USA – CALIFORNIA Trends and Developments Contributed by: Ryan David Williams, Betsie Stukenborg and Lauren Simon, Ashbury Legal
Application to decentralised finance (DeFi) In determining whether a business is exchanging, transferring or storing digital financial assets and is thus subject to licensing requirements, the DFAL considers who is controlling the digital asset. The DFAL defines “control” of digital financial assets as the “power to execute unilaterally or prevent indefi- nitely a digital financial asset transaction”. This limits the scope of the DFAL and provides clarity that the DFAL licensing requirements are limited to businesses actually exercising control over digital assets, which should be welcome relief to many DeFi protocols and developers. However, the determination of whether a business controls digital financial assets and is therefore sub- ject to the DFAL requires fact-specific analysis and cannot be applied broadly to different categories of digital asset businesses, including DeFi. For exam- ple, smart contracts execute automatically when preset criteria are met, which can suggest that no one possesses sufficient “control” over the resulting transaction. However, the person or team holding the admin key to such smart contracts may retain control to potentially stop, pause or redirect transactions, in which case they may exercise sufficient control to be subject to licensing requirements. Similar questions arise with multi-party computation wallets and multi- sig wallets, in which the question of control will turn on the practical reality of which party is holding (or not holding) sufficient keys or shards to authorise or stop a transaction. While the concept of “control” will be helpful in limiting the application of the DFAL to certain DeFi applications, the statute still leaves room for uncertainty, and control thresholds will need to be developed over time through the practical application of the DFAL. Exemptions The DFAL provides several practical exemptions from its licensing requirement, including: • banks and other established financial institutions; • government agencies; • businesses with less than USD50,000 in annual digital asset activity with California residents; and • merchants who merely accept digital assets as payment for goods or services.
• Most recently, in October 2025, California’s Unclaimed Property Law was amended to include digital assets, subjecting dormant crypto held by custodial platforms to the same unclaimed prop- erty regime as traditional financial assets. DFAL In 2023, California enacted the DFAL, which creates a comprehensive regulatory framework focused on con- sumer protection for “digital financial asset business activity”. Effective 1 July 2026, businesses engaged in covered digital financial asset activity either in Cali- fornia or with California residents must either hold or have applied for a licence with the California Depart- ment of Financial Protection and Innovation (DFPI). The DFAL provides for a holistic licensing framework and raises digital financial asset activity to a similar standard as traditional banking activities. Who must obtain a DFAL licence Any business that is engaged in digital financial asset activity in California or with California residents must apply for and obtain a licence. The DFAL defines a digital financial asset as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender”. Digital financial asset activities covered under the DFAL include exchanging digital financial assets, transferring digital financial assets, storing or custo- dying digital assets, issuing tokens with redeemable value and operating crypto kiosks (ATMs). Notably, the DFAL excludes from the definition of digi- tal financial asset any asset deemed to be a security by the SEC. However, following passage of the DFAL, the SEC published guidance in March 2026 stating that, while digital assets may be the subject of an investment contract in certain contexts, the assets themselves are rarely securities. As a result, a single digital asset can be the subject of an investment con- tract in some contexts and not in others. Given this guidance and the fungible nature of digital assets, it is unlikely that this provision of the DFAL provides a workable exclusion.
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