The Governor of California approves a strict regulatory framework for cryptocurrencies by 2025

The legislation, known as the Digital Financial Assets Act, will require individuals and businesses engaged in digital asset activities to obtain regulatory licenses, similar to banks and money transfer agencies.

California Governor Gavin Newsom has approved a new cryptocurrency regulation bill that aims to establish a stricter regulatory framework for cryptocurrency businesses, which will take effect in July 2025.

The legislation, known as the Digital Financial Assets Act, will mandate that individuals and businesses engaged in digital asset activities must obtain a license from the Department of Financial Protection and Innovation (DFPI) if they want to continue operating in California.

Digital Financial Assets Act

The new regulations build on the state's existing money transfer laws, which currently prohibit banking and money transfer services from operating without a valid license issued by the DFPI Commissioner.

The Digital Financial Assets Act introduces additional measures that empower the DFPI to impose strict audit requirements on cryptocurrency companies and require them to keep comprehensive financial records.

Specifically, the Act states that licensees must retain records for at least five years from the date of any activity. These records must include a detailed general ledger updated at least monthly, including all assets, liabilities, capital, income and expenses of the licensee.

Failure to comply with these requirements will result in enforcement action against non-compliant companies.

Newsom changes stance in an ever-changing regulatory environment

The approval of the cryptocurrency regulation bill marks a significant shift in the Newsom governor's previous perspective on the matter.

In 2022, Newsom rejected a similar bill aimed at establishing a regulatory framework for digital assets in California and returned it without signing it, citing concerns that the bill lacked the flexibility needed to adapt to the rapidly evolving cryptocurrency environment.

At the time, Newsom said it would be wiser to wait for federal regulations before working with state legislatures to implement a comprehensive cryptocurrency licensing program.

At the same time, the federal government has been exploring various regulatory approaches to strengthen security and oversight in the cryptocurrency industry.

One notable measure being considered is the application of the Electronic Funds Transfer Act to cryptocurrencies as a means of combating fraudulent transfers. The Consumer Financial Protection Bureau recently announced its intention to authorize this measure to "reduce harm caused by errors, hacking and unauthorized transfers."

As California prepares to implement the Digital Financial Assets Act, it remains to be seen how this new regulatory landscape will affect the state's cryptocurrency industry and whether it will set a precedent for further regulatory developments in the broader U.S. market.