USA – CALIFORNIA Trends and Developments Contributed by: Alexander Lindgren, Karl Lindgren and Daniel TeJumson, Lindgren, Lindgren, Oehm & You LLP
if a provider exerts control over another person’s digital financial assets; • persons who engage in digital financial asset administration (issuing a digital financial asset with the authority to redeem the digital financial asset for legal tender, bank or credit union credit, or another digital financial asset) (California Financial Code Section 3102 (h) and Section 3102 (i)(1)); • persons who issue electronic certificates repre - senting interests in precious metals or who hold such certificates for others (California Financial Code Section 3102 (i)(2)); and • persons who exchange certain digital representa - tions of value used within online games for either (i) a digital financial asset offered by or on behalf of the same publisher, or (ii) legal tender or bank or credit union credit outside the relevant game ecosystem (California Financial Code Section 3102 (i)(3)). There is a common thread of “access” or “custody” that runs through the first three examples, includ - ing custody by virtue of ability to redeem a token for value. One potential area of ambiguity relates to back-end controls and authority over the code gov - erning tokens, or smart contract systems established to enable otherwise user-driven activity which might be licensable if conducted by a centralized person or group of persons. Practitioners should carefully exam - ine so-called administrative or upgrade-only keys and authorities with respect to such systems, as retention of back-end permissions could implicate sufficient authority over the assets redemption, or control over the activity enabled by the smart contract system, to implicate licensure under the DFAL. Statutory exclusions California Financial Code Section 3103 sets out a number of exclusions from DFAL licensure. These exemptions include various governmental bodies, banks and credit unions, certain trust companies, and a range of Commodity Futures Trading Commis - sion- and SEC-registered entities, as well as limited- purpose exemptions for certain service providers and de minimis activity. Additionally, the following exemp - tions (drawn from California Financial Code Section 3103 (b)(5), (7), (8), (9), (13) and (17)) are relevant to technology and infrastructure providers:
“(5) A person whose participation in a payment system is limited to providing processing, clearing, or per - forming settlement services solely for transactions between or among persons that are exempt from the licensing requirements of this division.” [Note: This provision parallels the payment proces - sor exclusion for money transmission activity and its (A) A person that contributes only connectivity soft - ware or computing power to securing a network that records digital financial asset transactions or to a pro - tocol governing transfer of the digital representation of value. (B) A person that provides only data storage or secu - rity services for a business engaged in digital finan - cial asset business activity and does not otherwise engage in digital financial asset business activity on behalf of another person. equivalent under the California MTA.] “(7) A person that is any of the following: (C) A person that provides only to a person otherwise exempt from this division a digital financial asset as one or more enterprise solutions used solely among each other and that does not have an agreement or a relationship with a resident that is an end user of a digital financial asset.” [Note: This set of provisions is essential to both node operators/validators on open networks and software and infrastructure providers in the sector, but care should be given to any effective relationship with end users.] (8) A person using a digital financial asset, including creating, investing, buying or selling, or obtaining a digital financial asset as payment for the purchase or sale of goods or services, solely on the person’s own behalf for personal, family, or household purposes or for academic purposes. (9) A person whose digital financial asset business activity with, or on behalf of, residents is reasonably expected to be valued, in the aggregate, on an annual
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