Gavin Newsom's awkward crypto timing

Gov. Gavin Newsom is one of the Democratic Party's most prominent promoters and defenders of blockchain and crypto technology. But Newsom's recent efforts to boost the sector and fend off new state-level regulation of it have suffered from awkward timing.

In May, Newsom issued an executive order that sought to promote blockchain research, spur innovation, and explore how the technology might be used in government. Days later, two prominent cryptocurrencies imploded and crypto markets collapsed. Less than two months later, the Celsius Network, one of the largest cryptocurrency exchanges, declared bankruptcy, affecting more than 48,000 Californians with assets worth $650 million.

After the Celsius debacle, a new state-level attempt to regulate the industry soared through both chambers of the California legislature, passing on Aug. 30 with only six dissenting votes.

Three weeks later, Newsom vetoed that bill, claiming that it was “premature" for the state to move forward without considering "forthcoming federal regulation.”

Newsom's unfortunate timing soon struck again. In the months since his veto, crypto exchange FTX has filed for bankruptcy, former FTX Chief Executive Sam Bankman-Fried (a supporter of Newsom’s executive order) has been charged with multiple federal crimes, and crypto prices have fallen further. Despite Newsom's expectations, federal legislation regulating the nascent, but volatile, crypto industry remains in limbo.

Newsom has not expressed regrets for the veto. In an interview, he said that his executive order hadn't gone "as far as a lot of people wanted in the industry," and noted that California had taken a different approach than New York, which has pursued particularly strict crypto regulation, as well as Wyoming, which has such a lax regime that it has been described as the "Delaware of digital assets."

"I think California’s approach was a sober approach," Newsom said. "We tried to … look at this through the prism, long term, of how this fundamentally is going to change relationships, particularly in the financial sector. Blockchain in particular is something that I see only becoming more and more predominant in our lives."

In Sacramento, however, lawmakers and advocates who pushed California's latest attempt to regulate blockchain and crypto are unconvinced that the state has struck the right balance, and are gearing up to try again.

"During the last legislative session, industry expressed concerns about the costs of complying with fair and reasonable rules," said Assemblymember Tim Grayson, chair of the Banking and Finance Committee and author of AB 2269, the bill Newsom vetoed. "As we now know, the costs of doing nothing are so much higher: real people are being hurt.

“I appreciate the industry stakeholders who have already come to me in good faith to work towards policy that promotes responsible innovation while protecting consumers," Grayson added.

Industry stakeholders have been eager to weigh in before. Payment processors Block Inc., Paypal and Stripe; financial giants Fidelity and J.P. Morgan Chase; nonfungible token marketplace OpenSea; crypto financial services firm Blockchain.com; crypto exchange Coinbase; software giant Salesforce; and trade groups including the Electronic Transactions Assn., TechNet and the Blockchain Advocacy Coalition spent more than $400,000 combined lobbying the Assembly, the state Senate, the executive branch and Newsom himself between April 1 and the end of August, according to California lobbying disclosures.

All of those organizations lobbied on the crypto regulation bill Newsom vetoed. In a letter of opposition to Grayson, the bill's author, the Blockchain Advocacy Coalition wrote that the bill needed “greater clarity and flexibility” to prevent the potential “stifling of a nascent yet promising industry.” The coalition also opposed “unclear definitions” of digital asset terms and “onerous registration requirements." Others in the cryptocurrency industry saw the bill as a jobs killer that would drive innovation out of California and undermine Newsom's executive order.

Any new legislative effort to regulate the industry is likely to be met with another windfall for Sacramento's top lobbyists, warned Robert Herrell, executive director of the Consumer Federation of California, a nonprofit advocacy group that was a major supporter of the bill Newsom vetoed.

"[Big Tech companies] have almost unlimited resources and they are constantly currying favor with elected officials at all levels,” Herrell said. “That gives them access that consumers don’t have. None of the people who are left holding the bag after Celsius [and FTX] went under have that kind of access.”

Salesforce lobbied Newsom directly on NFTs and blockchain technology, according to the company's lobbying disclosure. On May 18, Salesforce treated Newsom to a $130 dinner, the lobbying report shows. The report does not say whether the lobbying in question occurred at the dinner, but a Salesforce spokesperson said it did not. Marc Benioff, the billionaire CEO of Salesforce, is a close friend of Newsom's and the godfather of the governor's oldest son.

Newsom views NFTs and blockchains separately from cryptocurrencies and can’t recall crypto being discussed at the Salesforce dinner, he told The Times.

“I didn’t even know they had any interest in that space, Salesforce in particular, so that's news to me,” Newsom said. “I know so many people from Salesforce, including Marc Benioff. I was just with Marc and we had not one conversation on crypto.”

The bill Newsom vetoed would have required cryptocurrency exchanges to disclose their assets and financial stability, temporarily banned a category of cryptocurrency called unbacked or “algo” stablecoins and required companies that trade crypto assets or manage customers' money to become licensed with the California Department of Financial Protection and Innovation by Jan. 1, 2025.

Newsom said in his veto statement that his administration “conducted extensive research and outreach to gather input on approaches that balance the benefits and risks to consumers.”

But Newsom and his top aides did not meet with the Consumer Federation of California, Herrell said.

Herrell was proud that he was able to build a wide coalition of “strange bedfellows" to back the crypto regulation bill, he said. “We worked our butts off to build that coalition,” Herrell said. “The events of the last few months have just confirmed what many of us already knew, which is that this is a Wild West marketplace in crypto. It lacks basic foundational rules of the road, and basic foundational consumer protections.”

Newsom's veto statement suggested he was counting on federal action to lay out those rules of the road. But with Bankman-Fried — the main force pushing for regulatory changes in Washington — facing federal charges, and Republicans set to take control of the House of Representatives, congressional action on crypto regulation appears unlikely in the near term.

In hindsight, Newsom’s veto of California crypto regulation “looks pretty bad,” said Rep. Brad Sherman (D-Northridge), one of Congress’ leading anti-crypto voices.

“In general, we don't like people being defrauded, and the Securities and Exchange Commission is moving slowly,” Sherman, who wants crypto to be banned, told The Times. “Congress is an immobilized mess, and state legislators can step in, and at least make sure that when you invest in something truly evil that you’re not defrauded. If you're going to be in the business of holding other people's money, you need to be regulated and audited and bonded.”

Newsom seems to have pivoted a bit in the wake of the FTX crisis. Last month, his office issued an executive report that looked into the ramifications of his crypto executive order. The report found that people who have been historically underserved by the traditional banking industry “have fallen victim to hacks, scams, fraud, and product collapses.” It also cited three major risks involved in the crypto marketplace: fraud, misinformation as well as privacy and safety.

The California Legislature is moving forward. Grayson has already introduced one new bill, AB 39, which would force all companies involved with money transfers — a definition that would include crypto companies — to register with state financial regulators.

State Sen. Monique Limón (D-Goleta), chair of the California Senate Banking and Financial Institutions Committee, seems ready to revisit a new version of the bill Newsom vetoed — or go further.

“If all crypto companies complied with the consumer protection provisions of AB 2269, I am sure that California consumers and retail investors would be exposed to fewer risks in this space,” Limón told The Times. “I look forward to working with Chairman Grayson as he leads legislative efforts that prioritize California consumers in the coming legislative session.”

Times staff writer Taryn Luna contributed to this report.

This story originally appeared in Los Angeles Times.