California wants to be the country’s crypto capital. But will consumers be left behind?
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It was a sweeping statement with a clear message. California, home to one of the world’s largest economies, long a tech cradle, will lead the way in two others: cryptocurrency, and blockchain — the technology that enables virtual currencies.
“California is a global hub of innovation, and we’re setting up the state for success with this emerging technology – spurring responsible innovation, protecting consumers, and leveraging this technology for the public good,” California Gov. Gavin Newsom said in a statement announcing his executive order in early May. “Too often government lags behind technological advancements, so we’re getting ahead of the curve on this, laying the foundation to allow for consumers and business to thrive.”
Newsom in the May order said he wants to:
▪ Create clear regulatory rules of the road for crypto assets and companies operating in blockchain that protect California consumers.
▪ Create and encourage research and workforce development into blockchain technology that spurs innovation, cultivates students and creates pipelines for all three.
▪ Incorporate blockchain into more state agencies’ operations.
The objective: to “solidify California’s status as the premier global location for responsible crypto asset companies to start and grow.”
That could boost California consumers’ trust in the technologies, say industry researchers and entrepreneurs. About one in eight adults — about 16% — have invested in, traded, or used cryptocurrencies, the governor’s office said.
But the lack of a regulatory framework and the careening crypto market’s recent rollercoaster ride have left other potential, but skittish, users of crypto and blockchain on the sidelines. After the rise in interest and investment in the virtual money over the past couple of years, prices have plummeted resulting in crypto layoffs.
While experts sort through the meaning of the ups-and-downs, they say adding consumer protections to the executive order’s to-do list could calm nascent users’ nerves.
“One of the benefits of blockchain will be to make processes more streamlined and so much cheaper — think signing stacks of documents to buy a house,” said Christine Parlour, Sylvan C. Coleman Chair of Finance and Accounting at UC Berkeley’s prestigious Haas School of Business, whose research dives deeply into the worlds of financial technology, digital payments and credit markets.
But, “regulatory uncertainty is one of the reasons that some consumers are uncertain about entering into the crypto sphere,” Parlour added. “Clearly outlined consumer protections or ‘caveat emptor’ signs will let everyone know where they stand, reduce uncertainty and encourage adoption.“
California consumers’ advocates, meanwhile, are urging caution and warning against flagwaving for the new technology.
Consumer Federation of California executive director Robert Herrell was pointed in prepared remarks following Newsom’s signature. Calling a strong regulatory and enforcement framework that protects consumers “critically important,” Herrell nevertheless worried that Go-Biz, the Governor’s business and economic development office, was goosing the effort at the expense of useful consumer safeguards.
“We are somewhat concerned that Go-Biz appears to be in charge of much of the process and consumer organizations will remain vigilant that consumers not take a back seat to promoting an industry spending billions to protect itself,” Herrell said.
A bill by state Assemblyman Tim Grayson, D-Concord, is sponsored by the consumer group. AB 2269 would create the Digital Financial Assets Law, licensing and regulating cryptocurrency exchanges and other digital financial businesses’ activities to protect consumers.
The bill would require new disclosures regarding prices and fees for cryptocurrency transactions and require digital financial businesses are overseen and regulated by the state’s Department of Financial Protection and Innovation. The bill’s first hearing before a state Senate banking and finance committee is slated for late June.
Consumer federation officials say the public including crypto investors are skeptical of the industry and do not have enough reliable information about cryptocurrencies. Volatility in the crypto markets has made the situation worse, they say, enhancing the need for consumer protections.
“Fortune favors the balanced and wise, not just the so-called ‘brave’,” the federation’s Herrell said in a statement supporting the legislation. “Hundreds of millions in self-promotion from the crypto industry shouldn’t overshadow the need for solid consumer protection.”
Others are skeptical, too.
Molly White is a software engineer and Wikipedia editor who has emerged as a prominent national skeptic of crypto and the decentralized financial alternative it promises users. White called the industry’s marketing of crypto “predatory” in a recent Washington Post interview; and, in a Bloomberg interview again called the crypto industry’s narrative into question.
“I think it’s possible to see a broad shift of the Internet to become more decentralized to sort of take the power out of tech companies that are currently wielding a lot of power. But I don’t think that crypto is going to be the way that that happens,” White told Bloomberg Quick Take.
“If we look at what’s currently being described as Web3, you see a lot of the same big players, the same venture capitalists, the same tech companies that are holding power in Web2,” White continued. “I think it’s a little strange that they are holding this narrative that they will be taking power away from themselves and giving it back to the little guy, as opposed to just using it as a new opportunity to make money.”
Meantime, the absence of meaningful regulation in California has been a roadblock to industry progress in the crypto sector, Parlour said, leading businesses to seek avenues into other markets.
“Because of this, various enterprises are moving to the Bahamas, Estonia, the United Arab Emirates, the list goes on and on,” Parlour said. “Given the depth of experience here, if there was a supportive regulatory environment, it would strengthen California’s status in crypto.”
Brian Foote is closely watching what the executive order may mean. His San Diego-based Humbl offers a litany of blockchain services in the digital economy — from mobile pay, non-fungible tokens and mobile wallets that digitally store credit, debit and ID cards, to credentials for government agencies — and has become something of an evangelist for the new technology.
But Foote said he first had to leave tech-rich California and plant stakes in Wyoming. The Cowboy State’s established regulations for blockchain-driven businesses allowed him to gain early entry into the industry.
“As a lifelong Californian, it was surreal to have to go to Wyoming, to leave the state to give birth to a public company,” he said. “If (Gov. Newsom) can give us a clear regulatory framework for California companies to begin building a tokenized economy in blockchain, California can be a real leader for another cycle.”
In interviews Foote has said the 2030s will be the “blockchain decade” where functions from home mortgages and auto purchases to how we store and carry banking, driver’s license and insurance information will be supported by blockchain technology.
Consumers today are “tenants of their data on the web. You rely on brokers, brokerages, middlemen to perform simple functions in your daily life,” he told San Diego television station KUSI in a recent interview. Blockchain technologies, he said, decentralize those functions, allowing consumers to conduct business directly.
Consumers’ comfort with mobile and blockchain technologies may have accelerated by up to a decade as the pandemic, shelter-at-home orders and work-from-home environments have changed the way Californians shop, work and conduct business, he said.
“We pivoted away from merchant-facing (businesses) to scaleable software and a tokenized economy,” Foote said in a Bee interview. “Customers have started thinking about virtual environments — that has accelerated five to 10 years in my mind.”
Industry analysts have cheered the executive order. Some say the Governor’s charge immediately positions California as the nation’s most crypto-friendly state, leapfrogging New York and Wyoming — two states with crypto-industry and blockchain laws on the books — and Florida, where Miami is an emerging hub as a gateway to a Latin America that has embraced the technology.
“Silicon Valley has been a hotspot for blockchain and cryptocurrency development since the early days of those global industries,” Shelly Kramer, a brand strategist and an analyst at Futurum Research, wrote. “As emerging fields that receive substantial investment and create a lot of jobs, it’s wise for Newsom to take the lead in crafting a regulatory framework that encourages blockchain and crypto industry presence in California.”
California is staking out crypto industry pole position, but Parlour is waiting to see where that leads.
“I view it as a very positive development,” the UC Berkeley finance professor and digital economy expert said. “It is clear that Washington has decided to engage on these issues and so it is in California’s best interest to make sure that the state maintains its technology lead....It is still early days. As with any push for a regulatory framework, the eventual details will matter.”
Parlour said Newsom’s order shows that California wants everyone — entrepreneurs, investors, consumers and policymakers — around the table as it crafts policy around the emerging technology and the types of businesses that it can generate.
“This seems to be how California is approaching the problem,” Parlour said. “Let’s hope that this will lead in the direction we are all hoping for.”
This story was originally published June 21, 2022 at 5:00 AM.
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