Ever at the forefront, California, like New York, first established a comprehensive licensing, supervisory, and enforcement framework for digital asset businesses in 2023 when it enacted its Digital Financial Assets Law (DFAL). After much retooling, the DFAL, administered by the California Department of Financial Protection and Innovation (DFPI), finally became effective July 1, 2026 and broadly applies to crypto exchanges, wallet providers, crypto kiosks, transaction facilitators, and any nonexempted entity engaging in digital financial asset business activity.
The finalized DFAL, as enacted, tweaked some of the original legislation, most significantly, by repealing all stablecoin regulation in deference to the preemptive effect of the GENUIS Act (the Guiding and Establishing National Innovation for U.S. Stablecoins Act, federal law establishing the first comprehensive national regulatory framework for U.S. dollar-backed payment stablecoins). But it still implements a licensing requirement with a rigorous and iterative application process, requiring detailed disclosures on governance, risk management, cybersecurity, financial condition, and consumer protection practices.
The comprehensive licensing framework includes:
Application procedures through the Nationwide Multistate Licensing System (NMLS);
Required application materials;
Financial statement requirements;
Surety bond requirements;
Reporting obligations;
Examination procedures; and
Recordkeeping requirements.
Significantly, the final regulations also provide the first implementing guidance under the DFAL and, in particular, establish the framework governing the interaction between DFAL and the California Money Transmission Act (MTA). The regulations also define key concepts such as “control,” incorporate the NMLS Forms MU1 and MU2, as well as the DFPI Form 2 filings for personal financial information for officers and directors, and establish detailed supervisory expectations for ongoing compliance for licensed entities.
The regulations create three targeted exemptions from the separate MTA licensure for DFAL-regulated businesses to reduce duplicative regulation where DFAL-regulated activity also involves related fiat movement covered by the MTA. The exemptions cover:
Money transmission undertaken to transmit payment for the purchase or exchange of a digital financial asset or the proceeds of its sale or exchange;
Stored value usable exclusively for purchasing, selling, or exchanging digital financial assets; and
Certain limited money transmission activities where the DFAL person maintains an average daily outstanding money transmission liability of $50,000 or less and complies with the MTA’s safeguarding requirements.
Lastly, California also convened the first meeting of its Tech Fraud Task Force joining state agencies, experts, and technology leaders to leverage opportunities and address risks posed by emerging technologies. The Task Force includes major technology companies, financial industry associations, consumer advocacy organizations, and blockchain analytics firms, among others. The Task Force signals California’s continued and heightened focus on technology-enabled financial fraud. Digital asset and fintech businesses operating in or serving Californians should now anticipate increased regulatory scrutiny and coordinated enforcement efforts across state agencies.
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Janice L. Sperow is a member of the AAA's AI Ambassador program, which brings together experienced AAA arbitrators and mediators to examine emerging issues at the intersection of AI and dispute resolution.