California Governor’s Blockchain Executive Order Calls for State and Federal Regulatory Harmony | Troutman Pepper

On May 4, following in the footsteps of President Biden’s recent executive order (Federal EO), California Governor Gavin Newsom issued his own blockchain-related executive order (CA EO), making California the first among the states to endorse a proactive, harmonized approach to regulate blockchain technology. The CA EO assesses how existing state and public institutions may leverage blockchain technology to foster innovation and propel California to the forefront of the emerging digital asset market. The CA EO is founded on two notable objectives: (1) federal and state regulatory harmony and (2) consumer education and scholastic exposure.

Regulatory Harmony. As the CA EO notes, “all of society, including consumers and responsible financial technology companies, are best served by a consistent regulatory approach.” In alignment with the theme of consistency, the CA EO requires various California-state agencies to perform the same strategic due diligence outlined in the Federal EO. The CA EO has tasked, in collaborative fashion, the Governor’s Office of Business and Economic Development (GO-Biz), the Business, Consumer Services, and Housing Agency (BCSH), the Department of Financial Protection and Innovation (DFPI), and the Government Operations Agency (GovOps) with a myriad of distinct responsibilities: (1) soliciting comments from both resident organizations and out-of-state organizations with interest in blockchain technology; (2) devising a regulatory framework synchronized to existing federal and state cryptocurrency and blockchain-related legislation; (3) determining the intersection between blockchain technology, legacy-state systems, and potential blockchain applications that are “public-serving;” and (4) analyzing the relationship between crypto assets, energy, climate, and illicit activity.

The deadline for the agencies to provide to Governor Newsom its collective report for issues previously noted is October 4, or within 60 days after certain federal agencies are required to, under the Federal EO, provide President Biden a “report on the future of money, ”Which is due September 5.

The CA EO explicitly expands the DFPI’s regulatory supervision under the California Consumer Financial Protection Law (CCFPL), thereby empowering the agency to exercise rulemaking authority, enforcement authority, and develop guidance for entities offering crypto asset-related financial products and services in California.

Under the CA EO, by June 3, the DFPI must solicit from entities licensed under the CCFPL information concerning their crypto asset-related financial products and services so that the DFPI can be better equipped to administer appropriate rulemaking. Conversely, the CA EO affords the DFPI approximately one year to develop guidance for California state-chartered banks and credit unions that offer crypto asset-related financial products and services. The DFPI must publish the preceding guidance by March 31, 2023.

Consumer Education and Scholastic Exposure. To increase consumer awareness of the benefits and risks associated with crypto asset-related financial products and services, the CA EO has assigned the DFPI the duty of drafting and publishing consumer education materials. These materials must explain to consumers how to avoid fraud and steer clear of crypto-related scams. Furthermore, GovOps, through a “Request for Innovative Ideas” established through Executive Order N-04-19, must solicit from the private sector, academia, and the community-at-large potential blockchain pilot programs targeted toward solving challenges specified by the California Blockchain Working Group. Lastly, the CA EO encourages members of the Governor’s Council for Postsecondary Education to identify research opportunities for students with interest in blockchain technology.

Our Take. Due to the advent of the internet in the 1990s, mass dissemination of information across the globe has become both frictionless and uninhibited by geographical boundaries. Blockchain technology, by leveraging the internet (and in particular its use cases in Web3), has the potential to fully capture the internet’s true, intrinsic value through disintermediation of many – if not all – operational features of the global economy. The CA EO appropriately contemplates the global fluidity of blockchain by focusing its impending research on state and federal interagency regulatory balance. Other states may likely follow suit because fragmented regulatory regimes will not only stifle innovation in this space, but such regimes may also impose on blockchain-related entities inconsistent regulatory and compliance burdens that would hinder the ability of those organizations to operate seamlessly within each of the 50 states and the world at large.

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