For the second year in a row, EFF and a coalition of virtual currency and consumer protection organizations have beaten back a California bill that would have created untenable burdens for the emerging cryptocurrency community.

This week, the author of A.B. 1326, Assemblymember Matt Dababneh withdrew the bill from consideration, saying in a statement:

Unfortunately, the current bill in print does not meet the objectives to create a lasting regulatory framework that protects consumers and allows this industry to thrive in our state. More time is needed and these conversations must continue in order for California to be at the forefront of this effort.

State lawmakers were poised to quickly jam through an amended version of a digital currency licensing bill­ with new provisions that were even worse than last year’s version.

As in the previous version, the bill required a “digital currency business” to get approval from the state before operating in California and also comply with regulations similar to those applicable to banks and money transmitters. The amended bill, however, was so carelessly drafted that it would have forced Bitcoin miners, video game makers, and even digital currency users to register with a state agency and be subject to the new regulations.

Worse, the bill failed to accomplish its intent—protecting consumers—because it would have limited the number of digital currency options available to Californians.

EFF is grateful that Assemblymember Dababneh recognized there were problems with the legislation and put the brakes on sending it through the legislature as its session winds down.

That said, the bill demonstrates that there are still too many technical and policy gaps in the current thinking about digital currencies and the need for regulation.

EFF continues to believe that before lawmakers anywhere consider legislation regulating digital currencies, they need to better understand the technology at issue as well as demonstrating how the legislation actually benefits consumers. The California bill unfortunately failed in both respects.

A.B. 1326 Would Have Hurt Consumers

First, as EFF’s opposition letter to A.B. 1326 stated, the bill’s goal to protect consumers would have ironically been frustrated by the legislation, as it would have restricted access to currencies that benefit consumers in ways that non-digital currencies do not.

Many digital currencies allow individuals to directly transact with one another even when they do not know or trust each other. These currencies have significant benefits to consumers as they eliminate the third parties needed in non-digital transactions that can often be the sources of fraud or other consumer harm.

Further, intermediaries in traditional currency transactions, such as payment processers, are often the targets of financial censorship, which ultimately inhibits people’s ability to support controversial causes or organizations.

Because the bill would have allowed California’s Department of Business Oversight to determine which digital currency businesses operated in California, the government would have been deciding which currencies and businesses could be used, rather than consumers. This would have significantly limited Californians’ digital currency options, to their detriment.

A.B. 1326’s Vague Terms Would Have Required Consumers to Register

The bill was also written in a manner that failed to grasp how digital currencies work, leading to broad definitions of “digital currency business” that would have regulated not just businesses transacting on behalf of digital currency users, but the users themselves.

There were many vague definitions in the bill. Take for example, a provision requiring anyone who transmits digital currencies to another person to register and comply with its complex regulations.

Digital currency users often directly transmit digital currency value to others without any intermediary, meaning those users would have been subject to the regulations even though they are merely using a digital currency. Additionally, despite the bill purporting to have an exemption for parties such as Bitcoin miners, they would also have to register because in appending transactions to the Blockchain, they could be viewed as transmitting digital currency.

The bill also would have required video game makers who offer in-game digital currency or goods to register, as the exemption for such activity is limited to items or currency that have no value outside of the game. The reality is that many items and currencies within games often have independent markets in which players buy, sell, or exchange items, regardless of whether a game maker allows for those transactions. Those game makers, however, would have to obtain a license under the bill even though they often do not control the outside markets. The bill would have also created roadblocks for video game companies who offer in-game currency that can be used to buy real world items, such as T-shirts or stickers.

Additionally, the bill contained no exemption for start-ups or smaller companies innovating digital currencies, giving established currencies such as Bitcoin and its more sophisticated industry a leg up over competition.

The many problems with the bill would ultimately have been bad for the state, as it would have pushed innovation elsewhere and chilled a young and quickly evolving industry.

EFF recognizes that there are risks for consumers using digital currencies and appreciates lawmakers interested in addressing them.  We think any legislative response, however, should be based on a better understanding of the state of digital currencies and narrowly focused on the situations that pose risks for consumers. Such an approach would preserve space for innovation in the industry while still protecting users.