California’s Legislature Considers Issues Arising from Emerging Technologies

Recent California legislation addresses issues arising from two well publicized emerging technologies, bitcoin and blockchain.  The more recent, Assembly Bill (“AB”) 1489 governs regulatory and substantive law in respect of virtual currency or bitcoin.  AB 2658, enacted late last year, creates a committee to study and report on the use of blockchain, bitcoin’s underlying technology, in various contexts and transactions. Both these bills recognize the importance of harmonizing existing law with actual practice utilizing new and emerging technologies.

AB 1489, currently before the banking and finance committee, governs virtual currency.  It would enact two model acts drafted by the National Conference of Commissioners on Uniform State Laws, authors of the Uniform Commercial Code. 

The first, the Uniform Regulation of Virtual Currency Businesses Act (the “URVCBA”), creates the regulatory framework for virtual currency business activity.  It sets out various licensing requirements, defines virtual currency and virtual currency business activity, and establishes requirements for security, net worth, and reserves for licensed and registered businesses.

The second bill AB 1489 would enact, the Uniform Supplemental Commercial Law for the URVCBA (the “Supplemental Act”), as described in the bill, “would provide rights to virtual currency businesses and their customers based on Uniform Commercial Code provisions.”  However, it addresses a deeper and not widely understood issue in virtual currency, the issue of free negotiation or transfer of virtual currency free of prior claims. 

Under current law, virtual currency is most likely classified as a “general intangible.”  When taken by a vendor for payment of the sale of inventory subject to the security interest of a creditor, virtual currency becomes proceeds and is impressed with that creditor’s security interest.  It remains impressed with that security interest notwithstanding subsequent sale or other transfer. The next purchaser or transferee of that virtual currency, and the next, takes it subject to that existing security interest. 

The Supplemental Act sets up a framework where virtual currency can be freely negotiated, 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 the choice between direct holding and Division 8’s indirect holding system to the market.  

AB 2658 was passed and signed into law late last year.  It 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 solves the double spending problem resulting from the lack of a tangible token), it can 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.

This e-bulletin was prepared by Walter K. Oetzell, Wallter K. Oetzell, APC, wkoetzell@oetzelllaw.com.