Under the proposed rules, companies engaged in the exchange, transfer, storage, or administration of digital financial assets would be required to obtain a license through the Nationwide Multistate Licensing System (NMLS). The proposal outlines disclosure obligations to consumers, financial and operational reporting requirements, and compliance expectations for key individuals. The rule also addresses the treatment of kiosks and other customer access points, setting requirements for location disclosures and transaction limitations.
Background: From Legislative Enactment to Regulatory Implementation
The DFAL was enacted in 2023 in response to the rapid growth of digital financial products and growing concerns about consumer protection in the absence of federal regulation. The law is modeled in part on New York’s BitLicense framework and was originally set to take effect on July 1, 2025, but AB 1934 extended the date of licensure under the DFAL to July 1, 2026. The DFAL tasked DFPI with creating a licensing regime for businesses engaging in “digital financial asset business activity” with or on behalf of California residents.
The statute defines a “digital financial asset” as a digital representation of value that is used as a medium of exchange, unit of account, or store of value—but is not legal tender. It explicitly covers custodial and non-custodial services, including platforms that facilitate transactions through smart contracts, decentralized exchanges, and digital wallets.
Scope of the Proposed Regulations
The proposed rules are intended to clarify the scope and expectations of DFAL licensees. Key provisions include:
- Licensing through the NMLS using customized versions of the MU1 and MU2 forms
- Capital and financial condition requirements for licensees
- Annual and event-based reporting obligations
- Mandatory consumer disclosures related to fees, risks, and transaction terms
- Special rules for kiosk operators, including location listings and transaction receipts
Important Carveouts and Interaction with the Money Transmission Act
The DFPI has also proposed a key exemption to clarify the intersection between the DFAL and California’s Money Transmission Act (MTA). Under the proposed rules, companies that transmit legal tender “incidentally” in connection with otherwise regulated digital financial asset activity would be exempt from separate MTA licensure. This exemption is significant for digital asset firms whose operations include occasional fiat handling. However, the Department’s interpretation of what constitutes “incidental” remains subject to further clarification and may be an area of concern for compliance professionals seeking certainty in structuring payment flows.
Businesses that only transmit legal tender or operate under existing money transmission licenses may fall outside the scope of DFAL, but entities engaged in digital financial asset activity must comply with the new framework once it becomes effective.
Enforcement, Examination, and the Path Ahead
While the proposed rules provide the scaffolding for licensing, the DFPI is vested with broad examination and enforcement powers under the DFAL. It may examine licensees and their agents—both in and outside California—at any time to assess compliance and ensure proper accounting of digital financial asset activities. The Department can also impose civil penalties of up to $100,000 per day for unlicensed activity, and up to $20,000 per day or per incident for violations by licensees. The DFPI may also issue cease-and-desist orders, suspend or revoke licenses, seek injunctive relief, and pursue restitution on behalf of consumers where economic harm is shown.
As the comment period unfolds, stakeholders should consider providing feedback on the proposed application requirements and potential ambiguities in the regulatory text.
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