California’s Digital Asset License Deadline Threatens Disruption

The licensing and remaining compliance requirements in California’s digital asset licensing regime may bring hundreds of exchanges, custodians, blockchain-based payment firms, and stablecoin issuers—collectively known as digital asset businesses—under the supervision of the state’s Department of Financial Protection and Innovation for the first time.

Despite industry focusing on federal legislative and regulatory developments, California’s Digital Financial Assets Law will be significant for many businesses that form the backbone of the US blockchain industry.

Those covered by DFAL must submit a complete license application by July 1 to avoid disruption to their digital asset business operations in the country’s largest market.

Regulatory Trends

The DFPI, for more than a decade, used public announcements and guidance to decline applying its money transmission laws to digital asset businesses. As a result, digital asset businesses generally weren’t required to be licensed in California. The state’s position made it an outlier among state regulators and placed it alongside historically more laissez-faire states such as Utah and Wyoming.

Only two states currently have digital asset licensing regimes for non-bank financial institutions—New York’s BitLicense regulations and Louisiana’s Virtual Currency Businesses Act. In 2025, Illinois passed its own licensing regime, the Digital Assets and Consumer Protection Act, and most of its provisions take effect in 2027.

A number of other states have enacted licensing laws directed at the digital asset kiosk industry, and certain compliance requirements for them are already in effect in California. But many others have shoehorned some or all of the activities of a digital asset business underneath preexisting state money transmission licensing regimes, an approach that has sometimes resulted in an awkward regulatory fit.

Details of DFAL

California in 2023 created a licensing and compliance regime for activities involving digital financial assets (used interchangeably herein with the more commonly used phrase, digital asset), which the statute defines as digital representations “of value” used “as a medium of exchange, unit of account, or store of value.”

The term “digital financial asset” excludes securities issued in compliance with federal or California law. Specifically regulated by the statute are persons that engage in (or hold themselves out as engaging in) digital financial asset business activity “with, or on behalf of a resident” of California.

Persons engage in digital financial asset business activity if, among other things, they exchange, hold in custody, or transmit digital financial assets. The term also covers digital financial asset administration, which the statute defines as issuing a digital financial asset with the authority to redeem the asset for legal tender, bank or credit union credit, or another digital financial asset.

DFAL has exemptions: Certain banks and trust companies aren’t covered, nor are merchants that accept digital financial assets as payment for goods or services.

Those who fall under the statue’s definitions will need a DFAL license by July 1 to provide DFAL-regulated services in California. Covered persons will have a transitional period to continue operating in the state while their license application is pending.

The compliance requirements are more comprehensive than those found within money transmission statutes and more akin to those found in the BitLicense regime:

• Covered persons that engage in exchange activity must use “reasonable diligence” to ensure that the execution of California customer orders results in an outcome “as favorable as possible under prevailing market conditions” and then periodically evaluate their trading records “against benchmarks to determine execution quality” and remediate any identified deficiencies.
• Before making a digital financial asset available for exchange, those same businesses must also certify to the DFPI that they have assessed the likelihood that the digital financial asset would be deemed a “security by federal or California regulators.”
• Unlike most state money transmission statutes, DFAL contains an express requirement that covered persons have a risk-based anti-fraud program.
• DFAL limits which stablecoins can be made available in California, although it’s unclear how the DFPI will enforce those requirements in light of similar provisions in the federal GENIUS Act.

Early Application Importance

Affected businesses should start preparing their DFAL license applications now and submit them well in advance of the July 1 deadline. The statute’s application requirements are more burdensome than they may appear, and a complete application is required by that date to use DFAL’s transitional path to licensure.

Covered persons who haven’t reached the level of compliance maturity needed to obtain a BitLicense may need to draft new compliance materials or uplift existing ones to meet compliance requirements. Even though BitLicense holders will have an application advantage, DFAL contains requirements that may be new for BitLicense holders.

Because the application window is short and many entities will be applying simultaneously, those who submit applications close to the deadline risk jeopardizing their ability to continue operating in what is likely one of their biggest markets. Affected businesses shouldn’t take that risk.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Steven Merriman is a fintech compliance partner at Perkins Coie in Seattle.

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