Registration Under California Digital Financial Assets Law Begins March 9, Law Takes Effect July 1
In Short
The Situation: While most states address digital asset regulation through their money transmission regulatory regimes, a growing number of jurisdictions have transitioned toward specialized digital asset licensing. Following the lead of states like New York and Louisiana, California seeks to implement the broad digital asset licensing framework it enacted in 2023.
The Change: California's Assembly Bill No. 39 and Senate Bill 401 (together, the "Digital Financial Assets Law") establish a comprehensive licensing and oversight regime for businesses engaging in digital financial asset activities with California residents. Non-bank digital asset businesses, including exchanges and custodians, will be required to obtain a license from California's Department of Financial Protection and Innovation (the "DFPI") or qualify for an exemption in order to continue covered activities.
Looking Ahead: Registration for licensing opens on March 9, 2026, giving covered businesses a limited window to: (i) assess the statute's applicability; (ii) register before the law takes effect on July 1, 2026 (the effective date was extended from July 1, 2025 to July 1, 2026 by Assembly Bill No. 1934, signed by Governor Newsom in September 2024); and (iii) prepare for compliance activities such as disclosures and reporting. Entities may continue to operate while their application is pending review, but those that fail to apply or do not qualify for an exemption must cease covered activities with California residents after July 1, 2026.
Like the New York BitLicense regime, California's Digital Financial Assets Law creates a comprehensive licensing, prudential oversight, disclosure, and enforcement framework for "digital financial asset business activity" conducted with or on behalf of California residents. The statute is administered by the DFPI and is directed at non-bank digital asset businesses, with significant exemptions for traditional financial institutions and limited-scope or de minimis activity. Registration for California's new digital asset licensing regime opens March 9, 2026, with the law taking effect on July 1, 2026.
Key features of the Digital Financial Assets Law include the following:
- Scope and Covered Activities. The Digital Financial Assets Law 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 …" While the law does not enumerate specific digital assets, its intentionally broad definition likely encompasses cryptocurrencies such as Bitcoin, as well as stablecoins. Securities that are registered with the SEC or exempt from SEC registration, or that are qualified or exempt from qualification under California law, are expressly excluded from the definition. Covered activities include exchanging, transferring, or storing digital financial assets; engaging in digital financial asset administration; and holding electronic precious metals or certificates on behalf of others. The statute applies to persons doing business in California and/or engaging in covered activities with California residents.
- Key Exemptions. Exemptions from registration include the following entities: foreign or FDIC-insured banks; federally or state-chartered credit unions in California; licensed trust companies; certain SEC-registered and CFTC-registered entities; persons whose annual digital financial asset business activity with residents is not likely to exceed $50,000 in aggregate annually; merchants accepting digital financial assets solely as payment for non-digital-asset goods and services; persons providing digital asset products or services without compensation; and several other persons and entities listed in the law.
- Licensing Requirements. Prior to submitting an application, applicants must establish written policies and procedures for information security, business continuity, disaster recovery, anti-fraud, anti-money laundering, counter-terrorist financing, and other compliance programs. Applicants must also include extensive disclosures related to business history, regulatory and litigation history, banking relationships, and insurance coverage. The Digital Financial Assets Law additionally requires executive officers and persons who control the applicant to submit fingerprints for FBI criminal history checks. The DFPI will evaluate applicants based on financial condition, character, and fitness, and may investigate business premises. After the investigation, the DFPI may approve, conditionally approve, or deny the license. The DFPI may issue conditional licenses to holders of New York virtual currency business licenses issued on or before January 1, 2023.
- Ongoing Obligations and Enforcement. Once licensed under California's Digital Financial Assets Law, entities must comply with extensive ongoing regulatory requirements. This includes submitting comprehensive annual reports, contributing to the administration of regulations, promptly reporting material changes, obtaining prior approval for changes in control or mergers, and maintaining detailed transaction records. Licensees are also required to maintain surety bonds or trust accounts, as well as sufficient capital and liquidity to ensure financial integrity and safe operations.
Licensees must provide clear disclosures to customers regarding fees, insurance coverage, risks, and transaction terms, and implement robust operational and consumer protection programs. Exchanges offering digital financial assets must certify that they have assessed whether an asset could be considered a security, disclosed conflicts of interest, conducted cybersecurity and risk evaluations, and established policies for reviewing and delisting assets. The DFPI has broad enforcement authority, including the power to suspend or revoke licenses, issue cease-and-desist orders, and impose civil penalties for unlicensed activity or material violations.
Two Key Takeaways
- Registration opens soon. Businesses engaged in covered digital financial asset activities with California residents may register as early as March 9, 2026. To continue operations, applications must be filed by July 1, 2026.
- Broad compliance obligations apply. Licensed entities will face extensive compliance requirements including: (i) examinations and requests by the DFPI; (ii) implementation of compliance programs, reporting, and payment of fees; and (iii) implementation of record-keeping, protections and disclosures for California residents. In addition to these compliance obligations, applicants must submit extensive documentation, including business and litigation history, banking relationships, and insurance details, to the DFPI.
