This past September, Democratic California governor Gavin Newsom vetoed a bill that overwhelmingly passed both chambers of the California legislature and would have delivered rules and transparency to the state’s burgeoning and largely unregulated cryptocurrency industry.
The move came after the crypto industry spent more than $400,000 on lobbying efforts and representatives from the Bay Area tech giant Salesforce lobbied Newsom directly on blockchain technology and other industry matters and treated him to a swanky dinner, according to lobbying disclosures.
This wasn’t the only time Newsom refused to crack down on crypto operations, even in the face of mounting industry scandals and imploding crypto firms. Last December, Newsom’s office published a largely glowing report on cryptocurrencies crafted mainly by tech and venture capital interests — including several crypto companies facing lawsuits and enforcement actions.
Last month, the governor’s office did not find it necessary for anyone to attend an oversight hearing by California lawmakers on cryptocurrency’s recent effects on the state — the same day that Newsom found the time to attend a frothy press conference with Elon Musk.
And earlier this month, Newsom lobbied the Biden administration for a bailout of Silicon Valley Bank, one of the main financial institutions for Silicon Valley’s largest investors. He didn’t, however, disclose the fact that he and his wife, Jennifer Siebel Newsom, are both clients of Silicon Valley Bank, according to the Intercept.
These developments are just the latest example of how Newsom appears to be letting Big Tech and Wall Street interests dictate California’s approach to reining in cryptocurrency, at the expense of consumer protection.
Newsom, often seen as a future Democratic presidential candidate, has the potential to have California set the standard on crypto regulations, much like it has done with vehicle emissions. California is the most populous state in the country, the soon-to-be fourth-largest economy in the world, and home to more than 20 percent of all blockchain and crypto companies in North America.
Now California assemblymember Tim Grayson (D), author of the previously vetoed crypto bill, has proposed new legislation to regulate the crypto industry. The bill aims to license crypto exchanges operating in California by 2025, require companies to issue financial stability reports, and ban “unbacked stablecoins.”
Stablecoins are a digital currency designed to have a one-to-one value with a common currency like the dollar. Unbacked stablecoins, on the other hand, rely on a convoluted system of algorithms for their value.
“It’s clear that licensure is the next natural step for this industry, and it is equally clear that until we take that step, Californians will continue to be vulnerable to prevalent and preventable financial scams,” Grayson said in a statement announcing the new legislation.
If the California legislature passes the bill, Newsom may again be put to the test: Will he sign a bill that offers basic consumer protection, or once again do the bidding of his friends in Big Tech?
Newsom’s office did not respond to a request for comment.
Cryptocurrencies are essentially unregulated digital money or assets that can be bought and sold on exchanges similar to virtual stock markets. Blockchains are an open-source digital ledger technology used to track the cryptocurrency transactions.
The lack of regulations on crypto allows for a bevy of scams such as “pump and dump” schemes, which involves creating excitement around a certain cryptocurrency and selling it while the prices are high, as well as the selling of blatantly fake products.
Crypto also requires a ton of electricity. Bitcoin, for example, utilizes “proof of work,” a blockchain technology that uses large amounts of electricity to solve increasingly challenging math problems.
In May 2022, Newsom issued an executive order aimed to promote research into blockchains and set California crypto policy in line with a Biden administration order that sought to establish consumer protection, promote financial stability, and research the creation of a US-run digital currency.
Newsom’s order directed a number of government agencies to collaborate on a report looking at the effects cryptocurrency has had on the economy and how crypto’s underlying technologies could be used by the government.
“Really excited to see [California] taking the initiative on blockchain policy to protect consumers, provide oversight, and help grow the economy. Excited to work with @GavinNewsom on this!” tweeted since-disgraced fraudster Sam Bankman-Fried, who led the now-defunct crypto exchange FTX.
Despite the fact that two major cryptocurrencies imploded within days of Newsom’s order and a crypto exchange utilized by 48,000 Californians soon went bankrupt, the subsequent report, released in early December, ended up being largely a spin piece for the crypto industry.
Of the forty-seven attendees who took part in ten roundtable discussions for the report, only six attendees were dedicated to consumer protection, according to a list of attendees provided by California’s Department of Financial Protection and Innovation. Of the remaining forty-one attendees, thirty-seven came from tech, crypto, and venture capital companies.
A number of the participants represented crypto companies facing lawsuits and federal enforcement actions.
There was Kraken, which was fined by the Treasury Department in November 2022 for facilitating sanctions evasion; Gemini, which the Securities and Exchange Commission (SEC) charged this January for unregistered securities offerings and sales; Ripple, which the SEC also charged with unregistered securities offerings in December 2022; and Silvergate Bank, which collapsed on March 9 and is allegedly facing a Justice Department investigation due to its role in facilitating transactions between FTX and Alameda Research — two companies run by Bankman-Fried.
Also in attendance for the roundtable discussions were HUMBLE, Inc., which is facing a lawsuit for making “materially false and misleading statements” to its clients; Block and OpenSea, which are facing lawsuits for security breaches; and PayPal, which is being sued for seizing customer assets without notice. One roundtable attendee suggested California “can destigmatize crypto by promoting a greater understanding in the public sphere,” the report states, essentially recommending that the state help launder crypto’s poor reputation.
The resulting report briefly acknowledged the need for regulation, scams associated with cryptocurrencies, and how marginalized groups that are traditionally underserved by the banking system “have fallen victim to hacks, scams, fraud, and product collapses.”
But instead of detailing policy recommendations for consumer protections, the report directed California’s Department of Financial Protection and Innovation to educate Californians on how to not get scammed and train its “staff who engage with consumers on how best to seek redress.”
Newsom’s report also acknowledged the environmental impacts associated with blockchain technology. But instead of legislative or regulatory remedies, the report simply recommended encouraging “more environmentally efficient blockchain technologies and environmental protections” and making consumers aware of the “environmental impacts and . . . any claims of clean energy use and carbon offsets.”
Such an approach doesn’t directly combat the massive carbon footprint of crypto’s proof-of-work processes and relies solely on the consumer’s environmental values, said Jeremy Fisher, a senior advisor at the Sierra Club, who took part in one of Newsom’s roundtable discussions.
“I understand California is interested in not wanting to stifle innovation, but even from the parties that were part of our roundtable who are interested in innovation, they were very clear that the idea of proof of work . . . was not really something that was in California’s interest,” Fisher told us.
Consumer advocates were disappointed in the report, arguing that innovation should not take precedence over basic protections.
“This is not an area where we want to be behind, this is an area where California should be leading,” said Robert Herrell, president of the Consumer Federation of California. “[Crypto] is an industry in need of adult supervision, and right now it is not there.”
Cozy Tech Relationships
Several of the companies that took part in the crypto report have donated generously to Newsom’s political campaigns.
That included Cameron and Tyler Winklevoss, cofounders of Gemini, who donated $116,000 to Newsom’s first gubernatorial run in 2018, according to state disclosures. Brad Garlinghouse, CEO of Ripple, donated $20,000 to Newsom’s 2018 campaign as well. OpenSea also donated $10,000 to Newsom’s 2022 gubernatorial run, according to state disclosures.
Newsom, in fact, has a long history of being cozy with Big Tech, dating back to his time as San Francisco’s mayor, when he spoke at major tech conferences. Later, when he served as the state’s lieutenant governor, Newsom rented space in the Founders Den, a venture capitalist clubhouse in San Francisco, instead of using the state office provided for him.
“Founders Den provides the kind of collaborative and creative atmosphere to foster new ideas not only for emerging new businesses, but government as well,” Newsom said at the time.
One of the managing partners of Founders Den contributed $12,000, the maximum amount allowed, to Newsom’s campaign for lieutenant governor, according to SFGate.
In 2014, Newsom accepted political donations in Bitcoin during his run for lieutenant governor. The state made it an official policy allowing politicians to accept all cryptocurrencies as donations in 2022.
More recently, as governor, Newsom signed multiple no-bid contracts with tech and health care companies during the COVID-19 pandemic. “The vast majority are Newsom supporters and donors who have contributed more than $113 million to his political campaigns and charitable causes, or to fund his policy initiatives, since his first run for statewide office in 2010,” Kaiser Health News reported.
In 2021, the Bay Area tech behemoth Salesforce won a contract to help create MyTurn, the extremely unpopular website dedicated to helping Californians register for COVID-19 vaccines. It has cost the state at least $50 million. Salesforce is run by Marc Benioff, the godfather of Newsom’s eldest son.
On May 18, 2022, in the lead-up to the California legislature introducing the crypto regulation bill that Newsom would later veto, representatives of Salesforce treated Newsom to a $130 dinner.
The company also lobbied Newsom multiple times on blockchain-related issues, according to state lobbying disclosures. Salesforce runs its own blockchain service that allows for the staking of ownership claims to digital art known as non-fungible tokens (NFTs) and constructing digital “smart contracts.”
Musk, the controversy-plagued tech magnate whom Newsom recently lauded for bringing Tesla’s engineering headquarters back to Silicon Valley, has donated $28,300 to Newsom’s campaign efforts since 2009, according to state disclosures.
Musk is also a crypto enthusiast and wants Twitter to start processing payments with crypto as an option.
During the pandemic, he repeatedly hyped Dogecoin, a cryptocurrency commonly referred to as a “shitcoin,” due to its over-reliance on Musk hyping the digital currency and its lack of value. Tesla accepts Dogecoin as a form of payment, but that’s more or less the extent of its use.
“California Has Not Lived Up to Its Reputation”
Amid the crypto market’s turmoil this past summer, the California legislature passed a bill that would have required cryptocurrency companies to seek licensure with the state, much like New York’s BitLicense program. The bill would have also banned unbacked stablecoins and required financial stability disclosures from companies.
In letters of opposition to the bill, the Blockchain Advocacy Coalition wrote that the provisions lacked clear definitions needed to prevent the potential “stifling of a nascent yet promising industry” and that the bill “could be a major deterrent for smaller companies in the industry that are unable to navigate such a lengthy, cumbersome and expensive compliance process.”
Newsom seems to have agreed, vetoing the bill on September 23.
“A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases, and is tailored with the proper tools to address trends and mitigate consumer harm,” Newsom wrote in his veto statement, adding that it would “premature” to adopt a licensing structure ahead of “forthcoming federal actions.”
Six weeks after Newsom’s veto, crypto exchange FTX began to collapse, and with it federal legislation that was largely seen as a wish list for the crypto industry.
“I remain frustrated by the administration’s release of the executive order and its dismissal of the legislature’s concerns, especially since those concerns have been proven correct time and again,” said California assemblymember Tim Grayson, chair of the Assembly Banking and Finance committee, during a February oversight hearing looking into crypto’s effects on the California economy.
“The simple fact is California has not lived up to its reputation as a leader and we have failed to provide some basic consumer protections in this particular space,” added state senator Monique Limón (D), chair of the Senate Banking and Finance committee.
Now, both Grayson and Limón are the lead authors of a new crypto licensing bill that is making its way through the legislature, and both seem to be undeterred by Newsom’s lack of involvement with the legislation.
“The legislature has received no significant engagement on this topic, nor have we seen any crypto-specific regulations proposed,” Limón said during the hearing. “While I would have liked to have seen the governor’s office participate in this conversation, we will do our best to understand the administration’s support and approach.”