Disclosures And Protections - - CA Financial

Section § 3501

This law requires businesses that conduct digital financial activities with residents to provide clear, separate disclosures about fees, insurance coverage, and other key information before engaging in any transaction. It mandates that these disclosures include a detailed list of fees, whether there's insurance or protection against loss, any conditions affecting transaction reversals, and the rights and responsibilities of both parties regarding errors or unauthorized transfers.

Moreover, businesses must notify residents if any conditions around their transactions change, like fee schedules or service outages. Upon completing a digital financial transaction, businesses must confirm transaction details, including fees and the precise time of the transaction. They may provide either individual or daily aggregate confirmations to customers.

(a) When engaging in digital financial business activity with a resident, a covered person shall provide to a resident the disclosures required by subdivision (b) and any additional disclosure the department by rule determines reasonably necessary for the protection of residents. The department shall determine by rule the time and form required for disclosure. A disclosure required by this section shall be made separately from any other information provided by the covered person and in a clear and conspicuous manner in a record the resident may keep. A covered person may propose, for the department’s approval, alternate disclosures as more appropriate for its digital financial asset business activity with, or on behalf of, residents.

(b) Before engaging in digital financial asset business activity with a resident, a covered person shall disclose, to the extent applicable to the digital financial asset business activity the covered person will undertake with the resident, all of the following:

(1) A schedule of fees and charges the covered person may assess, the manner by which fees and charges will be calculated if they are not set in advance and disclosed, and the timing of the fees and charges.

(2) Whether the product or service provided by the covered person is covered by either of the following:

(A) A form of insurance or other guarantee against loss by an agency of the United States as follows:

(i) Up to the full United States dollar equivalent of digital financial assets placed under the control of, or purchased from, the covered person as of the date of the placement or purchase, including the maximum amount provided by insurance under the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or otherwise available from the Securities Investor Protection Corporation.

(ii) If not provided at the full United States dollar equivalent of the digital financial asset placed under the control of or purchased from the covered person, the maximum amount of coverage for each resident expressed in the United States dollar equivalent of the digital financial asset.

(B)

(i) Private insurance against theft or loss, including cybertheft or theft by other means.

(ii) Upon request of a resident with whom a covered person engages in digital financial asset business activity, a covered person shall disclose the terms of the insurance policy to the resident in a manner that allows the resident to understand the specific insured risks that may result in partial coverage of the resident’s assets.

(3) The irrevocability of a transfer or exchange and any exception to irrevocability.

(4) A description of all of the following:

(A) The covered person’s liability for an unauthorized, mistaken, or accidental transfer or exchange.

(B) The resident’s responsibility to provide notice to the covered person of an unauthorized, mistaken, or accidental transfer or exchange.

(C) The basis for any recovery by the resident from the covered person in case of an unauthorized, mistaken, or accidental transfer or exchange.

(D) General error resolution rights applicable to an unauthorized, mistaken, or accidental transfer or exchange.

(E) The method for the resident to update the resident’s contact information with the covered person.

(5) That the date or time when the transfer or exchange is made and the resident’s account is debited may differ from the date or time when the resident initiates the instruction to make the transfer or exchange.

(6) Whether the resident has a right to stop a preauthorized payment or revoke authorization for a transfer and the procedure to initiate a stop-payment order or revoke authorization for a subsequent transfer.

(7) The resident’s right to receive a receipt, trade ticket, or other evidence of the transfer or exchange.

(8) The resident’s right to at least 14 days’ prior notice of a change in the covered person’s fee schedule, other terms and conditions that have a material impact on digital financial asset business activity with the resident, or the policies applicable to the resident’s account.

(9) That no digital financial asset is currently recognized as legal tender by California or the United States.

(10)

(A) A list of instances in the past 12 months when the covered person’s service was unavailable to 10,000 or more customers seeking to engage in digital financial asset business activity due to a service outage on the part of the covered person and the causes of each identified service outage.

(B) As part of the disclosure required by this paragraph, the covered person may list any steps the covered person has taken to resolve underlying causes for those outages.

(c) Except as otherwise provided in subdivision (d), at the conclusion of a digital financial asset transaction with, or on behalf of, a resident, a covered person shall provide the resident a confirmation in a record which contains all of the following:

(1) The name and contact information of the covered person, including the toll-free telephone number required under Section 3507.

(2) The type, value, date, precise time, and amount of the transaction.

(3) The fee charged for the transaction, including any charge for conversion of a digital financial asset to legal tender, bank credit, or other digital financial asset, as well as any indirect charges.

(d) If a covered person discloses that it will provide a daily confirmation in the initial disclosure under subdivision (c), the covered person may elect to provide a single, daily confirmation for all transactions with, or on behalf of, a resident on that day instead of a per transaction confirmation.

digital financial transactions resident disclosures fee schedule insurance coverage unauthorized transfers transaction irrevocability error resolution stop payment rights transaction confirmations service outages contact information update prior notice for fee changes legal tender recognition daily confirmation option toll-free contact number

(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3503

This section outlines rules for businesses that handle digital financial assets on behalf of others. It requires them to maintain enough of each type of digital asset to cover all their obligations. These assets must belong to the account holders, not the business itself, and cannot be claimed by the business’s creditors. Businesses can comply by including specific terms in their contracts that define digital assets as financial assets and themselves as securities intermediaries. In case of bankruptcy, these assets are held in trust for customers and are protected from creditors' claims. Additionally, businesses must own securities equal to or greater than their total liabilities to customers.

(a)

(1) A covered person that has control of a digital financial asset for one or more persons shall at all times maintain in its control an amount of each type of digital financial asset sufficient to satisfy the aggregate entitlements of the persons to the type of digital financial asset.

(2) If a covered person violates this subdivision, the property interests of the persons in the digital financial asset are pro rata property interests in the type of digital financial asset to which the persons are entitled without regard to the time the persons became entitled to the digital financial asset or the covered person obtained control of the digital financial asset.

(b) A digital financial asset maintained for purposes of compliance with this section shall meet all of the following criteria:

(1) The digital financial asset shall be held for the persons entitled to the digital financial asset.

(2) The digital financial asset shall not be property of the covered person.

(3) The digital financial asset shall not be subject to the claims of creditors of the covered person.

(c) A covered person may comply with this section by including, and complying with, a provision in its contract with a resident that states all of the following:

(1) That a digital financial asset controlled by the covered person on behalf of the resident will be treated as a financial asset under Division 8 (commencing with Section 8101) of the Commercial Code.

(2) That the covered person is a securities intermediary under Division 8 (commencing with Section 8101) of the Commercial Code with respect to any digital financial assets under control of the covered person on behalf of the resident.

(3) That the resident’s account or wallet provided by or through the covered person is a securities account under Division 8 (commencing with Section 8101) of the Commercial Code.

(d) Even if commingled with other assets of the covered person, digital financial assets maintained for purposes of compliance with this section are deemed to be held in trust for the benefit of the customers of the covered persons’ digital financial asset business activity, in the event of bankruptcy or receivership of the covered person, or in the event of an action by a creditor against the covered person who is not a beneficiary of this statutory trust. Digital financial assets maintained for purposes of compliance with this section or eligible securities impressed with a trust pursuant to this subdivision shall not be subject to attachment, levy of execution, or sequestration by order of any court, except for a beneficiary of this statutory trust.

(e) A covered person shall at all times own eligible securities, as described in subdivision (b) of Section 2082, having an aggregate market value computed in accordance with United States generally accepted accounting principles of not less than the aggregate amount of all of its outstanding United States dollar-denominated liabilities owed to its customers.

digital financial assets control of assets customer entitlements creditor protection asset ownership securities intermediary trust protection bankruptcy protection contract provisions financial asset treatment account holder rights financial liability eligible securities market value compliance assets in trust

(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3505

This law requires digital asset exchanges, known as "covered exchanges," to fulfill several responsibilities before listing or offering digital financial assets to residents. They must evaluate potential security classification, disclose conflicts of interest, conduct risk assessments, and set procedures for listing evaluation or cessation. Assets listed under New York regulations prior to 2023 are exempt from certification.

If a covered exchange acts without necessary certification or with false representation, it faces penalties of up to $20,000 per day. Additionally, exchanges must handle asset exchange requests from residents efficiently and strive for optimal market conditions, reviewing trading records biannually for quality assurance. Introducing a third party or failing to execute favorable trades requires justification. Repeated procedural failures indicate improper implementation, but isolated failures are not automatically liable if procedures were properly set up and followed.

(a)

(1) Except as provided for under paragraph (2), a covered exchange, prior to listing or offering a digital financial asset that the covered exchange can exchange on behalf of a resident, shall certify on a form provided by the department that the covered exchange has done the following:

(A) Identified the likelihood that the digital financial asset would be deemed a security by federal or California regulators.

(B) Provided, in writing, full and fair disclosure of all material facts relating to conflicts of interest that are associated with the covered exchange and the digital financial asset.

(C) Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud.

(D) Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the digital financial asset, including an evaluation of whether material changes have occurred.

(E) Established policies and procedures to cease listing or offering the digital financial asset, including notification to affected consumers and counterparties.

(2) Certification by a covered exchange shall not be required for any digital financial asset approved for listing on or before January 1, 2023, by the New York Department of Financial Services pursuant to Part 200 of Title 23 of the New York Code of Rules and Regulations.

(3) The department, after a finding that a covered exchange has listed or offered a digital financial asset without appropriate certification or after a finding that material misrepresentations were made in the certification process, shall require the covered exchange to cease offering or listing the digital financial asset and may assess the civil penalty of up to twenty thousand dollars ($20,000) per day the violation has occurred.

(b)

(1) A covered exchange shall make every effort to execute a resident’s request to exchange a digital financial asset that the covered exchange receives fully and promptly.

(2)

(A) A covered exchange shall use reasonable diligence to ensure that the outcome to the resident is as favorable as possible under prevailing market conditions. Compliance with this paragraph shall be determined by factors, including, but not limited to, all of the following:

(i) The character of the market for the digital financial asset, including price and volatility.

(ii) The size and type of transaction.

(iii) The number of markets checked.

(iv) Accessibility of appropriate pricing.

(B) At least once every six months, a covered exchange shall review aggregated trading records of residents against benchmarks to determine execution quality, shall investigate the causes of any variance, and shall promptly take action to remedy issues identified in that review.

(3) In a transaction for or with a resident, the covered exchange shall not interject a third party between the covered exchange and the best market for the digital financial asset in a manner inconsistent with this subdivision.

(4) If a covered exchange cannot execute directly with a market and employs other means in order to ensure an execution advantageous to the resident, the burden of showing the acceptable circumstances for doing so is on the covered exchange.

(c) For purposes of this section:

(1) “Conflict of interest” means an interest that might incline a covered exchange or a natural person who is an associated person of a covered exchange to make a recommendation that is not disinterested.

(2) “Covered exchange” means a covered person that exchanges or holds itself out as being able to exchange a digital financial asset for a resident.

(d) Failure of a particular policy or procedure adopted under this section to meet its goals in a particular instance is not a ground for liability of the licensee if the policy or procedure was created, implemented, and monitored properly. Repeated failures of a policy or procedure are evidence that the policy or procedure was not created or implemented properly.

digital financial asset covered exchange risk assessment conflict of interest disclosure security classification New York Department of Financial Services commercial penalties resident exchange request execution quality favorable market conditions benchmarks third-party interjection liability exemption procedural failure transaction execution

(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3507

If you're a business covered by this law and operate a website, you must clearly show a toll-free phone number for customers to call for help. This phone line needs to be available for live customer support 10 hours a day, Monday through Friday, except on federal holidays.

A covered person shall prominently display on its internet website a toll-free telephone number through which a resident can contact the licensee for customer service issues and receive live customer assistance. The telephone line shall be operative 10 hours per day, Monday through Friday, excluding federal holidays.

toll-free telephone customer service issues live customer assistance internet website requirement operative hours Monday through Friday federal holidays contact licensee resident access business compliance website display requirements customer support line live assistance availability customer service communication phone line operation hours

(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3509

This law states that any requirements that apply to a 'covered person' or a 'covered exchange' will start being enforced starting July 1, 2026.

The requirements imposed on a covered person or a covered exchange under this chapter shall be operative on July 1, 2026.

covered person covered exchange operative date enforcement date July 1 2026 regulatory compliance financial regulation future obligations operational requirements implementation timeline

(Amended by Stats. 2024, Ch. 945, Sec. 3. (AB 1934) Effective January 1, 2025.)