Governor Newsom Signs Blockchain Executive Order Intended to Support Web3 Businesses and Provide Regulatory Clarity

Following President Biden’s March 9, 2022 “Executive Order on Ensuring Responsible Development of Digital Assets,” on May 4, 2022, California Governor Gavin Newsom issued his own “Blockchain Executive Order to Spur Responsible Web3 Innovation, Grow Jobs, and Protect Consumers.” The California order seeks to develop a regulatory framework for blockchain technology that provides clearer guidance regarding the regulation of blockchain technology and crypto assets, while also allowing room for further innovation.

Key Takeaways

• The order tasks California state agencies with recommending proposals for new state regulations regarding blockchain and crypto assets, and providing better education to the public about these technologies.
• The move is a sign that California is interested in bringing some clarity and coordination to the regulatory framework.
• Depending on what framework is ultimately adopted, California may be a more favorable location for the formation of a crypto business than other states, where lack of guidance creates uncertainty that may discourage growth, or strict regulation inhibits crypto and blockchain investments.

Background

As the Order itself recognizes, crypto assets and blockchain technology are a “burgeoning industry” that “surpassed a $3 trillion market cap last November.”[1] This growth has profoundly increased “post-money valuations for venture capital-backed blockchain and crypto asset companies.”[2] According to PitchBook, while the “average global late-stage VC valuations have fallen 14%,” blockchain and crypto asset companies have “climbed on average 91%.”[3]

California’s Executive Order is one of many emerging state efforts to recognize and regulate the industry, either through executive order or through legislation. Other states have introduced or passed new legislation relating to cryptocurrency and blockchain, including, for example, New Jersey,[4] New Hampshire,[5] Washington,[6] Hawaii,[7] and Arizona.[8] More legislation, last totaled at “153 pieces of cryptocurrency-related legislation pending this year in 40 states and Puerto Rico,”[9] is in the works around the country, as states move to keep pace with the rapidly growing industry.

Executive Order

The California Executive Order has seven priorities that fall into four categories: 1) direction for rulemaking, 2) regulations and coordination, 3) education regarding Web3 uses and technology, and 4) voluntary reporting.

Directions for Rulemaking

The order provides guidance for rulemaking regarding crypto assets and blockchain technology.

First, it tasks several state agencies with developing regulation based on feedback from stakeholders. The order directs these agencies to solicit feedback from California and out of state companies, “communities that have historically benefited less from technology-driven economic growth,” technical experts, entrepreneurs, venture capital firms, and stakeholders interested in addressing systemic inequities and mitigating potential negative externalities in environmental impact.[10] Soliciting feedback from stakeholders and members of the crypto industry both is an indication of investment in the industry and is consistent with a growing nationwide trend, where “crypto executives and lobbyists are helping to draft bills to benefit the fast-growing industry.”[11]

Second, the order tasks a state agency with determining use cases for blockchain technologies that incorporate the technology into state operations. The agency will issue a “Request for Innovative Ideas” to “the private sector, academia, and community” for ideas for programs that enable blockchain technologies “to respond to specific challenges.”[12] Blockchain technologies will be added to the list of technologies considered by the state when recruiting new vendors to develop “innovative technological solutions.”[13]

Regulations and Coordination

The order establishes processes to coordinate the California regulatory scheme with federal regulation.

The order directs California state agencies to “engage in a process concurrent with the federal strategy articulated in President Biden’s Executive Order.”[14] The Washington, D.C. Office of the California Governor is tasked with working with these state agencies to make progress on developing regulation and “encourage regulatory clarity.”[15]

California state agencies will establish a regulatory framework that “promote[s] a common approach” between the state and federal guidance. California agencies are tasked with implementing the processes outlined in the federal Executive Order and tracking developments. The state will develop “guidance, and, as appropriate, regulatory clarity” regarding private companies in California, with the goal of California “remaining the premiere global location for responsible crypto asset companies to start and grow.”[16] The order’s dual articulated goals are to expand the state’s consumer protection framework and to reduce the burdens on companies that operate both in California and nationwide.

Education Regarding Web3 Uses and Technology

The order has a two-fold approach to education: (1) creating economic opportunities; and (2) enhancing consumer protection.

The order encourages members of the Governor’s Council for Postsecondary Education to identify opportunities for further research regarding blockchain technology and crypto assets, with the goal of educating students about these technologies and exposing them to new opportunities related to Web3 innovation. This goal is intended, at least in part, to enable a diverse “pipeline of talent” to benefit economically and continue to innovate.

State agencies also will provide education to increase Californians’ awareness of the benefits and risks associated with crypto assets. The agencies will publish education materials to protect consumers and help them avoid scams.

Voluntary Reporting

The order also establishes a voluntary reporting scheme. State agencies will create a “market-monitoring inquiry to solicit voluntary information” from companies about the crypto assets and services they use. The goal of this reporting mechanism is to better allow the state to develop formal rulemaking based on this information.

What to Expect

The processes outlined in the order are set to kick into gear relatively quickly. Within 30 days, California state agencies will solicit public comments. Biden’s Executive Order tasks federal agencies with preparing a report on future money and payment systems. Within 60 days of the publication of that federal report, California state agencies will provide their own report to the California Governor’s Office recommending next steps. By March 31, 2023, California will seek input from stakeholders to publish guidance for California state-chartered banks and credit unions.

California’s Executive Order signals that California aims to position itself at the forefront of technological and business development in the crypto and blockchain spheres. Governor Newsom said, “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.”[17] By embracing blockchain and crypto assets, soliciting feedback to inform regulation, and aiming to quickly align California’s regulation with federal regulation and with consumers’ developing needs, California will be an early mover state in adopting regulation that provides updated guidance on these technologies.

Although the order does not introduce any new regulations immediately, but rather tasks agencies with developing those regulations, California Web3 businesses and consumers that rely on crypto assets or blockchain can expect to benefit from the changes. The regulation is designed to accommodate the needs and perspectives of businesses and consumers in California, explicitly soliciting their feedback to inform the updated regulatory framework. With the stated interests of fostering innovation and of leveraging crypto and blockchain technologies, the regulations clearly intend to embrace these technologies, provide greater clarity regarding the state regulatory framework and its interplay with federal regulations, and support continued growth.

[1] Governor Newsom Signs Blockchain Executive Order to Spur Responsible Web3 Innovation, Grow Jobs, and Protect Consumers (May 4, 2022).

[2] Id.

[3] James Thorne, As VC valuations reset, crypto keeps climbing, PitchBook (Apr. 22, 2022).

[4] Tennyson Donyea, N.J. committees approve measures regulating cryptocurrency blockchain technologies, PBS (Mar. 16, 2022).

[5] Governor Chris Sununu Establishes Governor’s Commission on Cryptocurrencies and Digital Assets (Feb. 9 2022).

[6] Brooks Butler, Washington State Passes New Blockchain Law, Crypto Briefing (Apr. 1, 2022).

[7] Joel Frank, Crypto Regulation Task Force to Be Established in Hawaii, FX Empire (May 3, 2022).

[8] 2017 Arizona House Bill No. 2417.

[9] Erico Lipton & David Yaffe-Bellany, Crypto Industry Helps Write, and Pass, Its Own Agenda in State Capitols, NYTimes (Apr. 10, 2022).

[10] Exec. No. N-9-22 (May 4, 2022).

[11] Lipton, supra note 10.

[12] Exec. No. N-9-22 (May 4, 2022).

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Governor Newsom Signs Blockchain Executive Order to Spur Responsible Web3 Innovation, Grow Jobs, and Protect Consumers (May 4, 2022).