The California DFAL License Application Is Open: Assess Your Business Model Now for the July 1 Deadline

We published a client alert in April 2024 about the implementation of a “BitLicensesque” regime in California, the Digital Financial Assets Law (DFAL). After an extended delay of the effectiveness of the licensing provisions, the wait is over. The California Department of Financial Protection and Innovation (DFPI) has started accepting applications through the Nationwide Multistate Licensing System (NMLS). Any person who engages in digital financial asset business activity with or on behalf of a California resident and is not otherwise exempt must submit a complete DFAL license application by July 1, 2026, to continue serving California residents.

In the April 2024 alert, we discuss the activities that would be subject to the DFAL licensure requirement. Digital asset custody, exchange, and issuance and certain activities involving online game platforms are all in scope. The DFAL includes specific requirements for stablecoin-related activities and digital asset kiosks. Companies planning to engage in stablecoin exchange or custody or operating a digital asset kiosk should review the relevant chapters carefully.

In addition to the financial and legal information about the applicant and their control persons, a DFAL license applicant must provide an independent review of its Bank Secrecy Act/anti-money laundering program, and develop and maintain an information security and operational security program, among other internal compliance policies and procedures, meeting the requirements of the DFAL. The DFPI will assess the sufficiency of an applicant’s information security program following the National Institute of Standards and Technology Cybersecurity Framework 2.0. Preparation of these items may require significant lead time if an applicant has not already done the groundwork. Because the DFPI requires a “complete” application by July 1, 2026, to continue operations past that date, applicants must assess their licensure applicability and start the application process early.

The DFPI has proposed regulations under the DFAL that would provide some clarification about the interaction between the DFAL and the Money Transmission Act. While the proposed regulations purport to exempt certain digital financial asset business activities from the scope of the Money Transmission Act, one should not assume being a DFAL licensee automatically means that no other license is required. Each business activity should be evaluated against the licensing triggers and available exemptions under each applicable law.

If you wonder whether your business requires a DFAL license or another type of license, we are here to help. Reach out to your Goodwin team for assistance in determining if the DFAL applies to your business and filing an application with the DFPI.