Did California just kill innovation for Fintech Industries?
The US used to be a pioneer with regard to Bitcoins compared to other jurisdictions. Although the US has put enormous effort into the attempt to understand Bitcoins and its potential risk, there were no formal recommendations or guidance on a federal level. Consequently, regulatory bodies and courts have acted independently from each other, resulting in a complete mishmash of regulatory approaches.
The newly amended proposal by the State of California does not represent the old pioneering role. Instead of moving forward, California seems to stop moving at all in the attempt to gain full control.
Goodbye legal certainty
Although the initial aim of AB1326 was to finally provide a regulatory framework that provides legal certainty for users regarding the money transmission law, the proposal provides literally nothing. Instead oflarifying the role of the California Money Transmission Law aka the issue at stake, the proposal is silent on it. Instead of dealing with the crux of money transmission licensing, the bill simply sets up an enrollment scheme. Businesses remain in uncertainty as to how to comply with the existing issue of money transmission licensing as well as with the new enrollment scheme.
Legal certainty is a cornerstone, providing that everyone who is subject to the law must have the knowledge of it as well as the ability to regulate their behavior. Continuing to remain silent on money transmission licensing and simply developing a new enrollment scheme, the Fintech industry remains to stay in legal uncertainty.
Au Revoir License et salut enrollment
The status quo of the bill varies significantly from its original proposal. Whereas the old bill proposed a license system the new bill features an exclusive enrollment scheme. It seemed reasonable to get a prior approval by showing a sample form for transactions. The old proposal sought to convert a license under the bill and under the Money Transmission Act. Under the new bill, instead of obtaining a license, businesses have to enroll in the Digital Currency Business Enrollment Program. Businesses that are not enrolled are not allowed to conduct digital currency business. Prior to actually conducting business, the enrollee has to provide specific disclosures concerning transactions, opening accounts and providing receipts. Additionally, commissioners can oblige the enrollee to submit surveys, investigations and questionnaires in order to obtain information on the business model, capitalization and net worth and cybersecurity. For this so-called „fact gathering“ records, including correspondence, accounts and books can be taken.
Apart from complying with these compliance standards, there is quite the financial part to this enrollment scheme. Firstly, there is a non- refundable $5.000 fee for enrollment. Then, there is an annual fee of $2.500 in order to stay enrolled
Adiós Fintech Innovation
Fintech businesses and start-ups evolved because of their founders and their ideas. Advertisement strategies differ greatly compared to other businesses. California now wants to have a say in it. Any form of innovation, development, coding or networking must receive prior approval by the commissioner. In other words, there is full and complete regulation of the Fintech industry. Businesses refusing to enroll cannot continue to work. Businesses that enroll are subject to approval and might eventually not be able to develop in their pursued interests if they lack assent.
How does the State think economy will continue to grow if there is full control? Any form of innovation, invention and further development is now dependent on the state. It is probable that Fintech businesses will make a move - out of California. California might eventually become the least attractive market place for the Fintech industry in case the bill - given its current status - will pass.
With only a short time span left, we only hope to say hasta luego.