The application of the securities laws to digital financial assets has been fraught for lawyers and their clients. After taking a hard line that many of these assets were securities under the federal securities laws, the Securities and Exchange Commission with the change of Administration now appears to be taking a less hostile approach. In January, Acting Commissioner Mark Uyeda announced the formation of a Crypto Task Force. Then in February, the Staff of the Division of Corporation Finance issued a statement that certain meme coins are not securities.

A conclusion that a digital financial asset is not a security may simply transfer regulation from one regulator (the SEC) to another (the California Department of Financial Protection & Innovation), or as Bilbo Baggins exclaimed: "Escaping goblins to be caught by wolves!"*

California's Digital Financial Assets Law will require persons engaged in “digital financial asset business activity” to be licensed by the Department. Cal. Fin. Code § 3201. The DFAL defines "digital financial asset" as "a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender." Cal. Fin. Code § 3102(g)(1). One exclusion from this definition is a "security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department." Cal. Fin. Code § 3102(g)(2). Accordingly, if the SEC determines that a digital financial asset is a security, someone exchanging, transferring, or storing that asset would be subject to the DFAL, unless exempt. Conversely, a determination that a particular digital financial asset is not a security would bring persons engaged in exchanging, transferring, or storing that asset within the ambit of the DFAL. Oddly, a security that is neither registered with nor exempt from registration would not be excluded from the definition of a "digital financial asset" for purposes of the DFAL.

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J.R.R. Tolkien, The Hobbit, or There and Back Again.