CA legislators need to be cautious with cryptocurrency laws

Former California Assembly Majority Leader Ian Calderon is bullish on cryptocurrency — so much so that his family put off purchasing a home so they could deepen their investment in digital assets. For the 36-year-old Southern California Democrat, it’s to “secure the future” for his four young children, he said.

A few years ago, a decision like that would have been ridiculed. But given the push for cryptocurrencies in the mainstream global economy since Calderon left office in 2020, he may be on to something.

After all, according to Matt Damon and other A-list celebs and athletes being paid to advertise crypto, “fortune favors the brave.”

Calderon introduced several bills to advance state policy on the nascent — and volatile — $2 trillion sector during his eight years in the Capitol. Most didn’t pass, but they cleared a lane for two intriguing cryptocurrency bills in the Legislature this year.

“I care about California leading this conversation,” said Calderon, who went into consulting but is prohibited from lobbying until next year. “I care about California being successful long-term. This is an industry of the future. If we don’t pay attention now, we will lose our advantage.”

The question is whether being first is more important than getting it right.

In a broad sense, cryptocurrencies are an alternative, decentralized means of exchange. While each is distinct, they are mostly based on a vast network of computers and blockchain technology, databases that record and secure transactions. (I know, just stay with me.) Transactions are done peer-to-peer, and the technological backbone makes it almost impossible to counterfeit.

When people talk about “Web 3.0,” they’re referring to this digital universe. It aims to transfer power back to consumers, without middleman platforms like Google or Facebook.

State legislators from both political parties are eager to expand this technology in California. Last month, state Sen. Sydney Kamlager, D-Los Angeles, introduced Senate Bill 1275, which would allow government agencies in California to accept virtual currencies as payment. Assemblyman Jordan Cunningham, a Central Coast Republican, proposed a bill that would extend the opportunity to businesses as well.

Even though there’s no law barring a business or public agency from accepting virtual currencies, Cunningham’s Assembly Bill 2689 would essentially remove ambiguity and provide state consent. The proposal could get its first committee hearing as soon as this month.

“This bill could have the ancillary benefit … that California wants to be the home for blockchain,” Cunningham said. “We want to be where the next generation of the internet is built. We want to capture those jobs and business.”

A November study by the Pew Research Center found that 16% of Americans have invested, traded or used cryptocurrencies, and 86% had at least “heard a little” about them. That’s a dramatic increase from five years ago, when 1% had invested and 48% were familiar. Massive returns for early Bitcoin investors have fueled growing confidence.

Full disclosure: I’m part of that 16% who invested. But it took months of research to get my arms around the fundamentals and a middle-class salary that made me feel comfortable risking a chunk of my savings. The average consumer probably isn’t there yet, which is troubling given the explosion of advertising to large audiences.

Sure, widespread adoption of virtual currencies makes them more stable, valuable and empowering for everyday users. But public understanding of cryptocurrency is lagging far behind these nine-figure global marketing campaigns.

California needs a clear-eyed grasp of what it would be telling its citizens by endorsing crypto in state law. President Joe Biden signed an executive order on the sector Wednesday that will commission research and strategies to protect consumers, clamp down on lawbreaking, reduce climate impacts and make the U.S. market a global leader.

The move by the White House was heralded as a watershed moment. It’s also the right approach to policymaking.

Virtual currencies are becoming increasingly popular among hedge funds with very different profit motives than the average person. Wall Street is getting friendlier, too, with dozens of publicly traded companies and more than half of the world’s biggest financial institutions invested in crypto. This level of institutional exposure is fairly new, and most people can only speculate about their objectives or how it changes things for the little guy.

A 2020 legislative working group studied the potential for blockchain in California, which was one of Calderon’s political wins in the sector. In the final report, the group suggested three pilot programs. One would create digital wallets to improve Department of Motor Vehicles identification and securely share driver records. Another would help the state Department of Food and Agriculture trace food-borne contamination with a better data system. And the third was a recommendation to move the California Secretary of State’s Office archives online to better preserve critical documents.

Cunningham has another bill, AB 2781, that would study the potential of blockchain technology to improve the beleaguered Employment Development Department.

“That could solve the fraud problem overnight,” he said. “There’s so many advantages to (blockchain) technology.”

There are merits to cryptocurrency legislation that is still short on specifics because it sends a signal that California is the best place to do business. American crypto companies are eagerly searching for a friendly state, especially with Securities and Exchange Commission Chairman Gary Gensler taking a narrow view on virtual currencies that would expand federal oversight.

I loathe how money is manipulated in this country and how markets are exploited by monopolies. That’s hardened my belief in virtual currencies that could empower citizens. Crypto is a disrupter, and I want nothing more than large-scale adoption.

But this is a very different space race. If California wants to be a leader in virtual currencies, prioritizing consumer education needs to be part of the deal.