Key takeaways
- California's Digital Financial Assets Law (DFAL), Division 1.25 of the Financial Code, requires a license for covered digital asset business with California residents from July 1, 2026.
- Section 3503(a) requires a licensee that controls digital assets for others to hold enough of each type to satisfy all customers' entitlements at all times.
- Section 3503(e) requires eligible securities, as defined in section 2082(b), worth at least the licensee's US dollar liabilities to customers.
- Section 3207 adds a surety bond or trust account, and capital and liquidity set by the DFPI, with liquid assets held as cash, certain digital assets or high-quality liquid assets.
- SB 97, signed on June 30, 2026, repealed the DFAL stablecoin chapter after the federal GENIUS Act.
What are the key facts on DFAL reserves?
DFAL reserves are the digital assets, securities and capital a California licensee must hold so customers can be repaid in full.
| Item | Position |
|---|---|
| Rule | California Financial Code, Division 1.25, sections 3207 and 3503 |
| Regulator | Department of Financial Protection and Innovation (DFPI) |
| Applies to | Persons exchanging, transferring or storing digital financial assets for California residents, and certain issuers |
| Licensing date | On or after July 1, 2026; a completed application filed by that date allows operation pending decision |
| Last checked | October 11, 2026, against the California Financial Code and the DFPI |
Who must hold DFAL reserves?
Any DFAL licensee that controls digital assets or owes US dollars to California customers.
The DFPI's DFAL guidance says a license is generally required to exchange, transfer or store digital financial assets with or for California residents, or to hold oneself out as doing so, and for certain issuers. Exemptions include certain banks and persons who reasonably expect less than $50,000 a year from covered activity. The license requirement applies on or after July 1, 2026, after AB 1934 moved the date from July 1, 2025. SB 97 (Chapter 52, Statutes of 2026) requires a completed application, not a placeholder, by that date for a business to keep operating while it waits for a decision. The reserve rules below apply from the moment a firm is licensed, so they should be operating before the application is decided, not after.
What does section 3503 require for digital assets?
A licensee must hold, at all times, enough of each type of digital asset to cover every customer's entitlement to that type.
Section 3503(a) requires a covered person that controls digital financial assets for others to maintain in its control an amount of each type sufficient to satisfy the aggregate entitlements of the persons entitled to it. If it falls short, each customer's interest becomes a pro rata property interest in that type, whenever they became entitled. Under section 3503(b), the assets held for compliance are held for the customers, are not the licensee's property and are not subject to its creditors' claims. Section 3503(d) deems them held in trust for customers, even if commingled, in bankruptcy, receivership or a creditor action. Section 3503(c) lets the licensee comply by contract, treating the assets as financial assets under Division 8 of the Commercial Code and itself as a securities intermediary.
This is a like-kind rule: bitcoin owed must be held as bitcoin, not as dollars of equal value. Our guide to the virtual currency like-kind requirement compares similar rules in other states.
What backs US dollar balances?
Eligible securities with a market value at least equal to the licensee's US dollar liabilities to customers.
Section 3503(e) requires the licensee to own, at all times, eligible securities as defined in section 2082(b), with an aggregate market value computed under US GAAP of not less than its outstanding US dollar-denominated liabilities to customers. Section 2082(b) is the list used for California money transmitters: cash, insured deposits, US government and agency obligations, rated state and local obligations, eligible bankers' acceptances, rated commercial paper and other rated obligations, qualifying money market funds, certain receivables, and standby letters of credit naming the commissioner. Our state-by-state table of permissible investments shows how California compares with other states. The test is in dollars at market value, so falling bond prices can open a gap even when no customer balance has changed.
What capital, liquidity and security are required?
Section 3207 adds a surety bond or trust account, plus capital and liquidity set by the DFPI for each licensee.
| Requirement | Section 3207 | Detail |
|---|---|---|
| Surety bond or trust account | Subdivision (a) | In US dollars, in a form and amount the DFPI sets; a trust account must be at a California bank, trust company or credit union with prior approval |
| Capital and liquidity | Subdivision (b) | Amount and form the DFPI considers sufficient for financial integrity and ongoing operations, based on the licensee's specific risks |
| Liquid assets | Subdivision (c) | Cash, digital assets the licensee does not control for protected residents, or high-quality liquid assets under 12 CFR 249.20(a), in proportions the DFPI sets |
| Increases | Subdivision (d) | The DFPI may require more; proof of compliance is due within 30 days of written notice |
The factors the DFPI may consider include the composition of assets and liabilities, the volume of digital asset business, leverage, liquidity, the protection given by the bond or trust account, the products offered and the customer protections in an insolvency. Because the figures are set per licensee, two firms of the same size can face different requirements.
What changed for stablecoins?
SB 97 repealed the DFAL's stablecoin chapter, Chapter 6 starting at section 3601, with immediate effect on June 30, 2026.
Before the repeal, a licensee could deal in a stablecoin only if the DFPI had approved it, weighing the issuer's redemption rights and the amount, nature and quality of its reserves. The repeal followed the federal GENIUS Act, which now sets reserve rules for payment stablecoin issuers. Stablecoins a licensee holds for customers are still digital financial assets, so the like-kind rule in section 3503(a) continues to apply to them. For money transmission capital tests, CSBS guidance treats fiat-backed stablecoins with an unconditional right to redeem at par as tangible assets.
What happens if a licensee falls short?
Customers' claims become pro rata shares of what is held, and the DFPI can require more capital or liquidity.
If a licensee holds less of an asset type than customers are entitled to, section 3503(a) gives each entitled customer a pro rata property interest in the amount held, regardless of when they became entitled or when the licensee acquired control. In practice, a customer who deposited early is not protected ahead of one who deposited late. The trust under section 3503(d) keeps those assets away from the licensee's general creditors, but it cannot create assets that are missing. Under section 3207(d), the DFPI can also require higher capital or liquidity, with proof of compliance due within 30 days of written notice. A shortfall found and fixed the same day is an operational event; one found weeks later can become a question about the licensee's controls.
What does a daily DFAL control routine look like?
It compares, asset by asset, what customers are owed with what the licensee controls, at one cut-off each day.
| Step | What is compared | Typical source |
|---|---|---|
| 1 | Customer entitlements by asset type | Customer ledger at the cut-off |
| 2 | Assets controlled by asset type | Hot and cold wallet balances and custodian statements |
| 3 | US dollar liabilities to customers | Customer ledger dollar balances |
| 4 | Eligible securities at market value | Bank and custody statements, priced under GAAP |
| 5 | Differences and their causes | Pending withdrawals, unconfirmed deposits, fees and errors |
Pending blockchain transactions are the most common source of apparent differences: a withdrawal broadcast but not confirmed has left the ledger but not yet the wallet. Each such item should be listed, aged and cleared, so that a genuine shortfall is not hidden among timing differences.
How does a DFAL licensee test its position?
It tests each digital asset in units, and dollar balances against eligible securities, separately.
| Line | Owed to California and other customers | Held | Result |
|---|---|---|---|
| Bitcoin | 1,240.50 BTC | 1,241.10 BTC | Covered, 0.60 BTC excess |
| Ether | 18,400.0 ETH | 18,350.0 ETH | Short 50.0 ETH |
| USDC | 62,000,000 USDC | 62,000,000 USDC | Covered |
| US dollar balances | $45,000,000 | $47,500,000 eligible securities | Covered, $2.5m excess |
The firm holds more than enough value in total, but section 3503(a) works asset by asset. The 50.0 ETH shortfall cannot be offset by the bitcoin excess or the dollar excess; the licensee must buy or recover 50.0 ETH. Until it does, customers owed ether hold pro rata interests in the 18,350.0 ETH held. The dollar test passes because $47.5 million of section 2082(b) eligible securities exceeds $45.0 million of dollar liabilities.
What should a DFAL licensee check?
These checks show the DFPI and examiners that customers can be repaid in kind.
- Reconcile wallet and custodian holdings to the customer ledger for each asset type every day.
- Treat each asset type separately; never net a shortfall in one against an excess in another.
- Hold section 2082(b) eligible securities at market value against all US dollar customer balances.
- Keep the surety bond or trust account at the amount and form the DFPI has set.
- Monitor capital and liquid assets against the levels the DFPI requires for the licensee.
- Review customer contracts if relying on the Division 8 securities intermediary route in section 3503(c).
- Track DFPI guidance and regulations on the DFAL as they are published.
Our guide to crypto custody reconciliation describes the daily process.
How does Safeheld help?
Safeheld reconciles wallet, custodian, bank and ledger records for each entity and asset every day, so shortfalls in any single asset appear as breaks before they reach a report.
See daily reconciliation.
Frequently asked questions
What are the DFAL reserve requirements?
A licensee must hold enough of each digital asset type to cover customers' entitlements (section 3503(a)), eligible securities at least equal to US dollar liabilities to customers (section 3503(e)), and the bond or trust account, capital and liquidity the DFPI sets under section 3207.
When did DFAL licensing start?
The license requirement applies on or after July 1, 2026. Businesses that filed a completed application by then may continue while the DFPI decides.
Are customer digital assets protected if a DFAL licensee fails?
Section 3503 deems assets held for compliance to be held in trust for customers, not the licensee's property and not available to its creditors, even if commingled.
What are eligible securities under DFAL?
Those defined in Financial Code section 2082(b), the list used for California money transmitters, including cash, insured deposits, government obligations, rated instruments and qualifying money market funds.
Does DFAL still regulate stablecoins?
SB 97 repealed the DFAL stablecoin chapter on June 30, 2026. Stablecoins held for customers remain digital financial assets subject to the like-kind rule.
Can a DFAL licensee net one asset's excess against another's shortfall?
No. Section 3503(a) applies to each type of digital financial asset separately, so an excess of bitcoin cannot cover a shortfall of ether.
Does a DFAL licensee need a surety bond?
It needs a surety bond or a trust account, in US dollars, in the form and amount the DFPI sets, under section 3207(a). A trust account must be held at a California bank, trust company or credit union with the DFPI's prior approval.
How much capital does a DFAL licensee need?
The amount and form the DFPI considers sufficient for that licensee, based on factors in section 3207 such as asset and liability composition, volume, leverage and liquidity.
References
- DFPI, Digital Financial Assets Law frequently asked questions
- DFPI, Digital Financial Assets Law: preparing for your application
- Public Law 119-27, Guiding and Establishing National Innovation for U.S. Stablecoins Act (govinfo.gov)
- CSBS, MTMA interpretive guidance: stablecoin tangibility (March 2026, PDF)
About Safeheld
Safeheld is reconciliation and regulatory financial control software for regulated firms that hold client money. For digital asset businesses it reconciles wallets, custodians, banks and customer ledgers by entity and asset every day, and resolves differences before they reach regulators. To discuss your digital asset operations, contact us at safeheld.com/contact.
This article is general information on US stablecoin and digital asset rules and is not legal or regulatory advice.