Gavin Newsom’s awkward crypto moment

Gov. Gavin Newsom is one of the most prominent figures in the Democratic Party promoters and advocates of blockchain and crypto technology. But Newsom’s recent efforts to push the industry and advocate for new regulation at the state level have hit a bumpy road.

In May, Newsom issued an executive order intended to promote blockchain research, spur innovation and explore how the technology could be used in government. Days later, two highlights cryptocurrencies imploded and crypto markets collapsed. Less than two months later, the Celsius networkone of the largest cryptocurrency exchanges, filed for bankruptcy, affecting more than 48,000 Californians with assets worth $650 million.

After the Celsius debacle, a new statewide attempt to regulate the industry rocketed through both chambers of the California legislature, approved in August. 30 with only six votes against.

Three weeks later, Newsom vetoed that bill, claiming that it was “premature” for the State to move forward without regard to “upcoming federal regulation.”

Newsom’s unfortunate timing soon struck again. In the months following his veto, crypto exchange FTX has filed for bankruptcy, the former CEO of FTX Sam Bankman-Fried (a supporter of Newsom’s executive order) has been indicted multiple federal crimesand crypto prices have fallen more. Despite Newsom’s expectations, federal legislation regulates the nascent, but volatile, crypto industry remains in limbo.

Newsom has expressed no regrets over the veto. In an interview, he said his executive order had not gone “as far as a lot of people in the industry wanted,” noting that California had taken a different approach than New York, which has pursued particularly strict crypto regulation , since as well as Wyoming, which has such a lax regime that it has been described as the “Delaware of digital assets.”

“I think California’s approach was a sober approach,” Newsom said. “We tried to … look at it through the prism, long-term, of how this is going to fundamentally change relationships, especially in the financial sector. Blockchain, in particular, is something that I see becoming more and more prevalent in our lives.”

In Sacramento, however, lawmakers and advocates who pushed California’s latest attempt to regulate blockchain and crypto aren’t convinced the state has struck the right balance, and are preparing to strike back to try

“During the last legislative session, industry raised concerns about the costs of complying with fair and reasonable rules,” said Rep. Tim Grayson, chairman of the Banking and Finance Committee and author of AB 2269, vetoed the Newsom bill. “As we now know, the costs of doing nothing are much higher: real people are suffering.

“I thank the industry stakeholders who have already come to me in good faith to work toward a policy that promotes responsible innovation while protecting consumers,” Grayson added.

Industry stakeholders have been eager to intervene before. Payment processors Block Inc., Paypal and Stripe; financial giants Fidelity and JP Morgan Chase; OpenSea non-fungible token market; crypto financial services company Blockchain.com; crypto exchange Coinbase; software giant Salesforce; and trade groups such as the Electronic Transactions Assn., TechNet and the Blockchain Advocacy Coalition spent more than $400,000 combined lobbying the Assembly, the state Senate, the executive branch and Newsom himself between April 1 and late August, according to California lobbying disclosures. .

All of these organizations lobbied on the crypto regulation bill that Newsom vetoed. In a letter of opposition to Grayson, the bill’s author, the Blockchain Advocacy Coalition wrote that the bill needed “more clarity and flexibility” to avoid the potential “suffocation of a nascent but promising industry.” The coalition also objected to “unclear definitions” of digital asset terms and “burdensome registration requirements”. Others in the cryptocurrency industry saw the bill as a job killer that would drive innovation out of California and undermine Newsom. executive order.

Any new legislative effort to regulate the industry is likely to meet another windfall for top lobbyists in Sacramento, warned Robert Herrell, executive director of the Consumer Federation of California, a nonprofit advocacy group that he was a strong supporter of the bill that Newsom vetoed.

“[Big Tech companies] they have almost unlimited resources and they’re constantly currying favor with elected officials at all levels,” Herrell said. “That gives them access that consumers don’t have. None of the people left holding the bag after Celsius [and FTX] happened to have that kind of access.”

Salesforce pressed Newsom directly about NFTs and blockchain technology, according to the company pressure disclosure. On May 18, Salesforce treated Newsom to a $130 dinner, the lobbying report shows. The report does not say whether the lobbying in question occurred during the dinner, but a Salesforce spokesperson said it did not. Marc Benioff, the billionaire CEO of Salesforce, is a close friend of Newsom and the godfather of the governor’s oldest son.

Newsom sees NFTs and blockchains separately from cryptocurrencies and doesn’t recall crypto being discussed at the Salesforce dinner, he told The Times.

“I didn’t even know they had any interest in this space, Salesforce in particular, so this is news to me,” Newsom said. “I know a lot of people at Salesforce, including Marc Benioff. I was just with Marc and we didn’t have a single conversation about crypto.

The bill Newsom vetoed would have required cryptocurrency exchanges to disclose their assets and financial stability, and temporarily banned a category of cryptocurrency called unbacked or “Algo” stablecoins. and required companies that trade crypto assets or manage clients’ money to obtain a license from the California Department of Financial Protection and Innovation in January. 1, 2025.

Newsom said in his veto statement that his administration “conducted extensive research and outreach to gather input on approaches that balance benefits and risks for consumers.”

But Newsom and his top aides did not meet with the Consumer Federation of California, Herrell said.

Herrell was proud that he was able to build a broad coalition of “strange bedfellows” to support the crypto regulation bill, he said. “We’ve worked hard to build this coalition,” Herrell said. “The events of the last few months have just confirmed what many of us already knew, which is that this is a Wild West market in crypto. It lacks basic rules of the road and basic consumer protections.

Newsom’s veto statement suggested he was counting on federal action to set those driving rules. But with Bankman-Fried – the main force driving regulatory change in Washington – Faced with federal charges and Republicans poised to take control of the House of Representatives, congressional action on crypto regulation seems unlikely in the short term.

In retrospect, Newsom’s veto of California’s crypto regulation “looks pretty bad,” the representative said. Brad Sherman (D-Northridge), one of the leading anti-crypto voices in Congress.

“In general, we don’t like people being ripped off, and the Securities and Exchange Commission is moving slowly,” Sherman, who wants crypto. to be banned, he told The Times. “Congress is an immobilized mess, and state legislators can step in and at least make sure that when you invest in something really bad, you don’t get ripped off. If you’re going to be in the business of keeping other people’s money, you have to ‘be regulated, audited and bound’.

Newsom appears to have pivoted somewhat in the wake of the FTX crisis. Last month, his office issued a executive report which looked at the ramifications of his crypto executive order. The report found that people who have historically been underserved by the traditional banking industry “have fallen victim to hacks, scams, fraud and product collapses.” He also cited three main risks involved in the crypto market: fraud, misinformation, as well as privacy and security.

The California Legislature is moving forward. Grayson has already introduced a new bill, AB 39which would require all companies involved in money transfers – a definition that would include crypto companies – to register with state financial regulators.

State Sen. Monique Limón (D-Goleta), chairwoman of the California Senate Banking and Financial Institutions Committee, appears ready to revisit a new version of the bill that Newsom vetoed, or go further.

“If all crypto companies complied with the consumer protection provisions of AB 2269, I am confident that California consumers and retail investors would be exposed to less risk in this space,” Limón told The Times. “I look forward to working with Speaker Grayson as he leads legislative efforts that put California consumers first in the upcoming legislative session.”

Times staff writer Taryn Luna contributed to this report.

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