States, not Washington, will lead crypto regulation in 2024

While Presidential candidates tour the country, hoping to court the crypto community with federal policy frameworks and tax proposals, it’s governors and legislatures at the state level that are taking decisive action on meaningful digital asset regulations. 

Blockchain enthusiasts focusing only on what’s happening around Washington are missing the forest for the trees. 2023 was a pivotal year for state digital asset policy, and 2024 promises even bigger implications for both businesses and consumers. 

This year was dominated by California Governor Gavin Newsom’s signing of Assembly Bill 39 into law. The bill, the Digital Financial Assets Law (DFAL), establishes comprehensive rules of the road for digital financial asset businesses operating in the state. 

Starting in 2025, digital financial asset businesses in California will be subject to a licensing and supervisory regulatory regime, including capital and liquidity requirements, regular disclosures and stablecoin approval standards. 

The state legislature modeled the law on New York’s Virtual Currency Business Activity regulations, better known as the “BitLicense” regulation and the limited purpose trust company provisions of New York banking law. However, they also adopted important provisions meant to improve on New York’s process, which has received considerable criticism from industry. These provisions include an expedited licensing pathway for businesses already subject to similar state licensing standards. 

Despite these promising advancements, DFAL also has some serious setbacks. Overly broad and imprecise definitions could unintentionally pigeonhole a wide range of unrelated activity, technology and individuals into the bill’s purview, creating operational challenges for both licensees and regulators. Exemptions for smaller digital financial asset businesses, including early stage digital asset startups, are also insufficient to preserve the state’s competitive edge.

DFAL also stands to command significant attention in 2024, as the legislature is expected to take up legislation aimed at cleaning up unaddressed issues in the statute. 

Another remaining issue from 2023 will also command the attention of state crypto policymakers in 2024: The New York Attorney General’s Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act. Attorney General Letitia James originally proposed the legislation in May, with only a month left in New York’s legislative session. If passed, the bill would have had devastating consequences for the digital asset industry throughout the state. 

Read more from our opinion section: The crypto industry is better positioned than ever in Washington

New York’s existing digital asset regulations and the industry’s current regulator, the Department of Financial Services, would have been subsumed by a new, largely duplicative regulatory regime with the Attorney General’s office at the helm. The bill’s requirement for licensees to be monoline would have been the most disruptive, leading almost every business currently licensed to conduct virtual currency business activity in New York to be out of compliance on day 1. The legislature ultimately declined to introduce the bill this session, but it will most certainly be a topic of discussion in 2024. 

Another Attorney General who is hoping to extend their reach over digital assets is New Jersey AG Matt Platkin. The industry is currently holding its breath to see if the NJ State Legislature will pass legislation that would house crypto regulations under the AG’s Department of Law and Public Safety. 

Louisiana will hopefully serve as an opportunity for the industry to make some progress next year. The state government is widely expected to take up legislation to modify its digital asset regulations, which were established in 2022. 

Certain provisions of its rules governing “virtual currency business activity” are set to expire in 2025, requiring some action from the legislature. The state’s Governor-elect, Jeff Landry, could also introduce some interesting dynamics. He oversaw several cases related to the digital asset industry when he served as the state attorney general. Landry will have the final say over anything the legislature might pass through his authority to veto or sign legislation into law. 

A lot remains uncertain for the prospects of digital asset regulation in 2024. However, if trends from 2023 continue, there’s no doubt that states will continue to lead in this space. 

Peter is currently working to advance responsible rules of the road for the digital asset & web3 industries as Associate Director for State & Local Government Affairs at the Crypto Council for Innovation.

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