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Virtual currency businesses operating in California or serving California residents face a regulatory environment that has grown substantially more complex in recent years. Bitcoin, Ethereum, stablecoins, and other digital financial assets are now subject to overlapping state and federal regulatory frameworks that span money transmission licensing, securities registration, banking law, and anti-money laundering compliance. On October 13, 2023, California Governor Gavin Newsom signed into law AB 39 and SB 401, establishing the California Digital Financial Assets Law (DFAL) — a comprehensive licensing regime for virtual currency businesses administered by the Department of Financial Protection and Innovation (DFPI). As a California crypto currency lawyer with experience across these intersecting regulatory frameworks, Alan Abergel and the Law Offices of Alan Abergel, P.C. (LOAA) represent Bitcoin and other virtual currency businesses in navigating this multi-layered regulatory landscape, providing legal services that cover licensing, compliance, corporate formation, securities offerings, mergers and acquisitions, contract drafting, and defense in regulatory enforcement proceedings.
The California Digital Financial Assets Law, enacted through AB 39, represents a watershed moment for virtual currency regulation in the state. Prior to the DFAL, California lacked a dedicated licensing framework for virtual currency businesses, leaving companies to navigate a patchwork of existing financial services laws — primarily the Money Transmission Act — that were not designed with digital assets in mind. The DFAL changes this by establishing a purpose-built licensing regime that requires persons engaged in digital financial asset business activity involving California residents to obtain a license from the DFPI.
The DFAL bears structural similarities to New York's virtual currency regulatory framework, which requires entities conducting virtual currency business activity in New York to obtain a BitLicense or operate under a charter granted pursuant to the New York Banking Law. Like the New York regime, the DFAL imposes requirements related to capital adequacy, consumer disclosures, cybersecurity, anti-money laundering controls, record-keeping, and the custody and safeguarding of customer digital financial assets. The DFPI has rulemaking authority to implement and refine these requirements, and the regulatory details will continue to develop as the agency issues guidance and responds to industry feedback.
The scope of "digital financial asset business activity" under the DFAL is broad. It encompasses exchanging, transferring, or storing digital financial assets on behalf of others, as well as holding electronic precious metals or certificates of electronic precious metals on behalf of others, and exchanging digital financial assets for value among the participants of the exchange. Companies that facilitate any of these activities with or on behalf of California residents must evaluate whether they fall within the DFAL's licensing requirements or qualify for one of the statute's limited exemptions. LOAA assists virtual currency businesses in analyzing their activities against the DFAL's definitions, determining whether a license is required, and assisting in preparing and submitting license applications to the DFPI.
SB 401, the companion legislation to the DFAL, addresses a specific segment of the virtual currency industry that has experienced rapid physical expansion across California: digital financial asset transaction kiosks. These kiosks, commonly known as Bitcoin ATMs or crypto ATMs, are devices capable of accepting or dispensing cash in exchange for a digital financial asset. They are typically installed in convenience stores, gas stations, shopping centers, and other retail locations, and they serve as an accessible on-ramp for consumers who want to purchase Bitcoin or other cryptocurrencies using cash.
SB 401 imposes specific regulatory requirements on kiosk operators that go beyond the general licensing obligations of the DFAL. The legislation addresses concerns about consumer protection, fee transparency, fraud prevention, and the use of kiosks as vehicles for money laundering and scam-related transactions. Kiosk operators must comply with disclosure requirements that ensure consumers understand the fees, exchange rates, and risks associated with kiosk transactions. The legislation also imposes transaction limits and other safeguards designed to protect consumers, particularly those who may be vulnerable to scams that direct victims to deposit money at cryptocurrency kiosks.
LOAA represents kiosk operators in complying with SB 401's requirements, including the development of consumer-facing disclosures, fee schedules, and compliance procedures specific to kiosk operations. For companies that operate kiosk networks across multiple states, the firm provides guidance on how California's kiosk regulations interact with the requirements of other jurisdictions, helping operators develop compliance frameworks that satisfy multi-state obligations without creating unnecessary operational friction.
Before the DFAL's licensing regime becomes fully operational, and in many cases alongside it, virtual currency businesses that transmit money or monetary value — including digital financial assets — are subject to California's Money Transmission Act, administered by the DFPI. The Money Transmission Act requires any person engaged in the business of money transmission to obtain a license, and the DFPI has historically taken the position that certain virtual currency activities constitute money transmission under existing law.
At the federal level, virtual currency businesses that function as money services businesses (MSBs) must register with the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury. FinCEN registration is required for money transmitters, and virtual currency exchangers and administrators have been classified as money transmitters under FinCEN's regulatory guidance since at least 2013. Registered MSBs must implement anti-money laundering (AML) programs, file suspicious activity reports (SARs) and currency transaction reports (CTRs), maintain records of certain transactions, and comply with the Bank Secrecy Act (BSA) and its implementing regulations.
The interplay between state money transmission licensing and federal MSB registration creates a dual compliance obligation that virtual currency businesses must manage concurrently. LOAA assists clients with both California money transmission license applications and FinCEN MSB registrations, ensuring that the company's AML compliance program, transaction monitoring systems, and reporting procedures satisfy the requirements of both state and federal regulators. For businesses that operate in multiple states, the firm also provides guidance on the money transmission licensing requirements of other jurisdictions, as most states maintain their own licensing regimes with distinct application requirements, surety bond obligations, and net worth thresholds.
Legal Opinions: LOAA provides legal opinions to individuals and businesses that need a legal analysis of whether their activities require a California financial regulation license and which one and under which classification. These opinions involve a detailed examination of the services provided, the compensation structure, the relationship between the service provider and the customer, and the specific statutory definitions and exemptions. A well-reasoned legal opinion provides the client with a documented basis for its compliance position and can serve as evidence of good faith in the event of a future California agency regulatory inquiry about whether the client's activities constitute unlicensed practice.
Virtual currency businesses frequently encounter securities law considerations, whether in connection with the digital assets they handle, the manner in which they raise capital, or both. The threshold question in many cases is whether a particular digital financial asset constitutes a security under federal and state law. The Securities and Exchange Commission (SEC) has brought enforcement actions against many issuers and platforms that offered or traded unregistered securities in the form of digital tokens.
For virtual currency businesses that offer or facilitate trading in tokens that may be classified as securities, the regulatory implications are significant. Securities exchanges must register with the SEC or operate under an applicable exemption, and broker-dealers that intermediate securities transactions must be registered with the SEC and a self-regulatory organization such as FINRA. The failure to comply with these requirements has been the basis for numerous SEC enforcement actions against cryptocurrency exchanges and trading platforms.
Separately, virtual currency businesses that raise capital from investors through equity offerings, token sales, simple agreements for future tokens (SAFTs), or other investment structures must comply with federal and state securities laws governing the offer and sale of securities. Common exemptions include Regulation D for private placements to accredited investors, Regulation A for smaller public offerings, and Regulation Crowdfunding. Each exemption carries its own conditions regarding investor qualifications, offering limits, disclosure requirements, and ongoing reporting obligations. LOAA prepares private placement memoranda (PPMs), subscription agreements, and related securities offering documents for virtual currency startups and established companies raising capital. The firm advises on the selection and structuring of the appropriate exemption framework and coordinates state-level securities filings where required under California's Corporate Securities Law of 1968 or the securities laws of other states in which investors are located.
The virtual currency industry continues to attract entrepreneurs and development teams building new platforms, protocols, and financial products. These startups face a unique combination of legal considerations that includes not only the regulatory compliance issues discussed above but also fundamental business formation decisions that can have lasting implications for the company's regulatory posture, tax treatment, liability exposure, and ability to raise capital.
LOAA represents virtual currency startups from the formation stage, assisting with entity selection and organization, preparation of operating agreements and governance documents, founder equity arrangements, intellectual property assignment agreements, and early-stage employment and contractor agreements. The choice of entity depends on the company's intended activities, its fundraising plans, and the regulatory frameworks it will be subject to. LOAA tailors its guidance to the specific business model and objectives of each client.
The virtual currency industry has experienced significant M&A activity as larger companies seek to acquire technology, talent, customer bases, and regulatory licenses held by smaller competitors. Acquisitions of licensed virtual currency businesses present transaction-specific challenges that go beyond those found in conventional M&A deals, including the treatment of digital assets held in custody for customers, the transfer or re-application for state money transmission licenses and DFAL licenses, the assignment of FinCEN registration, the handling of pending regulatory examinations or enforcement matters, and the compliance implications of integrating two companies' AML programs and transaction monitoring systems.
LOAA handles mergers, acquisitions, and other strategic transactions involving virtual currency businesses, representing buyers, sellers, and investors. The firm conducts regulatory due diligence to assess the target company's licensing status, compliance history, outstanding regulatory obligations, and any pending or threatened enforcement actions. For transactions that involve the acquisition of a licensed entity, LOAA manages the regulatory approval process, which may require DFPI consent for the change of control of a money transmission licensee or, once the DFAL licensing regime is fully operational, approval for the transfer of a digital financial assets license.
The firm also handles the transactional documentation, including purchase agreements, escrow arrangements for digital assets, non-competition and non-solicitation agreements for key personnel, intellectual property assignments, and the various ancillary documents required to complete the acquisition. For virtual currency businesses involved in divestitures, spin-offs, or reorganizations,
Virtual currency businesses operate under the scrutiny of multiple regulators at both the state and federal level, and the enforcement environment has intensified considerably as digital assets have grown in market significance and public visibility. The DFPI has authority to investigate and bring enforcement actions against companies that violate the Money Transmission Act, the DFAL, or other California financial services laws. FinCEN can impose civil money penalties for BSA violations, and the SEC pursues enforcement actions against companies and individuals involved in unregistered securities offerings, unregistered exchange or broker-dealer activity, and fraud. State attorneys general, the Federal Trade Commission (FTC), and the Commodity Futures Trading Commission (CFTC) also exercise jurisdiction over various aspects of virtual currency business activity.
LOAA defends virtual currency businesses in administrative enforcement actions and regulatory investigations brought by these agencies. The firm represents clients in responding to subpoenas, civil investigative demands, and information requests, in negotiating with regulators to resolve identified deficiencies, and in contesting enforcement actions through administrative hearings and judicial proceedings. When informal resolution is achievable under the specific factual circumstances, the firm negotiates consent orders, corrective action plans, and penalty reductions that protect the client's ability to continue operating. When enforcement agencies pursue formal action, LOAA provides vigorous defense.
Proactive compliance is the most effective form of enforcement defense, and LOAA emphasizes this principle with every virtual currency client. Companies that invest in obtaining the required licensing and registrations, robust AML programs, maintain accurate records, file required reports on time, and demonstrate good-faith compliance efforts are far better positioned to weather regulatory scrutiny than those that treat compliance as an afterthought.
Disclaimer: The information on this page is provided for general informational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this content. Every legal matter is unique, and you should consult directly with a qualified attorney regarding your specific circumstances.
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