California passes law to protect unclaimed crypto from forced liquidation

California has passed a law that protects unclaimed cryptocurrency from being forcibly converted to cash, making it the first state to offer such explicit safeguards.

California Governor Gavin Newsom signed Senate Bill 822 on Oct. 14, effectively updating the state’s Unclaimed Property Law to include digital assets like Bitcoin, Ethereum, and other cryptocurrencies, and becoming the first US state to do so.

Senate Bill 822, which was authored by Senator Josh Becker of Menlo Park, was designed to address the legal uncertainty around how the state should handle dormant crypto holdings that remain unclaimed.

Under the new framework, it has been clarified that digital financial assets are a form of intangible property and must be treated under the same legal framework as unclaimed bank accounts, stocks, and other securities.

If a crypto account remains untouched for three years, despite reasonable efforts to contact the owner, the assets are deemed abandoned and transferred to the state. 

However, unlike traditional practice, where assets are liquidated, the law mandates that these digital assets be preserved in their original form.

Further, entities holding digital assets must notify account holders six to twelve months before those assets are reported as unclaimed.

The notification must be done using a standardised form approved by the State Controller, and if the account holder takes any action during this window, the three-year countdown resets.

Furthermore, companies are required to transfer the actual crypto asset, along with the associated private keys, directly to a custodian selected by the Controller within 30 days after the final reporting deadline.

The Controller has the power to choose one or more licensed custodians to manage these assets, but the law requires that these custodians hold valid state-issued licenses from the Department of Financial Protection and Innovation.

Only after a waiting period of 18 to 20 months can the Controller convert the unclaimed crypto into cash. 

If the rightful owner comes forward during this period, they are entitled to receive their original assets rather than the fiat equivalent, but after conversion, claimants would receive the cash proceeds instead.

Before the bill was signed into law, previous iterations and related legislative efforts took a more ambiguous approach.

A notable example was Assembly Bill 1052, which passed through the California Assembly in June but drew a lot of criticism from the crypto community.

It lacked clear language on asset preservation, leaving many to assume the state would liquidate digital assets upon seizure, while some were concerned that simply holding their Bitcoin without frequent activity could be grounds for the state to take custody.

Although the bill did require the state to first attempt contact before any seizure, it failed to offer concrete protections that would ensure the crypto was returned in its original form.

At the time, critics warned it could drive users away from regulated exchanges altogether and into more opaque parts of the ecosystem.

California passes crypto-related legislations

Beyond SB 822, California has introduced other legislation that addresses certain regulatory grey areas that previously existed.

Back in March, lawmakers amended Assembly Bill 1052 to include protections for crypto payments and self-custody, with the revised bill now allowing businesses and individuals to accept digital assets as payment and banning public agencies from restricting the use of hardware wallets.

It also prevents public officials from promoting or transacting in digital assets that might create a conflict of interest.

More recently, Assembly Bill 1180 received unanimous approval in the State Assembly.

That measure would create a pilot program for allowing certain state fees to be paid in cryptocurrency.

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