California lawmakers target crypto at joint hearing

California lawmakers are gearing up again to impose new regulations on the cryptocurrency industry.

The renewed effort follows the collapse of crypto exchange FTX and other high-profile failures in 2022. It also comes five months after Gov. Gavin Newsom (D) vetoed a cryptocurrency licensing bill that had overwhelmingly passed the General Assembly. In his veto, Newsom called for “a more flexible approach.”

On Wednesday, state Sen. Monique Limón (D) and Assemblymember Tim Grayson (D), the chairs of the Senate and Assembly banking committees, held a joint hearing titled, “Harmful Innovation: What FTX’s Collapse Means for Consumers and California’s Approach to Crypto.”

The lawmakers did not hide their frustration over Newsom’s veto or their continued skepticism of the troubled industry.

“It is clear that something is not right in crypto and people are getting hurt,” said Grayson, lead author of the vetoed bill who introduced a new bill this year to regulate and license crypto companies.

“Clearly the status quo is not working,” said Limón, who is the principal coauthor of Grayson’s bill.

Similar to New York’s BitLicense requirement, the proposed California measure would ensure digital financial asset companies are licensed by the state and would impose new disclosure requirements designed to protect customers.

The California proposal also mirrors crypto licensure legislation announced this week by the Illinois Department of Financial and Professional Regulation.

The state-level efforts to regulate the cryptocurrency industry are ramping up in the absence of federal action.

“With Congress unlikely to act, it is up to the states,” Robert Herrell, executive director of the Consumer Federation of California, said at the hearing.

Herrell shared stories of California residents who had been fleeced by cryptocurrency scams or financially ruined by crypto collapses. They included a 74-year-old widowed Asian-Filipina woman who lived on a fixed income and was scammed out of $112,500 over six months. Herrell urged lawmakers to move swiftly to corral the industry and help it shed its “Wild West reputation.”

“We license doctors, nurses, those who cut our hair, fix our cars and homes, and sell us insurance and other investments. Shouldn’t we license an industry this large and complex,” Herrell asked the lawmakers.

While Herrell warned of crypto’s pitfalls, Sheila Warren, CEO of the Crypto Council for Innovation, an industry-led group, cast cryptocurrency as a “once-in-a-generation opportunity to rethink foundational systems.”

Warren said crypto and blockchain technology have been used by underserved communities that have not traditionally benefited from traditional banking and investment opportunities. She gave the examples of immigrant workers using crypto remittances to send money back to their families in their home countries and content creators relying on nonfungible tokens to help get their projects off the ground.

“There are scammers,” Warren acknowledged. “However, the opportunity is very real.”

Warren called for “regulatory guardrails,” but warned of blanket efforts that could harm innovation.

The hearing also included a representative from California’s Department of Financial Protection and Innovation, which is currently investigating the FTX collapse.

The agency’s general counsel, Avy Mallik, told lawmakers that DFPI received nearly 700 crypto-related complaints and issued 65 consumer alerts in 2022. The agency recently launched a searchable database of crypto scams to help consumers know what to look for.

“This is a place where there’s a lot of activity, a lot of volatility,” Mallik said.

Asked by Limón if his agency needs more regulatory authority, Mallik declined to answer directly but said policing the crypto marketplace is a priority.

“We will use all of our authority and use it to its utmost extent,” Mallik said.