What the bill would do
AB 1326 would create a license for virtual currency services in California. It would force a wide range of Bitcoin companies to navigate a complicated and expensive application process, which includes providing unnecessary data to the Commission of Business Oversight. While there is a provisional license for start-ups, it won’t solve the problem: only the Commission of Business Oversight can grant the provision license and applications can be rejected for any reason. And because the bill’s language is vague, it’s not at all clear who the license requirement would apply to in the first place.
Why this is the wrong strategy for regulating Bitcoin
Virtual currencies like Bitcoin are still in their earliest stages of development. Regulating them now will lock us into an early moment in their evolution, before we know where the technology is headed.
Furthermore, the California virtual currency license is being touted as a model bill. That means its backers are trying to pass it here, then spread it across the country state-by-state. This could create wildly different standards for individual users, who may not know what rights they have and what legal protections exist. Even lodging a complaint could be confusing, with different regulatory bodies and processes in every state.
Why AB 1326 is deeply flawed
AB 1326 bill is Bitcoin-specific, attempting to write a law that is tailored to how Bitcoin works. It ignores how other virtual currencies differ—even though other virtual currencies, both current and future, would be affected.
AB 1326 is also technically inaccurate. The bill refers to businesses that have “full custody and control” over virtual currencies “in this state.” But virtual currencies don’t exist in a single physical location. Instead, cryptocurrencies’ “existence” often reflects the location where keys are stored—which might be in the cloud, on a server in your house, or in several other geographic places all at the same time. In addition, the question of who maintains “full custody and control” of virtual currencies is often complicated, especially when it comes to “smart contracts.”
The bill gives incredible discretion to the Commission of Business Oversight to reject licenses for almost any reason, with no administrative appeal.
Finally, this bill would be bad for video game currencies. Any game currency that can be shared, traded, or gifted among users may result in market value outside the game. As a result, those game currencies would be implicated.
Read additional analysis of the bill here.