Today's Law As Amended

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AB-1123 Virtual currency: regulation.(2017-2018)



SECTION 1.

 Section 107 of the Corporations Code is repealed.

107.
 No corporation, social purpose corporation, association, or individual shall issue or put in circulation, as money, anything but the lawful money of the United States.

SEC. 2.

 Section 2178 is added to the Financial Code, to read:

2178.
 (a) Notwithstanding any other law and consistent with subdivision (e) of Section 26004, a licensee shall report to the commissioner its plan to engage in any virtual currency business as described in Division 11 (commencing with Section 26000) and request, on a form provided by the commissioner, permission to engage in any virtual currency business without the issuance of a virtual currency license issued under Division 11 (commencing with Section 26000). However, the commissioner may require the licensee to increase its surety bond or eligible securities amounts in an amount necessary to ensure the consumer protection of the additional business. The commissioner may also place, as a condition on the authorization to engage in any virtual currency business pursuant to Division 11 (commencing with Section 26000), any condition authorized by Section 2036.
(b) This section shall become operative on July 1, 2018.

SEC. 3.

 Division 11 (commencing with Section 26000) is added to the Financial Code, to read:

DIVISION 11. Virtual Currency

CHAPTER  1. General Provisions
26000.
 For purposes of this division, the following definitions shall apply:
(a) “Commissioner” means the Commissioner of Business Oversight.
(b) (1) “Virtual currency” means any type of digital unit that is used as a medium of exchange or a form of digitally stored value.
(2) Virtual currency does not include the following:
(A) Digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms.
(B) Digital units that are used exclusively as part of a consumer affinity or rewards program.
(C) Digital units that can be redeemed for goods, services, or for purchases with the issuer or other designated merchants, but cannot be converted into, or redeemed for, fiat currency.
(c) “Virtual currency business” means maintaining full custody or control of virtual currency in this state on behalf of others.
(d) “Fiat currency” means government-issued currency that is designated as legal tender through government decree, regulation, or law, that customarily refers to paper money and coin and is circulated, used, and accepted as money.
26001.
 For the purposes of carrying out the provisions of this division, the commissioner may adopt regulations pursuant to the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code).
26001.5.
 This division shall be known and may be cited as the Virtual Currency Act.
CHAPTER  2. Licenses
26002.
 A person shall not engage in any virtual currency business in this state unless the person is licensed or exempt from licensure under this division.
26004.
 The following are exempt from the licensing requirement described in Section 26002:
(a) The United States or a department, agency, or instrumentality thereof, including any federal reserve bank and any federal home loan bank.
(b) Money transmission by the United States Postal Service or by a contractor on behalf of the United States Postal Service.
(c) A state, city, county, city and county, or any other governmental agency or governmental subdivision of a state.
(d) A commercial bank or industrial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor, or any foreign (other nation) bank that is licensed under Chapter 20 (commencing with Section 1750) of Division 1.1 or that is authorized under federal law to maintain a federal agency or federal branch office in this state; a trust company licensed pursuant to Section 1042 or a national association authorized under federal law to engage in a trust banking business; an association or federal association, as defined in Section 5102, the deposits of which are insured by the Federal Deposit Insurance Corporation or its successor; and any federally or state chartered credit union, with an office in this state, the member accounts of which are insured or guaranteed as provided in Section 14858.
(e) Subject to Section 2178, an entity licensed as a money transmitter under the Money Transmission Act described in Division 1.2 (commencing with Section 2000).
(f) A merchant or consumer that utilizes virtual currency solely for the purchase or sale of goods or services.
(g) (1) A transaction in which the recipient of virtual currency is an agent of the payee pursuant to a preexisting written contract and delivery of the virtual currency to the agent satisfies the payor’s obligation to the payee.
(2) For purposes of this subdivision, the following shall apply:
(A) “Agent” has the same meaning as that term is defined in Section 2295 of the Civil Code.
(B) “Payee” means the provider of goods or services, who is owed payment of money or other monetary value from the payor for the goods or services.
(C) “Payor” means the recipient of goods or services, who owes payment of money or monetary value to the payee for the goods or services.
(h) A person or entity developing, distributing, or servicing a virtual currency network software.
(i) A person or entity contributing software, connectivity, or computing power to a virtual currency network.
(j) A person or entity providing data storage or cyber security services for a licensed virtual currency business.
26006.
 (a) An applicant for licensure under this division shall pay to the commissioner a nonrefundable application fee of five thousand dollars ($5,000).
(b) An applicant for a license shall do so in a form and in a medium prescribed by the commissioner by order or regulation. The application shall state or contain all of the following:
(1) The legal name and residential business address of the applicant and any fictitious or trade name used by the applicant in conducting its business.
(2) A list of any criminal convictions of the applicant and any material litigation in which the applicant has been involved in the 10-year period next preceding the submission of the application.
(3) A description of any virtual currency services previously provided by the applicant and the virtual currency services that the applicant seeks to provide in this state.
(4) A list of other states in which the applicant is licensed to engage in the business of virtual currency and any license revocations, suspensions, or other disciplinary action taken against the applicant in another state.
(5) Information concerning any bankruptcy or receivership proceedings affecting the licensee.
(6) A sample form of receipt for transactions that involve money received for the business of virtual currency.
(7) The name and address of any bank through which the applicant’s business will be conducted.
(8) A description of the source of money and credit to be used by the applicant to provide virtual currency services.
(9) The date of the applicant’s incorporation or formation and the state or country of incorporation or formation.
(10) A certificate of good standing from the state or country in which the applicant is incorporated or formed.
(11) A description of the structure or organization of the applicant, including any parent or subsidiary of the applicant, and whether any parent or subsidiary is publicly traded.
(12) The legal name, any fictitious or trade name, all business and residential addresses, and the employment, in the 10-year period next preceding the submission of the application, of each executive officer, manager, director, or person that has control, of the applicant, and the educational background for each person.
(13) A list of any criminal convictions and material litigation in which any executive officer, manager, director, or person in control, of the applicant has been involved in the 10-year period next preceding the submission of the application.
(14) A copy of the applicant’s audited financial statements for the most recent fiscal year and, if available, for the two-year period next preceding the submission of the application.
(15) A copy of the applicant’s unconsolidated financial statements for the current fiscal year, whether audited or not, and, if available, for the two-year period next preceding the submission of the application.
(16) If the applicant is publicly traded, a copy of the most recent report filed with the United States Securities and Exchange Commission under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m).
(17) If the applicant is a wholly owned subsidiary of:
(A) A corporation publicly traded in the United States, a copy of audited financial statements for the parent corporation for the most recent fiscal year or a copy of the parent corporation’s most recent report filed under Section 13 of the federal Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m) and, if available, for the two-year period next preceding the submission of the application.
(B) A corporation publicly traded outside the United States, a copy of similar documentation filed with the regulator of the parent corporation’s domicile outside the United States.
(18) The applicant’s plan for engaging in the business of virtual currency, including without limitation three years of pro forma financial statements.
(19) Any other information the commissioner requires with respect to the applicant.
(c) The commissioner may waive any of the information required under subdivision (b) or permit an applicant to submit other information instead of the required information.
(d) The nonrefundable application fee for filing an application for licensure and approval to acquire control of a licensee is three thousand five hundred dollars ($3,500). An applicant for licensure and approval shall comply with subdivision (b).
(e) A licensee, including a licensee described in subdivision (b), shall pay annually on or before July 1, a license renewal fee of two thousand five hundred dollars ($2,500).
(f) A licensee shall pay annually on or before July 1, one hundred twenty-five dollars ($125) for each licensee branch office in this state.
(g) Whenever the commissioner examines a licensee, the licensee shall pay, within 10 days after receipt of a statement from the commissioner, a fee of seventy-five dollars ($75) per hour for each examiner engaged in the examination plus, if it is necessary for any examiner engaged in the examination to travel outside this state, the travel expenses of the examiner.
(h) Whenever the commissioner examines an applicant, the applicant shall pay, within 10 days after receipt of a statement from the commissioner, a fee of seventy-five dollars ($75) per hour for each examiner engaged in the examination plus, if it is necessary for any examiner engaged in the examination to travel outside this state, the travel expenses of the examiner.
(i) Each fee for filing an application shall be paid at the time the application is filed with the commissioner. No fee for filing an application shall be refundable, regardless of whether the application is approved, denied, or withdrawn.
26008.
 (a) Each licensee shall maintain at all times such capital as the commissioner determines is sufficient to ensure the safety and soundness of the licensee and maintain consumer protection and its ongoing operations. In determining the minimum amount of capital that must be maintained by a licensee, the commissioner shall consider a variety of factors, including, but not limited to:
(1) The composition of the licensee’s total assets, including the position, size, liquidity, risk exposure, and price volatility of each type of asset.
(2) The composition of the licensee’s total liabilities, including the size and repayment timing of each type of liability.
(3) The actual and expected volume of the licensee’s virtual currency business activity.
(4) Whether the licensee is already licensed or regulated by a state or federal entity, and whether the licensee is in good standing in such capacity.
(5) The amount of leverage employed by the licensee.
(6) The liquidity position of the licensee.
(7) The financial protection that the licensee provides for its consumers through its trust account or bond.
(b) Each licensee shall maintain a bond or trust account in United States dollars for the benefit of its consumers in the form and amount specified by the commissioner.
CHAPTER  3. Examinations and Records
26009.
 (a) The commissioner may at any time and from time to time examine the business and any branch office, within or outside this state, of any licensee in order to ascertain whether that business is being conducted in a lawful manner and whether all virtual currency held or exchanged is properly accounted for.
(b) The directors, officers, and employees of any licensee being examined by the commissioner shall exhibit to the commissioner, on request, any or all of the licensee’s accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
26010.
 The commissioner may consult and cooperate with other state or federal regulators in enforcing and administering this division. They may jointly pursue examinations and take other official action that they are otherwise empowered to take.
26011.
 A licensee shall file a report with the commissioner within five business days after the licensee has reason to know of the occurrence any of the following events:
(a) The filing of a petition by or against the licensee under the United States Bankruptcy Code (11 U.S.C. Secs. 101 to 110, inclusive) for bankruptcy or reorganization.
(b) The filing of a petition by or against the licensee for receivership, the commencement of any other judicial or administrative proceeding for its dissolution or reorganization, or the making of a general assignment for the benefit of its creditors.
(c) The commencement of a proceeding to revoke or suspend its virtual currency business license in a state or country in which the licensee engages in such business or is licensed to engage in such business.
(d) The cancellation or other impairment of the licensee’s bond or trust account as required by subdivision (b) of Section 26008.
(e) A charge or conviction of the licensee or of an executive officer, manager, director, or person in control of the licensee for a felony.
26012.
 A licensee shall maintain any records as required by the commissioner for determining its compliance with this division for at least three years.
CHAPTER  4. Enforcement
26013.
 Any licensee may surrender its license by filing with the commissioner the license and a report with any information as the commissioner requires. The voluntary surrender of the license shall become effective at the time and upon the conditions as the commissioner specifies by order.
26014.
 (a) The commissioner may prepare written decisions, opinion letters, and other formal written guidance to be issued to persons seeking clarification regarding the requirements of this division.
(b) The commissioner shall make public on the commissioner’s Internet Web site all written decisions, opinion letters, and other formal written guidance issued to persons seeking clarification regarding the requirements of this division. The commissioner may, at his or her discretion or upon request by an applicant or licensee, redact proprietary or other confidential information regarding an applicant or licensee from any decision, letter, or other written guidance issued in connection with an applicant or licensee.
26015.
 The commissioner may offer informal guidance to any prospective applicant for a license under this division, regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the licensing requirements that will be required of that applicant, based on the information provided by the applicant concerning its plan to conduct business under this division, and the factors used to make that determination.
26016.
 At any time, if the commissioner deems it necessary for the general welfare of the public, he or she may exercise any power set forth in this division with respect to a virtual currency business, regardless of whether an application for a license has been filed with the commissioner, a license has been issued, or, if issued, the license has been surrendered, suspended, or revoked.
(a) If it appears to the commissioner that a licensee is violating or failing to comply with this division, the commissioner may direct the licensee to comply with the law by an order issued under the commissioner’s official seal, or if it appears to the commissioner that any licensee is conducting its business in an unsafe or injurious manner, the commissioner may in like manner direct it to discontinue the unsafe or injurious practices. The order shall require the licensee to show cause before the commissioner, at a time and place to be fixed by the commissioner, as to why the order should not be observed.
(b) If, upon any hearing held pursuant to subdivision (a), the commissioner finds that the licensee is violating or failing to comply with any law of this state or is conducting its business in an unsafe or injurious manner, the commissioner may make a final order directing it to comply with the law or to discontinue the unsafe or injurious practices. A licensee shall comply with the final order unless, within 10 days after the issuance of the order, its enforcement is restrained in a proceeding brought by the licensee.
26017.
 (a) The commissioner may issue an order suspending or revoking a license, or taking possession of and placing a licensee in receivership, if after notice and an opportunity for hearing, the commissioner finds any of the following:
(1) The licensee is violating this division or a regulation adopted or an order issued under this division, or a condition of approval issued under this division.
(2) The licensee does not cooperate with an examination or investigation by the commissioner.
(3) The licensee engages in fraud, intentional misrepresentation, or gross negligence.
(4) The competence, experience, character, or general fitness of the licensee, or any director, officer, employee, or person in control of a licensee, indicates that it is not in the public interest to permit the person to provide virtual currency services.
(5) The licensee engages in an unsafe or unsound practice.
(6) The licensee is insolvent, suspends payment of its obligations, or makes a general assignment for the benefit of its creditors.
(7) The licensee has applied for an adjudication of bankruptcy, reorganization, arrangement, or other relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any person has applied for any such relief under that law against the licensee and the licensee has by any affirmative act approved of or consented to the action or the relief has been granted.
(8) Any fact or condition exists that, if it had existed at the time when the licensee applied for its license, would have been grounds for denying the application.
(b) In determining whether a licensee is engaging in an unsafe or unsound practice, the commissioner may consider the size and condition of the licensee’s provision of virtual currency services, the magnitude of the loss, the gravity of the violation of this division, and the previous conduct of the person involved.
26018.
 (a) Every order, decision, or other official act of the commissioner is subject to review in accordance with law.
(b) Whenever the commissioner has taken possession of the property and business of any licensee, the licensee, within 10 days after that taking, if it deems itself aggrieved thereby, may apply to the superior court in the county in which the head office of the licensee is located to enjoin further proceedings. The court, after citing the commissioner to show cause why further proceedings should not be enjoined and after a hearing and a determination of the facts upon the merits, may dismiss the application or enjoin the commissioner from further proceedings and direct the commissioner to surrender the property and business to the licensee.
26019.
 (a) If the commissioner finds that any of the factors set forth in Section 26017 is true with respect to any licensee and that it is necessary for the protection of the public interest, the commissioner may issue an order immediately suspending or revoking the licensee’s license.
(b) Within 30 days after the license is suspended or revoked pursuant to subdivision (a), the licensee may file with the commissioner an application for a hearing on the suspension or revocation.
(c) If the commissioner fails to commence a hearing within 15 business days after the application is filed with the commissioner pursuant to subdivision (b) or within a longer period of time agreed to by the licensee, the suspension or revocation shall be deemed rescinded.
(d) Within 30 days after the hearing, the commissioner shall affirm, modify, or rescind the suspension or revocation. Otherwise, the suspension or revocation shall be deemed rescinded.
(e) The right of the licensee to petition for judicial review of the suspension or revocation shall not be affected by the failure of the licensee to apply to the commissioner for a hearing on the suspension or revocation pursuant to subdivision (b).
26020.
 The commissioner may assess a civil penalty against a person that violates this division or a regulation adopted or an order issued under this division in an amount not to exceed one thousand dollars ($1,000) for each violation or, in the case of a continuing violation, one thousand dollars ($1,000) for each day or part thereof during which the violation continues, plus this state’s costs and expenses for the investigation and prosecution of the matter, including reasonable attorney’s fees.
26022.
 The enforcement provisions of this division are in addition to any other enforcement powers that the commissioner may have under law.
26023.
 (a) The commissioner may by order or regulation grant exemptions from this section in cases where the commissioner finds that the requirements of this section are not necessary or may be duplicative.
(b) A licensee shall, within 90 days after the end of each fiscal year, or within any extended time as the commissioner may prescribe, file with the commissioner an audit report for the fiscal year that shall comply with all of the following provisions:
(1) The audit report shall contain audited financial statements of the licensee for or as of the end of the fiscal year prepared in accordance with United States generally accepted accounting principles and any other information as the commissioner may require.
(2) The audit report shall be based upon an audit of the licensee conducted in accordance with United States generally accepted auditing standards and any other requirements as the commissioner may prescribe.
(3) The audit report shall be prepared by an independent certified public accountant or independent public accountant who is not unsatisfactory to the commissioner.
(4) The audit report shall include or be accompanied by a certificate of opinion of the independent certified public accountant or independent public accountant that is satisfactory in form and content to the commissioner. If the certificate or opinion is qualified, the commissioner may order the licensee to take any action as the commissioner may find necessary to enable the independent or certified public accountant or independent public accountant to remove the qualification.
(c) Each licensee shall, not more than 45 days after the end of each calendar year quarter, or within a longer period as the commissioner may by regulation or order specify, file with the commissioner a report containing all of the following:
(1) Financial statements, including balance sheet, income statement, statement of changes in shareholders’ equity, and statement of cashflows, for, or as of the end of, that calendar year quarter, verified by two of the licensee’s principal officers. The verification shall state that each of the officers making the verification has a personal knowledge of the matters in the report and that each of them believes that each statement in the report is true.
(2) Other information as the commissioner may by regulation or order require.
26024.
 In addition to the fees provided in Section 26006, the commissioner shall levy an assessment each fiscal year, on a pro rata basis, on those licensees that at any time during the preceding calendar year engaged in this state in the virtual currency business in an amount that is, in his or her judgment, sufficient to meet the commissioner’s expenses in administering the provisions of this division and to provide a reasonable reserve for contingencies.
CHAPTER  5. Miscellaneous Provisions
26025.
 A licensee shall disclose to consumers the following disclosure in a form and manner prescribed by the commissioner:
“Once submitted to the network, a virtual currency transaction will be unconfirmed for a period of time (usually less than one hour, but up to one day or more) pending sufficient confirmation of the transaction by the network. A transaction is not complete while it is in a pending state. Virtual currency associated with transactions that are in a pending state will be designated accordingly, and will not be included in your account balance or be available to conduct transactions.
The risk of loss in trading or holding virtual currency can be substantial. You should therefore carefully consider whether trading or holding virtual currency is suitable for you in light of your financial condition. In considering whether to trade or hold virtual currency, you should be aware that the price or value of virtual currency can change rapidly, decrease, and potentially even fall to zero.
(Insert company name) is licensed by the Department of Business Oversight to do business in California. If you have complaints with respect to any aspect of the virtual currency business conducted by (company name), you may contact the California Department of Business Oversight at its toll-free telephone number, 1-800-622-0620, by email at consumer.services@dbo.ca.gov, or by mail at the Department of Business Oversight, Consumer Services, 1515 K Street, Suite 200, Sacramento, CA 95814.”
26026.
 (a) Upon completion of a transaction subject to this division, the licensee shall provide to the consumer a receipt containing the following information:
(1) The name and contact information of the licensee including a telephone number of the licensee where consumers can contact the licensee for questions or to register complaints.
(2) The type, value, date, and time of the transaction.
(3) The type and amount of any fees charged.
(4) The exchange rate, if applicable.
(5) A statement of the refund policy of the licensee.
(6) Additional information the commissioner may require.
(b) The receipt required by this section shall be made in English and in the language principally used by that licensee to advertise, solicit, or negotiate, either orally or in writing, if other than English.
(c) The receipt required by this section may be provided electronically for transactions that are initiated electronically or in which a consumer agrees to receive an electronic receipt.
26029.
 The commissioner may, by regulation or order, either unconditionally or upon specified terms and conditions or for specified periods, exempt from all or part of this division any person or transaction or class of persons or transactions, if the commissioner finds such action to be in the public interest and that the regulation of such persons or transactions is not necessary for the purposes of this division. The commissioner shall post on the commissioner’s Internet Web site a list of all persons, transactions, or classes of person or transactions exempt pursuant to this section, and the provision or provisions of this division from which they are exempt.
26031.
 Notwithstanding any other law, a licensee in good standing under this division that plans to engage in activities permitted under the Money Transmission Act (Division 1.2 (commencing with Section 2000)) may request from the commissioner in a form specified by the commissioner to convert their license into a license under Division 1.2 (commencing with Section 2000). A licensee’s request to convert its license shall be accompanied by documentation or other evidence as determined by the commissioner that the licensee meets the requirements for licensure under Division 1.2 (commencing with Section 2000). If a licensee’s request for a converted license is granted, the licensee shall be subject to Section 2178 in order to thereafter engage in any virtual currency business.
26032.
 (a) A person or entity conducting virtual currency business with less than one million dollars ($1,000,000) in outstanding obligations and whose business model, as determined by the commissioner, represents low or no risk to consumers may register with a five-hundred-dollar ($500) license fee with the commissioner and, if approved, receive a provisional license to conduct virtual currency business. A person or entity that receives such a license shall also register with FinCEN as a money services business, if applicable.
(b) In determining whether to issue a provisional license, the commissioner shall consider a variety of factors, including, but not limited to:
(1) The nature and scope of the applicant’s business.
(2) The anticipated volume of business to be transacted by the applicant in California.
(3) The nature and scope of the risks that the applicant’s business presents to consumers.
(4) The measures which the applicant has taken to limit or mitigate the risks its business presents.
(5) Whether the applicant is regulated or otherwise authorized by another governmental entity to engage in financial services or other business activities.
(c) The commissioner may require a provisional licensee to certify adherence to certain risk-based performance standards related to safety, soundness, and consumer protection as prescribed by the commissioner.
(d) Based upon the factors identified in subdivision (b) and the provisional licensee’s history as a holder of a provisional license, the commissioner may at any time renew such license for an additional length of time or remove the provisional status from the license if the licensee meets all the requirements of this division. Unless the commissioner otherwise removes the provisional status of or renews such license, a provisional license shall expire two years after the date of issuance. If the commissioner renews a provisional license, the licensee shall pay a five-hundred-dollar ($500) renewal fee.
(e) The commissioner may request reports and documents and may audit the provisional licensee as needed to further consumer protection and enhance safety and soundness.
(f) A provisional licensee shall notify the commissioner within 15 days of surpassing the threshold in subdivision (a) and shall, within 30 days from that notice, apply for a license pursuant to Chapter 2 (commencing with Section 26002).
(g) A provisional license may be suspended or revoked pursuant to Section 26017.
CHAPTER  6. Operative Date
26040.
 This division shall become operative on July 1, 2018.