a college dropout might also crop up. Will these things bar the applicant from receiving a virtual currency license? Will having five different employers in a 10-year period be a black mark on an application?”
— – EFF

The EFF are not alone in their concerns. John Light, Founder of BitSeed, has been petitioning for the withdrawal of A.B. 1326, stating that “mandatory, top-down, one-size-fits-all regulations such as those proposed in AB-1326 will squeeze out the small-time entrepreneurs who offer bitcoin services to their communities.”

Jerry Brito, Executive Director of Coin Center, is in support of the bill. “We’re sad to see this opposition since we’re typically in complete alignment with our friends at EFF, and we think it stems from a misunderstanding of the state of the law in this space.”

“At Coin Center we’re idealistic but pragmatic, and we think opposing this bill is letting the perfect be the enemy of the good. The bill could certainly be improved, but even if it passed as is, it would be still be much, much better than having the existing ill-fitting money transmission license apply.”
— – Jerry Brito

During testimony given before the California State Senate on the subject last month, Brito explained his opinion that the bill is not perfect and it could be improved, “but it’s also the best bill we’ve seen from any state because it takes cryptocurrency’s unique attributes into account and avoids unnecessary regulation.”

“A.B. 1326 gives relief from these onerous regulations to hobbyists, developers, and small businesses. We don’t imagine EFF wants to deny these innovators such relief; we think they’ve dangerously misjudged the implications and unintended consequences of their vocal opposition.”
— – Brito

According to Brito, there are key points of difference between the regulation in California and New York, “AB 1326 would only regulate firms with full custody, not non-custodial ‘exchange services’, ‘issuers, administrators, or controllers’, or ‘transmitters’ whatever those words mean or could be interpreted to mean. Unlike all that other verbiage in the BitLicense, Full custody is a easy test for applicability: can you lose the customer’s money? If yes, then you should be licensed.”

“Bottom line: it’s not a choice between this bill and no regulation; it’s a choice between the sensible regulation in AB 1326—even if it could be improved—and the ill-fitting regulation of the Money Transmission Act. If this bill fails, we may end up with the aggressive and industry-stunting regulation that we’re all seeking to avoid. And if this bill fails, we’d also lose the best bill we’ve seen that could be a model for other states and a counterweight to the BitLicense.”
— – Brito