USA – CALIFORNIA Trends and Developments Contributed by: Alexander Lindgren, Karl Lindgren and Daniel TeJumson, Lindgren, Lindgren, Oehm & You LLP
basis at USD50,000 or less, measured by the USD equivalent of digital financial assets. (13) A person that does not receive compensation, either directly or indirectly, for providing digital finan - cial asset products or services or for conducting digi - tal financial asset business activity or that is engaged in testing products or services with the person’s own funds. (17) A merchant that accepts a digital financial asset as payment for the purchase or sale of goods or ser - vices, where the goods or services do not include digital financial assets. [Note: The inclusion of the terminal caveat ensures that any business exchanging one digital financial asset for another, or legal tender for digital financial assets and the reverse, is covered by the statute.] Industry case study: web3 gaming The DFAL’s definition of “digital financial asset busi - ness activity” includes certain exchanges of in-game value for legal tender or bank or credit union credit outside the relevant game ecosystem (California Financial Code Section 3102 (i)(3)). However, the definition of “digital financial asset” excludes a digi - tal representation of value issued by or on behalf of a publisher and used solely within an online game, game platform or family of games sold by the same publisher or offered on the same game platform (Cali - fornia Financial Code Section 3102 (g)(2)(B)). In short, the exclusion appears oriented towards assets like “gold” in World of Warcraft that are transferred only in-game. Many web3 gaming tokens, by design, are transferable and usable outside a single publisher- controlled environment, which can push them back into scope. Some web3 gaming tokens may be argued to fall within the securities exclusion, but this is often a contested determination. An SEC allegation that a token was offered or sold as an unregistered security does not, by itself, establish that the token is within the exclusion. For example, in its complaint against Coinbase filed on 6 June 2023, the SEC alleged that Axie Infinity Shards (AXS) were offered and sold as an
investment contract ( SEC v Coinbase, Inc, Complaint (SDNY, Case 1:23-cv-04738, filed 6 June 2023)). Part 3: Licensure Requirements Among other requirements, the DFAL requires licen - sees to maintain specified books and records for at least five years after the relevant activity, including a general ledger posted at least monthly listing assets, liabilities, capital, income and expenses (California Financial Code Section 3303). Applicants must also establish (and, during licensure, maintain) written policies and procedures addressing, among other things, information security and operational security programmes (California Financial Code Section 3701). The application for a licence must include detailed information about the applicant, its business, key individuals, litigation and bankruptcy history, and financial condition (California Financial Code Section 3203). The DFPI investigates the applicant’s financial condition, competence, experience and character and issues a licence only if statutory criteria are satisfied (California Financial Code Sections 3203 and 3209). Licensees must also maintain a surety bond or trust account and sufficient capital and liquidity, in forms and amounts determined by the DFPI, to protect Cali - fornia residents and support ongoing operations (Cali - fornia Financial Code Section 3207). The DFAL requires a covered person, before engag - ing in digital financial asset business activity with a resident, to make specified disclosures, including a schedule of fees and charges, the manner by which fees and charges will be calculated if they are not set in advance, and the timing of the fees and charges (California Financial Code Section 3501). Digital asset transaction kiosks The DFAL imposes additional requirements on a specific category of applicants, namely digital asset kiosk operators. From 1 January 2024, an opera - tor of a digital financial asset transaction kiosk (an electronic information processing device capable of accepting or dispensing cash in exchange for a digi - tal financial asset) must not accept or dispense more than USD1,000 in a day from or to a customer via a kiosk (California Financial Code Sections 3901 (b) and 3902). From 1 January 2025, an operator must
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