On May 4, 2022, Gavin Newsom, the governor of California, issued an executive order (the “CA EO”) directing several state agencies to undertake projects to support the responsible development of blockchain technology.1 The CA EO is broadly modeled on the similar executive order that US President Joe Biden issued in March 2022 (“Federal EO”) and emphasizes in several places that California will base its actions off of those of the US federal government.2 As with the Federal EO, the CA EO does not provide much insight into what the outcome of the various projects will be and tempers its enthusiasm for blockchain technology with the countervailing concerns of consumer protection and climate change.
In this Legal Update, we discuss the key points of the CA EO.
Innovation Report
The CA EO directs the California Office of Business and Economic Development (“GO-Biz”), California Department of Financial Protection and Innovation (“DFPI”) and California Government Operations Agency (“GovOps”) to issue a report to the governor recommending next steps on blockchain innovation. The report will be based on four workstreams that consist of:
1. Collecting input from stakeholders
2. Creating a regulatory approach to crypto assets that harmonizes the roles of federal and state authorities
3. Developing use cases for the application of blockchain technology in state operations
4. Building research and workforce pipelines
The report must be issued within 60 days of the publication of the “report on the future of money and payment systems” outlined in section 4 of the Federal EO.
Interestingly, the report under the CA EO appears to cover all uses of blockchain technology, while the report contemplated by the Federal EO is focused primarily on the suitability of a US central bank digital currency, which is not typically the domain of US states. Therefore, the linkage of the CA EO report to the issuance of the Federal EO report appears to reflect merely a timing consideration.
Stakeholder Engagement Workstream
The CA EO directs GO-Biz to collect information from stakeholders on potential blockchain applications and ventures, with particular attention to crypto assets and related financial technologies. The range of relevant stakeholders is broad and includes traditional technology developers and those concerned primarily with community outcomes (e.g., those interested in systemic inequities, energy consumption and environmental impact).
The CA EO also directs the DFPI to engage in a public process to develop a comprehensive regulatory approach to crypto assets that is “harmonized with the direction of federal regulations and guidance.” This engagement will include interaction with federal agencies, including as outlined in the Federal EO; California-chartered banks and credit unions; crypto-asset companies; and the public at large. Notably, the DFPI is required to exercise its authority under the California Consumer Financial Protection Law to develop guidance and, as appropriate, regulatory clarity and supervision of private entities offering crypto asset-related financial products and services in California. It also is required to issue public consumer protection principles for companies offering crypto asset-related financial products and services, which may include provisions on disclosures and error resolution.
Federal Coordination Workstream
The CA EO recognizes the federal government’s leading role in the development of digital assets regulation. This is in contrast to other states that have expressed a desire for states to take the leading role in regulating this area.3
Specifically, the CA EO directs the governor’s office in Washington DC to “engage in and encourage regulatory clarity via progress on the processes outlined in the Federal EO.” Therefore, we expect the California agencies to act in a way that leaves ample room for federal action and that avoids creating true conflicts between the state and federal regimes (e.g., issuing broad principles instead of detailed rules).
State Operations Workstream
The CA EO directs GovOps to issue a request for comment for ideas on how state agencies can use blockchain to address challenges. This part of the workstream focuses on deploying blockchain technology to address specific and identified challenges and builds off of the work of the California Blockchain Working Group.
This workstream also instructs GovOps to add blockchain to the list of technologies considered under applicable future solicitations, which will enable California agencies to work with vendors to procure innovative technological solutions. Notably, it explicitly tells GovOps and other state agencies to consider sustainability and energy consumption when assessing the fitness of particular blockchain technologies.
Training Workstream
The CA EO encourages the members of the California Council for Postsecondary Education to identify opportunities to create a research and workforce environment to “power innovation in blockchain technology.” This encouragement is intended to address both the development of a pipeline of talent for the blockchain industry and support of basic and applied research.
Takeaway
As with the Federal EO, the CA EO does not include definitive recommendations or binding interpretations of how California will address blockchain technology. However, if the CA EO results in agency action that is pragmatic and aligned with federal efforts, then it could help lay the foundation for legal certainty for the regulation of digital assets. Therefore, market participants should consider engaging with the California agencies through the public comment process.
1 Press Release, Governor Newsom Signs Blockchain Executive Order to Spur Responsible Web3 Innovation, Grow Jobs, and Protect Consumers (May 4, 2022), https://www.gov.ca.gov/2022/05/04/governor-newsom-signs-blockchain-executive-order-to-spur-responsible-web3-innovation-grow-jobs-and-protect-consumers/.
2 Please see our Legal Update on the Federal EO: https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/biden-executive-order-calls-for-regulatory-proposals-on-digital-assets-and-central-bank-digital-currency.
3 See e.g., Cynthia Lummis, The Fed Battles Wyoming on Cryptocurrency, WSJ (Nov. 30, 2021), https://www.wsj.com/articles/the-fed-battles-wyoming-cryptocurrency-powell-brainard-bitcoin-digital-assets-spdi-fintech-11638308314; SEC, Staff Statement on WY Division of Banking’s “NAL on Custody of Digital Assets and Qualified Custodian Status” (Nov. 9, 2020), https://www.sec.gov/news/public-statement/statement-im-finhub-wyoming-nal-custody-digital-assets.
