State Policy Risks in Cryptocurrency Holdings: How California's Unclaimed Crypto Law Reshapes Investor Behavior and Diversification Strategies

The evolving regulatory landscape for cryptocurrency is increasingly shaped by state-level policies, with California's newly enacted unclaimed crypto law-Senate Bill (SB) 822-serving as a pivotal case study. Effective January 1, 2026, the law integrates digital assets into California's Unclaimed Property Law framework, marking a significant shift in how investors and custodians manage crypto holdings. This legislation not only clarifies the treatment of unclaimed cryptocurrency but also introduces new risks and opportunities for investors, compelling a reevaluation of diversification strategies and behavioral patterns.

The Mechanics of California's Unclaimed Crypto Law

Under SB 822, digital financial assets are now classified as intangible property subject to escheatment after three years of inactivity. Inactivity is defined as either the failure to respond to a communication from a custodian or the absence of any "act of ownership interest," such as transactions or account access, within the dormancy period according to state law. Crucially, custodians must notify owners via certified mail or electronic means between six and 12 months before escheatment, using a prescribed form from the State Controller. This notice must explicitly outline the risk of state transfer and steps to prevent it.

The law also mandates that unclaimed crypto be transferred to the state Controller's appointed custodians-licensed entities capable of secure storage-without forced liquidation. However, custodians may convert the assets to fiat currency between 18 and 20 months after reporting, allowing owners to claim either the original cryptocurrency or its cash equivalent. This dual approach balances the preservation of asset value with administrative efficiency, but it introduces new complexities for investors.

Investor Behavior: From Dormancy to Engagement

The three-year dormancy rule and "use it or lose it" implications are already reshaping investor behavior. According to a report by , the law incentivizes regular engagement with custodial platforms to reset the escheatment timer, pushing investors to log in, transact, or otherwise demonstrate ownership interest. For long-term holders, this could mean adopting automated tools to maintain periodic activity or shifting to self-custody solutions, where they retain control of private keys and avoid custodian-driven dormancy triggers.

Self-custody, while offering greater control, also introduces risks. As noted by industry analysts, managing private keys requires technical expertise and robust security measures, which may deter less sophisticated investors. This dynamic could accelerate the adoption of user-friendly self-custody platforms, such as hardware wallets with automated activity prompts, to mitigate compliance risks.

Diversification Strategies: Balancing Risk and Compliance

The law's emphasis on preserving unclaimed crypto in its native form until conversion has broader implications for diversification strategies. Investors may now prioritize assets with lower volatility or shorter holding periods to align with the three-year dormancy rule, reducing exposure to high-risk, long-term positions. Conversely, the potential for appreciation in unclaimed crypto held by the state could encourage investors to retain assets they might otherwise sell, betting on future value increases.

Institutional players, meanwhile, face a different calculus. The law's clarity on custodial obligations-such as the requirement to deliver exact digital assets to state-appointed custodians-reduces regulatory uncertainty, potentially encouraging broader institutional adoption of crypto. However, compliance costs could strain smaller custodians, leading to market consolidation.

The Broader Policy Implications

California's approach reflects a broader trend of states seeking to modernize unclaimed property laws for the digital age. By treating crypto similarly to traditional assets like stocks or bonds, the law signals growing institutional legitimacy for the sector. Yet, it also highlights the inherent risks of policy-driven market distortions. For instance, the forced transfer of unclaimed assets to state custody-albeit with safeguards-could deter investors from holding crypto in jurisdictions with aggressive escheatment policies.

Conclusion

California's unclaimed crypto law underscores the growing intersection of state policy and cryptocurrency markets. While it provides much-needed clarity for custodians and investors, it also introduces new behavioral incentives and compliance challenges. Investors must now weigh the risks of dormancy against the benefits of long-term holding, while diversification strategies will increasingly account for regulatory timelines and custodial requirements. As other states consider similar frameworks, the lessons from California will shape the future of crypto as a mainstream asset class.