Recently enacted and pending California legislation has started to address issues arising from virtual currencies and blockchain technologies.

Assembly Bill (“AB”) 1489 governs regulatory and substantive law with respect to virtual currencies while AB 2658, enacted last year, creates a committee to study and report on the use of blockchain technology (upon which most virtual currencies are based) in various contexts and transactions. Both these bills address how existing law will apply to these emerging technologies.

The Assembly banking and finance committee is currently reviewing AB 1489, a proposed law that will govern virtual currencies. It would enact the Uniform Regulation of Virtual Currency Businesses Act (the “URVCBA”), and, thus, create a regulatory framework for virtual currency business activity including licensing requirements. It will define virtual currency and virtual currency business activity, and establish requirements for security, net worth, and reserves for licensed and registered businesses.
The second bill AB 1489 would enact is the Uniform Supplemental Commercial Law for the URVCBA (the “Supplemental Act”). According to the bill, it “would provide rights to virtual currency businesses and their customers based on Uniform Commercial Code provisions.” It also addresses the issue of negotiation or transfer of virtual currency free of prior claims.

At present, virtual currencies are usually classified as “general intangibles.” Thus, receipt of virtual currency by a vendor for payment for the sale of inventory subject to the security interest of a creditor, the virtual currency becomes characterized as “proceeds” and is subject to the creditor’s security interest that remains impressed upon the virtual currency notwithstanding subsequent sale or other transfer. Each successive purchaser or transferee of that virtual currency takes it subject to this existing security interest.

The Supplemental Act is structured to make virtual currency so that if can be freely negotiated and transferred free of the existing security interest. Virtual currency would be classified as “investment property” under Division 9 of the California Commercial Code and “financial assets” credited to a “securities account” under the indirect holding system (through a “securities intermediary”) of Division 8. Under this indirect holding system and other provisions of Division 8, the virtual currency could be transferred or negotiated to an innocent purchaser free of the existing security interest or third-party claims. The Supplemental Act neither prohibits nor discourages the current direct holding of virtual currency. It leaves that choice to the market.

Another Assembly Bill, AB 2658, that was passed and signed into law late last year, addresses virtual currency’s underlying technology, the blockchain. Blockchain is a distributed ledger maintained by a network of databases synchronized through the internet, rather than by a central administrator. It consists of sequential blocks linked and secured by cryptography. Although most often associated with virtual currency it can also serve myriad functions at lower transaction costs. These include registries, records of ownership, voting, securities trading, and even standardized or “smart” contracts. AB 2658 defines blockchains and directs the formation of a committee to study the potential applications, benefits and risks, and legal implications of blockchain use by the state of California and businesses.

If your business deals with virtual currency or blockchain technology, it is imperative to consult with legal counsel as these emerging technologies become regulated by Federal and State authorities to assure that you comply, and your transactions are legally protected from third party claims.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.