In a groundbreaking move, California has become the first state in the nation to enact legislation preventing the automatic conversion of unclaimed cryptocurrency. Governor Gavin Newsom officially signed Senate Bill 822 (SB 822) into law on October 11.
The new law modifies California’s existing Unclaimed Property Law. It now stipulates that any dormant digital assets surrendered to the state must be held in their original cryptocurrency form, instead of being immediately changed into U.S. dollars.
This policy addresses a key issue in the digital asset handling process related to unclaimed property. Currently, exchanges and custodians are required by law to turn over inactive accounts. In most states, these digital assets are quickly liquidated and converted into traditional currency.
When owners eventually reclaim their assets, they receive the equivalent dollar amount for which the state sold the crypto, which may be significantly different from its current value.
SB 822 aims to rectify this. California will now maintain unclaimed digital currencies “in kind,” hiring licensed cryptocurrency custodians to oversee them. The original assets will be returned to their owners, unless there are very specific circumstances requiring a conversion to fiat currency.
The legal team at Coinbase expressed their support for the bill’s passage. Industry experts have pointed out that this in-kind handling aligns the state’s treatment of crypto with how it currently handles securities and traditional bank accounts.
This policy also has the potential to reduce tax complications. When a state sells cryptocurrency and provides fiat currency, it may result in capital gains taxes for the owner, determined by the state’s sale price and the timing of the sale. By holding the assets in their original form until claimed, this outcome is avoided.
The in-kind requirement within SB 822 was proposed as a measure to minimize potential harm. When assets are forfeited to the state, owners will now be able to recover their original crypto coins instead of only receiving the proceeds from a sale.
The allowance to convert to fiat currency is designed as an administrative safeguard for instances where maintaining highly volatile assets proves unfeasible.
Who Benefits from This Law?
The law is applicable to “digital financial assets,” as defined by Section 3102(g) of the California Financial Code. This includes cryptocurrencies and stablecoins held by third-party custodians on behalf of California residents or accounts connected to California.
The new regulations pertain to digital financial assets held by business entities or financial institutions acting as custodians for other individuals or organizations.
If a centralized exchange, hosted wallet provider, or any other type of holder maintains an account with a California connection that has been inactive beyond the specified period, they are obligated to transfer the cryptocurrency itself to the State Controller, without first liquidating the assets.
The law sets a three-year period of inactivity as the threshold for forfeiture. Holders are also mandated to send pre-escheatment notices between six and twelve months prior to reporting the assets.
These notices must adhere to a format approved by the State Controller and can effectively reset the dormancy period if the owner responds.
After the assets are forfeited to the state, the Controller places them with custodians who are licensed by California’s Department of Financial Protection and Innovation.
The law contains provisions outlining the process for creating multi-signature keys to facilitate transfers. Claimants who can later verify ownership will receive the digital financial asset if it remains in custody. If the asset has been converted, the claimant will receive the net proceeds from the sale.
The Controller has the authority to convert assets to fiat currency, but only within a window of 18 to 20 months after the escheatment report.
What is Excluded from This Law?
Self-custody wallets fall outside the scope of the law. SB 822 applies to entities holding property belonging to someone else. Therefore, if there’s no third-party custodian involved, there is nothing to report or transfer.
Specific items excluded from the definition of “digital financial asset” are also exempt from the law. These include loyalty points, rewards program balances, in-game currencies used exclusively within a platform, and securities that are registered with or exempt from the SEC.
Legislative analyses provide detailed listings of these exclusions. Existing jurisdictional regulations still apply, meaning that any intangible property lacking a California nexus will not be subject to forfeiture to the state.
Private disputes, like bankruptcies and creditor liquidations, are governed by separate frameworks. SB 822 focuses specifically on how the state manages dormant assets that are forfeited through the Unclaimed Property Law.
What Does This Mean for Account Holders?
For California residents who use exchange accounts or custodial wallets, SB 822 establishes a clearly defined process to follow before forfeiture occurs and offers a pathway for recovering assets in their original form after they are forfeited.
Holders are obligated to send pre-escheatment notices, using forms approved by the Controller, within a timeframe of 6 to 12 months before reporting the assets. Responding to these notices resets the three-year dormancy clock.
The standardized notification requirement aims to reduce cases of unexpected forfeiture from accounts that users may have temporarily forgotten or lost access to.
If assets are transferred to state custody, claimants have at least 18 months after forfeiture to file for the return of the digital financial asset itself. If a conversion has taken place, the owners will receive the net proceeds from the sale.
The law addresses cryptocurrency custody with a level of specificity rarely found in state unclaimed property laws. It acknowledges multi-signature requirements, the licensing standards for custodians, and the important distinction between self-custody and third-party holding.
Currently, no other U.S. state has formally adopted in-kind holding as the standard practice for unclaimed digital assets.
Consequently, California’s emphasis on prioritizing the return of original assets to owners, rather than focusing on administrative simplicity, may influence how other jurisdictions structure their own regulations in the future.