On September 23rd, California Governor Gavin Newsom vetoed a bill that would create a regulatory framework for web3 and blockchain-related businesses operating in the golden state. The veto comes as a surprise following a harsh summer crypto crash which saw the majority of crypto assets all dropping in price.

To many, the answer to these falling prices and the risk they put on crypto portfolios was to begin incorporating new regulations and laws to keep companies stable to protect the industry. According to Newsom’s response, the bill he received felt premature; wishing to wait for federal laws to come into focus first before setting up a regulatory program. 

AB 2269

The purpose of the bill is to introduce a new licensing requirement for any and all “digital financial asset” businesses that use blockchain technology to exchange cryptocurrencies and other blockchain-native products such as NFTs in California. 

According to the bill, all licensing would be done by the Department of Financial Protection and Innovation which would oversee the application process and provide licenses to businesses that lasted for 5 years. 

The business would then need to show its monthly blockchain activity from a primary wallet address. This address would provide a “list [of] all assets, liabilities, capital, income, and expenses of the licensee.”

Further, the bill would also grant enforcement to the Department of Financial Protection and Innovation to penalize any unlicensed businesses operating with crypto assets. This crackdown on unlicensed businesses is intended to protect citizens from massive losses like what we saw with TerraLUNA. 

Why Newsom Vetoed the bill

Although regulations such as licensing have been called for by many already, Newsom’s decision to veto the bill is interesting because of his reasoning: believing that it is premature and requires federal action before locking in a regulatory framework. 

Newsom also shows a fair understanding of web3 in his letter explaining the veto, saying, “A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases and is tailored with the proper tools to address trends and mitigate consumer harm.”

The statement is correct - the blockchain industry is still in its infancy and the technology is expanding quickly. New business models are still figuring out how to operate on decentralized platforms and Newsom seems to recognize that regulations and licensing will only prevent these innovative new companies from reaching their potential in a timely and competitive manner. 

How will this impact the web3 industry?

Governor Newsom’s decision to veto the bill is going to make a big impact on the web3 industry by leaving it untouched in California which leads the world in technical innovation. Without the restraint of regulation, these businesses will be able to pursue new business models in an effort to better understand web3 and decentralized networks. 

Companies such as Google, Apple, and Intel are massive and they can attract strong talent from around the globe. This creates a huge supply of developers in the region which allows other Silicon Valley-based companies like Meta, a16z, and Coinbase to search for meaningful employees that can help the web3 industry grow. 

You can read more about crypto in California here.