AB 39 Stablecoins in California?

by David Rankin

I'm part of the leadership of a local Bitcoin and crypto MeetUp. I have a unique perspective having utilized DeFi since 2020 and see institutions quickly approaching. In the proposed bill AB 39 a bill addressing licensing of those providing a digital financial asset business, I take issue with addressing Stablecoins in Chapter 6:

AB 39:
"3601. (a) A covered person shall not exchange, transfer, or store a digital financial asset or engage in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor, if that digital financial asset is a stablecoin unless both of the following are true:
...
(2) The issuer of the stablecoin at all times owns eligible securities having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding stablecoins issued or sold in the United States.
(b) For purposes of this section:
(1) “Eligible securities” means the United States currency eligible securities described in subdivision (b) of Section 2082."
AB 1116:
"2082. (a) “Eligible security” means any United States currency eligible security or foreign currency eligible security.
(b) For the purposes of this division, the following are United States currency eligible securities:
(1) Cash, cash in transit via armored car, cash in smart safes, and cash in licensee-owned locations.
(2) Any deposit in an insured bank, an insured savings and loan association, or an insured credit union, including any deposit in an insured bank, an insured savings and loan association, or an insured credit union that is in an account held for the benefit of the licensee’s customers that is titled “(name of licensee) FBO Its (licensee’s customers or specific group of licensee’s customers)”.
(3) Any bond, note, or other obligation that is issued or is guaranteed by the United States or any agency of the United States.
(4) Any bond, note, or other obligation that is issued or guaranteed by any state of the United States or by any governmental agency of or within any state of the United States and that is assigned an eligible rating by an eligible securities rating service.
(5) Any bankers acceptance that is eligible for discount by a federal reserve bank.
(6) Any commercial paper that is assigned an eligible rating by an eligible rating securities service.
(7) Any bond, note, or other obligation that is assigned an eligible rating by an eligible securities rating service.
(8) Any share of an investment company that is an open-end management company, that is registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.), that holds itself out to investors as a money market fund, and that operates in accordance with all provisions of the Investment Company Act of 1940, and the regulations of the Securities and Exchange Commission applicable to money market funds, including Section 270.2a-7 of the regulations of the Securities and Exchange Commission (17 C.F.R. 270.2a-7).

Currently, there are no methods available to deposit cryptocurrency with a bank in order to obtain a loan. However, there are existing platforms such as MakerDAO, Liquity, and others that enable borrowing against crypto by using a stablecoin that is backed by crypto as collateral. This plays a significant role in the ecosystem. Based on the language used above, it seems that crypto assets are not considered eligible securities for the issuance of a stablecoin, which is something we had hoped to address. Liquity operates as a protocol and cannot be compelled to comply since there is no company or DAO in control of the smart contract that is immutable. If the government were to intervene, it would only impact the frontends and restrict its own citizens from participating in financial innovation. Geo-blocking has already been observed on numerous sites, placing U.S. citizens at a disadvantage in decentralized markets. Enforcing the requirement for an "eligible security" would push these protocols further into unregulated territory, which could encourage the use of VPNs or result in the relocation of crypto wealth from California, leading to a loss in potential tax revenues. Instead, we should eliminate the "eligible security" requirements and promote compliance for the public's safety. Admittedly, this position probably contradicts the prevailing opinions of companies like BlackRock and Circle. However, the de-pegging of USDC upon Silicon Valley Bank's recent issue from the crypto choke-point serves as evidence of the importance of alternative stablecoins, which demonstrated resilience during that event. There was even a vote to remove USDC from MakerDAO for its risk to DAI because of this event. Also keep in mind that the LQTY token associated with Liquity is offered on Coinbase which could hurt consumers with such wording.

For many of us involved in crypto, our goal, as suggested by Michael Saylor, is to eventually borrow against our crypto assets, a possibility currently offered by decentralized finance. If this option is taken away without a viable alternative, those in crypto will simply move to jurisdictions that allow for such freedoms.

Thus I request provide an alternative for certain crypto such as ETH, BTC, or derivatives such as WBTC as recognized and approved by the SEC or CFTC or other Government agency and be considered as "eligible securities" for the issuance of stablecoins for the purpose of borrowing within decentralized finance or removal of the following from AB 39-3601(b)(1).

(1) “Eligible securities” means the United States currency eligible securities described in subdivision (b) of Section 2082."