California DFPI Digital Asset Lending Regulatory Year In Review

A&B ABstract:

In December of 2022 California launched an interagency progress report (“Report”) analyzing the present regulatory standing of Web3, Crypto Assets, and Blockchain. The report was ready pursuant to Executive Order N-9-22 (the “Order”) issued by California Governor Gavin Newsome on Could 4, 2022, which declared California’s intent to control blockchain, together with crypto belongings and associated monetary applied sciences, and directed California state businesses, together with the Governor’s Workplace of Enterprise and Financial Improvement (“GO-Biz”), the Authorities Operations Company, the Enterprise, Shopper Service and Housing Company, and the Division of Monetary Safety and Innovation (“DFPI”) to gather suggestions from numerous stakeholders to grasp the dangers and discover alternatives for the state. The Order, amongst different directives, advises these California businesses, led by DFPI, in session with GO-Biz, to create a regulatory framework for crypto belongings in coordination with federal and state authorities, with the objectives of guaranteeing fairness, regulatory readability, client safety, innovation, and job development. Though these new applied sciences current some novel questions, for entities partaking in lending backed by digital belongings, the DFPI has made clear that the California Financing Regulation and comparable regulatory burdens apply.

Present Registration Necessities

The Report follows earlier requests for public remark, together with from the DFPI, which printed a request for public comment (the “Request”) stating an intent to develop a complete state regulatory framework for the providing of digital asset associated monetary services and products in California. Throughout the earlier request for remark, the DFPI states that it possesses the authority to develop complete rules below the California Shopper Monetary Safety Regulation (CCFPL), which authorizes the DFPI to “prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service.” Accordingly, the DFPI has put forth that it at the moment has the authority to require licensing and regulation of crypto asset-related monetary merchandise. Within the Order issued by Governor Newsom “crypto assets” is outlined as “a digital asset, which may be a medium of exchange, for which generation or ownership records are supported through a blockchain technology.” Given this backdrop, we will count on the DFPI to concern rules with out additional legislative enter.

Public Suggestions

Responses to the request for remark and different alternatives to supply public enter resulted in a number of key solutions for regulation, together with the next:

Present regulatory readability—together with by basing rules on particular forms of actions, merchandise, and providers (quite than particular entities).
Harmonize with federal tips—together with by modeling key phrases and necessities on these utilized by federal regulators.
Keep away from over-regulation—together with by minimizing compliance prices.

CCFPL Regulation and Supervision

The Report states that DFPI has issued licenses to 10 crypto asset associated corporations that have interaction in lending actions below California monetary licensing legal guidelines. Some make client loans which can be secured by crypto belongings, whereas others make business loans to crypto asset-related corporations. Along with licensing and different compliance exercise, the Report additional notes that enforcement actions have been additionally underway. The highlighted enforcement actions throughout the report associated to corporations allegedly working crypto deposit accounts that certified as unregistered securities in addition to funding schemes. The Report didn’t spotlight any enforcement actions associated to loans secured by crypto belongings or different licensing violations.

Nonetheless, on November 18, 2022 and November 22, 2022, the DFPI suspended California Financing Regulation licenses for 2 entities in reference to their crypto asset platforms. In each cases, the entities paused exercise on their platforms. The investigation of 1 entity stays ongoing whereas the opposite entered into an agreement to pause assortment of repayments and curiosity on loans belonging to California residents whereas its CFL License is suspended or as additional agreed to between the DFPI and the entity.

Takeaway

Whereas many features of Web3, Crypto Assets, and Blockchain regulation stay unclear, it’s clear that these partaking in lending actions collateralized or in any other case associated to such belongings are regulated below the CCFPL and different California legislation, and should abide by the identical strictures as some other lender.

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