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Digital assets are reshaping the financial landscape, prompting regulators around the world to introduce new laws that address the risks and opportunities of this evolving market. In California, the Digital Financial Assets Law (DFAL) was introduced as a state-level framework to bring clarity, oversight, and structure to digital financial activity.
As more companies enter the space, understanding how DFAL applies is becoming increasingly important. In this guide, we’ll break down what the DFAL covers, who it applies to, how it’s enforced, and what fintech companies need to know to stay compliant.
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
Overview of the Digital Financial Assets Law
The DFAL specifically applies to digital asset activity that involves California residents or businesses operating within the state. This law establishes a formal legal framework for the issuance, circulation, custody, and exchange of digital financial assets. It also aims to regulate an industry that, until recently, has operated with limited oversight, exposing markets to fraud, money laundering, and systemic risk.
At its core, this law seeks to subject digital assets to the same regulatory standards as traditional financial products. These standards include clear definitions of asset types, such as utility tokens, digital securities, and asset-backed tokens. It also introduces operational rules for entities facilitating their trade or storage, such as exchanges, wallet providers, and custodians.
By codifying these standards, the law offers several benefits:
Legal certainty: It clarifies the status of digital assets, which reduces ambiguity for businesses, investors, and regulators.
Market integrity: It imposes safeguards to prevent illicit activity, market manipulation, and security breaches.
Consumer protection: It establishes requirements for disclosures, custody practices, and redress mechanisms in case of fraud or loss.
International compatibility: In some jurisdictions, DFAL is designed to align with the Financial Action Task Force (FATF) recommendations and other cross-border financial rules, helping firms stay compliant across markets.
The DFAL clarifies legal pathways for digital asset businesses to operate responsibly and within a defined regulatory framework. This shift from informal innovation to regulated adoption marks a turning point for the digital finance ecosystem.
Scope of the Digital Financial Assets Law
The DFAL applies to a wide range of activities and entities involved in the creation, exchange, custody, and use of digital assets. Its scope is intentionally broad to capture the diverse and evolving nature of the digital economy, making sure that both established companies and emerging fintech startups fall under regulatory oversight.
Specifically, the law governs:
Issuance of digital assets: Any entity issuing tokens, whether for fundraising (e.g., ICOs), utility access, or as representations of real-world assets, should comply with registration and disclosure requirements.
Exchange operations: Centralized and decentralized platforms facilitating the buying, selling, or conversion of digital financial assets should meet operational and licensing standards. This includes compliance controls, transaction monitoring, and user verification.
Custodial services: Firms offering digital asset wallets or custody solutions should adhere to strict security, segregation, and reporting standards to protect customer assets.
Digital asset brokers and dealers: Entities acting as intermediaries in the sale or purchase of digital assets should comply with recordkeeping, anti-money laundering, and reporting obligations.
Technology service providers: In some cases, the law extends to third-party service providers offering infrastructure or compliance support for digital asset platforms, especially where they influence transactions or asset flows.
Additionally, the law may apply extraterritorially in certain jurisdictions, meaning that foreign fintechs offering services to local residents can also fall under its scope, even without a local presence in the country.
This wide application means that many fintech companies, including those not directly issuing tokens, may be subject to the law if they offer services that touch any part of the digital asset value chain.
Regulated Entities Under the Digital Financial Assets Law
The DFAL identifies several categories of entities that should register, comply, or seek licensing before engaging in digital asset-related activities. These regulated entities are defined not just by their business model, but by the role they play in the lifecycle of digital assets.
Below are the primary types of regulated entities:
Digital Asset Issuers: Any organization that creates and distributes digital tokens or coins is subject to registration and disclosure obligations. This includes companies launching utility tokens, stablecoins, security tokens, or asset-backed tokens. Issuers should provide detailed documentation on the asset’s structure, use case, risk factors, and governance model.
Digital Asset Exchanges: Platforms that match buyers and sellers of digital assets, whether centralized or decentralized, fall under the jurisdiction of exchange regulations. They should implement robust AML programs, protect customer data, and report suspicious transactions. In some jurisdictions, even decentralized protocols with governance mechanisms may be considered regulated exchanges.
Custodians and Wallet Providers: Entities offering safekeeping, storage, or digital wallet services should meet strict technical and operational requirements. These include private key security, asset segregation, insurance coverage, and audited internal controls. Custodians are held to fiduciary standards similar to those in traditional finance.
Brokers and Dealers: Firms that act as intermediaries in the trading of digital financial assets should adhere to licensing, suitability, and disclosure requirements. These entities may include OTC desks, automated trading services, or platforms that offer market access to clients.
Payment and Transfer Service Providers: Companies enabling the use of digital assets for payments, remittances, or peer-to-peer transfers may also be regulated, particularly if they convert between fiat and digital assets or hold client funds.
Compliance and Infrastructure Providers (in some jurisdictions): Entities offering KYC/AML tech, blockchain analytics, or transaction validation services can fall under regulatory oversight if their systems materially affect asset custody, transfer, or security.
Please note that a business's classification as a regulated entity depends on both its functions and the level of risk exposure. Fintechs that offer bundled services, such as issuing tokens and operating an exchange, may face layered regulatory obligations across categories.
Implications of the Digital Financial Assets Law for Fintechs
As digital asset services become more mainstream, the law is pushing fintechs to operate with the same level of rigor expected in traditional financial services, covering everything from licensing and customer verification to audit trails and disclosures. Here are the key implications of this law:
Increased Regulatory Scrutiny: Fintechs dealing with digital assets should now operate under formal oversight. This includes periodic audits, reporting obligations, and inspections by regulatory bodies. What was once a largely unregulated environment now demands regulatory interaction and proactive compliance.
Higher Compliance Costs: Meeting the standards of DFAL involves investment in legal counsel, compliance teams, risk management frameworks, and technology. For smaller fintechs or startups, these costs may impact timelines or product offerings unless they integrate compliance-by-design early in development.
Licensing and Operational Approvals: Fintechs should evaluate which part of their product stack triggers licensing requirements. Applying for the appropriate licenses may involve capital adequacy tests, senior management vetting, and detailed business plans.
Product Design Constraints: The DFAL may limit how certain digital financial products are structured, especially those involving yield generation, stablecoin reserves, or synthetic assets. Products should now comply with local definitions of digital securities, financial instruments, or e-money, which may impact tokenomics, redemption features, or access.
Stronger Trust Signals: On the upside, for some fintechs, proactive compliance can serve as a differentiator when working with partners, banks, or institutional investors.
Innovation Within Guardrails: Rather than restricting innovation, the law channels it within clear regulatory parameters. Fintechs that align with regulatory expectations can still launch new tokenized products, DeFi features, or digital payment systems, provided they meet standards for safety, transparency, and accountability.
Key Compliance Requirements Under the Digital Financial Assets Law
Compliance with the Digital Financial Assets Law requires a structured approach across all core operational areas. Here are the key requirements fintech firms must address to operate legally and responsibly in the digital asset space.
Licensing and Registration
For fintechs, obtaining the correct licenses not only satisfies regulatory mandates but also signals operational legitimacy to partners, users, and investors. A well-prepared license application, complete with ownership disclosures, business plans, and internal controls, demonstrates a company’s financial and operational readiness.
Licensing can enhance access to banking services, streamline investor due diligence, and foster greater credibility with global partners.
Custody Standards
Digital asset custodians should adopt stringent practices to protect customer funds from theft, mismanagement, or technological failure. High standards, such as segregated storage, multi-signature wallets, and cold/hot wallet separation, can help prevent loss and boost client confidence.
In an industry where asset safety is paramount, compliance with custody rules can help build a strong reputation.
See also:
Transaction Monitoring and Reporting
Transaction monitoring is essential for maintaining market integrity and deterring illicit activity. Real-time detection systems help fintechs flag suspicious behavior like large unverified transfers or abnormal transaction patterns to reduce the risk of regulatory fines or platform misuse.
Implementing these systems can enhance internal analytics and inform better risk-based decision-making.
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AML/KYC Procedures
Strong AML and KYC procedures help fintechs identify their customers, prevent money laundering, and comply with both local and international laws. Verifying user identities, screening against sanctions lists, and applying enhanced due diligence for high-risk accounts is foundational to legal and operational credibility.
These measures build trust with banking partners and payment processors, who often require strict compliance for their continued cooperation.
Recordkeeping Obligations
Recordkeeping obligations under DFAL establish a firm’s auditability and operational discipline. Firms should securely maintain detailed logs of customer onboarding, transactional data, internal compliance reviews, and communications with regulators. These records are crucial during inspections, legal reviews, or customer disputes.
Proper documentation also supports forensic analysis, internal accountability, and better governance. In jurisdictions where data retention spans 5 to 10 years, failing to keep accurate records can lead to penalties, reputational harm, or revoked licenses.
Disclosure and Transparency
Firms should clearly communicate the risks of digital assets, the mechanics of their offerings, and the terms of use. Well-crafted disclosures, including whitepapers, stablecoin reserve attestations, and platform terms, minimize the likelihood of legal claims and build user trust.
Regulatory agencies view transparency as a proxy for a culture of compliance, while customers see it as a sign of professionalism and adherence to ethical standards.
Cross-Border Implications of the Digital Financial Assets Law
Cross-border activity adds another layer of complexity to compliance with the digital financial assets law, particularly for fintechs operating in or targeting users in California. As a global hub for innovation, California attracts digital asset firms from around the world and also imposes strict oversight on those engaging with its residents.
Under California's Money Transmission Act (MTA) and the DFAL, any company that offers digital asset services to users in the state, even without a physical presence, may be required to register as a money transmitter or obtain a special-purpose license. This applies to firms offering crypto exchanges, wallets, stablecoins, or tokenized products.
For instance, a foreign crypto exchange that allows California residents to trade tokens or hold digital assets could be deemed to be conducting business in the state. It may be required to:
Register with the California Department of Financial Protection and Innovation (DFPI)
Appoint an in-state compliance representative
Comply with local AML/KYC requirements and consumer protection laws
Failure to comply could result in cease-and-desist orders, financial penalties, or restrictions on serving California-based users.
The misalignment between California regulations and federal or international crypto laws can create operational conflicts. For instance, a fintech licensed under New York’s BitLicense or a foreign regime like the UK’s FCA may still be noncompliant in California if its consumer protections, reporting mechanisms, or transaction limits don’t meet state-level standards.
To manage this risk, many fintechs adopt a conservative approach by aligning their compliance frameworks with California’s expectations even before a formal license is required. Others pursue state-by-state licensing or launch within regulatory sandboxes to engage legally while scaling operations.
Digital Financial Assets Law vs. Other Crypto Regulations
The DFAL introduces a detailed regulatory framework, but it does not operate in isolation. Fintech companies must evaluate how their requirements align or conflict with other crypto regulations in the United States and internationally.
At the federal level, agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) already regulate digital assets. If a token is considered a security, it falls under SEC oversight, which brings requirements such as registration, investor disclosures, and broker-dealer licensing. The CFTC governs crypto derivatives and monitors for manipulation in spot markets.
In comparison, DFAL focuses more on operational aspects like custody, exchange operations, KYC, and transaction monitoring, regardless of how the asset is classified. This creates situations where fintechs must comply with both DFAL and federal rules.
States such as New York have their own licensing frameworks, including the BitLicense, which imposes requirements related to capital, cybersecurity, and consumer disclosures. California’s DFAL proposal follows a similar direction, but other states continue to take different approaches. As a result, companies operating across multiple states face fragmented and often inconsistent compliance obligations.
Globally, the regulatory landscape is also evolving. The European Union’s Markets in Crypto-Assets Regulation (MiCA) introduces unified rules for digital asset service providers, including authorization procedures, stablecoin reserve requirements, and user protections. While DFAL and MiCA share similar goals, they differ in definitions, registration processes, and enforcement models, making cross-border compliance more complex.
To manage risk and scale globally, many fintechs adopt a highest-standard approach, building systems that meet the most rigorous requirements across all jurisdictions where they operate.
Enforcement, Penalties, and Regulatory Oversight
Penalties for non-compliance vary depending on the severity of the breach. They may include:
Fines: Civil monetary penalties can range from tens of thousands to millions of dollars, especially for willful violations or repeated offenses.
Cease-and-desist orders: Regulators can order firms to halt operations immediately, particularly if they’re operating without a license or exposing users to undue risk.
License revocation or suspension: For registered firms, ongoing compliance is a condition of maintaining licensure. Regulatory agencies can suspend or revoke licenses if obligations are not met.
Public enforcement actions: Agencies may publicly disclose violations, which can damage a company’s reputation, affect partnerships, and trigger investor concern.
Criminal charges: In cases involving fraud, misrepresentation, or money laundering, regulators may refer matters to law enforcement for prosecution.
Regulatory oversight doesn’t end after licensing. Firms should maintain ongoing compliance, including routine filings, audits, and event-driven disclosures. In California, for example, DFPI conducts both scheduled and unannounced examinations to verify that firms are upholding recordkeeping, custody, and consumer protection standards.
See also:
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The DFAL signals a clear shift from loosely defined innovation to a more structured regulatory environment for digital finance in California. For fintech companies in this space, compliance is a strategic requirement tied to growth, credibility, and long-term viability.
By aligning with DFAL’s core pillars, companies can meet regulatory expectations while delivering trusted, user-centered products.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with blockchain compliance, reach out to our regulatory experts today:
Published on Jul 16, 2025
Last updated on Jul 16, 2025
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