California's Crypto Shield: Preserving Digital Wealth, Stopping Forced Sales

California Becomes First State to Shield Unclaimed Crypto From Forced Liquidation

California has enacted a groundbreaking law to protect unclaimed cryptocurrencies from being forcibly liquidated, marking a pivotal shift in digital asset regulation. Governor Gavin Newsom signed Senate Bill 822 (SB 822) into law, updating the state's Unclaimed Property Law (UPL) to recognize Bitcoin, Ethereum, and other cryptocurrencies as intangible property, according to Hodl.fm. This move ensures that dormant crypto accounts—those inactive for three years after failed contact attempts—remain in their original form when transferred to state custody, rather than being converted to fiat currency, as reported by Decrypt.

The legislation, authored by Senator Josh Becker (D-Menlo Park), addresses longstanding ambiguities about how to handle unclaimed digital assets under California's escheatment framework. Previously, earlier drafts of the bill faced criticism for requiring exchanges and custodians to sell unclaimed crypto before transferring proceeds to the state, potentially triggering unintended taxable events for owners, Hodl.fm reported. After revisions prompted by industry advocacy, the final version mandates that custodians notify account holders 6–12 months before reporting assets as unclaimed, using a state-approved form to restart the escheatment clock if contacted, according to Cryptonomist.

Under SB 822, unclaimed crypto must be transferred to the California State Controller's Office in its original form, including exact token types, amounts, and private keys, within 30 days of the final reporting date, Hodl.fm reported. The Controller may appoint licensed custodians to manage these assets, with conversions to fiat permitted only 18–20 months after filing if no claim is made, Decrypt noted. Owners who later assert their rights can reclaim either the original crypto or net proceeds from any sale.

Industry advocates hailed the law as a victory for consumer protection and regulatory clarity. Joe Ciccolo, Executive Director of the California Blockchain Advocacy Coalition (CBAC), noted that earlier versions of the bill "would have introduced significant operational, compliance, and legal challenges for industry while offering little real protection to consumers," Hodl.fm reported. Paul Grewal, Coinbase's chief legal officer, tweeted his support, stating the law "stops the state from liquidating Californians' unclaimed crypto investments without their consent," as reported by The Block.

The law also introduces safeguards for custodians, requiring them to maintain valid licenses and adhere to state security standards, The Cryptonomist reported. This framework aims to balance investor rights with practical custody needs, ensuring assets are preserved until claimed. For example, if an owner reclaims their Bitcoin years later, they receive the asset itself—potentially retaining its appreciated value—rather than a depreciated fiat equivalent from an earlier forced sale, according to Tecronet.

California's move positions it as a leader in modernizing financial regulations for the digital age. The state's approach could influence other jurisdictions grappling with similar issues, as seen in ongoing legislative discussions in Michigan, Arizona, and Texas. Additionally, the law aligns with broader efforts to establish guardrails for emerging technologies, including Newsom's recent signing of SB 243, which sets guidelines for AI "companion" chatbots, Hodl.fm reported.

While the law addresses key concerns, challenges remain. Critics note that it does not fully resolve complexities around digital inheritance or lost private keys, Tecronet observed. Moreover, custodians may face increased operational costs to comply with the native form requirement, though proponents argue these adjustments reflect the maturing crypto ecosystem, Tecronet added.

As California implements SB 822, stakeholders will monitor its impact on consumer behavior, industry compliance, and potential ripple effects across the U.S. regulatory landscape. For now, the law stands as a testament to the state's commitment to fostering innovation while protecting individual financial rights in the digital era.