Senator Holly J. Mitchell Shelves California’s BitLicence, AB-1326

AB 1326 received mixed opinions from the Bitcoin community. John Light, Founder of BitSeed, petitioned for its withdrawal, 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.”

Joining the discussion was a coalition of nonprofit advocacy organizations and digital currency companies, formed in August, also calling for the bill to be withdrawn. The 17 organizations included nonprofit advocacy groups such as the Electronic Frontier Foundation (EFF), Fight for the Future, the Internet Archive, and the Free Software Foundation. The coalition also included a range of Bitcoin companies, including Bolt, Blockstream, Gem, Bitwage, Purse.io, and Automattic, the company behind WordPress.com.

“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.”
— – EFF

Jerry Brito, Executive Director at Coin Centre believe the opposition may have stemmed from a misunderstanding of the state of the law. “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,” said Brito.

Outside of conflicting opinions, on Sept 11, soon after the bill’s third reading it was ordered to the legislatures inactive file at the request of Senator Mitchell. Once a bill is on the inactive file it’s considered dormant, but can be placed back on the agenda with one day’s public notice.

In the wake of the mass exodus that occurred post-Bitlicense in New York, and California’s ongoing grapple with the cutting edge technology, it appears regulators are having difficulty achieving a balance between innovation and consumer protection.

Regulating Bitcoin in California came to the attention of the industry in 2013. The Bitcoin Foundation, an American non profit organisation with a stated mission to standardize, protect and promote the use of Bitcoin, was served with a cease and desist letter from California’s Division of Financial Institutions.

The Foundation ran a conference that year, allegedly engaging in the business of money transmission without a license or proper authorization. The penalties for such illicit activity can be severe, ranging from $1000 for each violation of Financial Code 2030, or $1000 per day under Financial Code 2151. In addition, anyone in violation of Financial Code 2152 could incur jail time.

In mid-2014, California took its first step towards recognizing bitcoin as a currency, when Governor Jerry Brown signed into law AB 129. "This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments," advised Mark Farouk, who drafted the law.

The bill was authored by Democratic assemblyman Roger Dickinson and repealed Section 107 of the California Corporations Code, which states “No corporation, association or individual shall issue or put in circulation, as money, anything but the lawful money of the United States.”

Many Bitcoin backers welcomed the change, as this new law paved the way for, and pre-empted the possibility of construing Section 107 as prohibiting the use of Bitcoin in the state of California.

However, not all were happy. Bob Lyddon, general secretary of IBOS stated, “The EBA and the financial action task force have already said this [digital currency] is really dangerous. If it isn’t a financial market infrastructure, it must be a payment service provider. It needs to be registered to be able to take in customer money.”

Within months California expanded its interest in digital currency, and Matt Dababneh drafted AB 1326. The bill’s intentions were to regulate the digital currency environment by requiring all “virtual currency businesses” to apply for and obtain a license, in order to offer services in California. To comply with the bill, a company is required to pay fees and submit a vast amount of paperwork.

“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.”
— – AB 1326

Juan Llanos is a financial-compliance expert and certified anti-money-laundering specialist, with an interest in digital currency. Llanos sees that elements of regulation could assist with Bitcoin’s growth, “Regardless of ideology, however, anyone advocating for anything would do well to seek to support whatever helps maximize the chances of success of the object of their advocacy, including, of course, regulation.”

“We’re in the second decade of the 21st century, and regulators still rely on after-the-fact, paper-based reporting. Further, regulated financial institutions seem incapable of providing unimpeachable transactional and financial reports to ultimately demonstrate their solvency.”
— – Juan Llanos

The current regulatory and licensing environment is described by Llanos as an invasive and heavily front-loaded process, which is required for all forty-eight states. “In fact, the applicant needs to submit reams (yes literally, paper reams, in some states) of data about business plans, service and product descriptions, actual and projected financial statements, personal financial information of officers and directors, multiple disclosures and affidavits, and, most importantly, the methodology for calculating and demonstrating that the company has sufficient liquidity to cover any ‘outstanding obligations’ — what is known as proof of solvency, the ultimate guarantee that consumer funds are safe.”