USA – CALIFORNIA Trends and Developments Contributed by: Alexander Lindgren, Karl Lindgren and Daniel TeJumson, Lindgren, Lindgren, Oehm & You LLP
other network infrastructure providers, a medium of exchange) within their own networks. However, practi - cal classification will remain fact-dependent and may turn on how the asset is used, marketed and held by consumers. Other fungible tokens Other fungible digital assets built on top of Layer-1 networks, such as Ethereum network ERC-20 tokens, present a more challenging case. Some are intended to operate as governance mechanisms, others as con - sumptive goods, and others as payment or settlement instruments. The variability is too broad to analyse globally. Persons handling such tokens should there - fore assess whether the token is reasonably charac - terised as a medium of exchange, unit of account or store of value. Questions to ask might include: • Is there a stated intent to function as one of these categories in the issuer’s documents, such as its “whitepaper”? • Does the digital asset have any function other than acting as a medium of exchange, unit of account or store of value? (This will not be dispositive, as there is no explicit carve-out for “utility” tokens, but it may be relevant to the overall characterisation.) • Is the digital asset a “tokenised” version of an asset that is commonly used as a medium of exchange, unit of account or store of value (much as USDC is, to some extent, a tokenised version of the US dollar)? If the answer is unclear, and the asset in question is divisible and fungible (thus at least amenable to use as a medium of exchange or unit of account), it may be defensive to assume coverage and proceed to an analysis of the activity in question. Non-fungible tokens Non-fungible tokens (or NFTs) might seem unlikely to qualify, but this may not be the case. To start, fine art is often considered a store of value and, for a time, NFT artworks sold for prices comparable to those of renowned historical artists – most of which rapidly lost that valuation. Does this mean that, for a limited time, limited edition NFTs were a store of value, but are no longer because they have subsequently proved to perform poorly financially? Perhaps, but this is not
obvious, and would imply that digital assets may come and go from the statute. Moreover, an NFT that represented a real-world asset which was itself a store of value may also qualify. NFTs are less likely to implicate mediums of exchange (given their non-fungibility), but many “series” NFTs (series of multiple substantially similar or identical NFTs) could be a unit of account as a consumable asset within a platform or network. Much as with fungible, layer-2 tokens, persons engag - ing in digital financial asset business activity with non- fungible tokens will need to evaluate whether it may be covered by the statute – although such person may not get a clear answer. Securities exclusion – a cautionary note The securities exclusion is a potentially appealing tool given recent enforcement history in the block - chain space. However, many tokens may not clearly be “securities” for purposes of the DFAL even if their distribution implicates securities laws (eg, a token’s initial distribution may raise securities law issues even if the token later functions primarily as a con - sumptive or governance instrument), especially in the case of tokens that were not explicitly structured as a standard class of conventional securities, such as tokenised stock. An issuer’s public positioning, dis - tribution practices, and (where available) regulator views on whether its outstanding token constitutes a security may therefore be relevant both for ensuring securities compliance and for analysing whether the DFAL’s securities exclusion is available. Part 2: “What is Licensable Digital Financial Asset Business Activity Under the DFAL?” California Financial Code Section 3102 (i) defines “digital financial asset business activity” to include: • persons (whether an individual or company) who engage in, or hold themselves out as engaging in, the exchange, transfer, or storage of digital financial assets with, or on behalf of, California residents (California Financial Code Section 3102 (i)(1)); with respect to the transfer, exchange, or storage of digital financial assets, the DFAL applies
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