California Bans Forced Crypto Liquidation for Unclaimed Assets

California’s SB 822 represents a fundamental departure from how states traditionally handle unclaimed digital financial assets. Previously, when cryptocurrency accounts became dormant, exchanges and custodians were required to liquidate the holdings and turn over fiat currency to the state under existing unclaimed property laws. This meant owners who later reclaimed their property would receive dollars at whatever price the state had sold their crypto for, potentially missing out on significant appreciation. The new law, signed by Governor Gavin Newsom on October 11, mandates that digital assets be transferred to the state in their original form and held by licensed crypto custodians.

The legislation specifically applies to ‘digital financial assets’ as defined by California Financial Code §3102(g), covering cryptocurrencies and stablecoins held by third-party custodians for California residents or accounts with a California nexus. This includes centralized exchanges, hosted wallet providers, and other entities acting as custodians for others. The policy addresses a critical friction point in digital asset escheatment—the process where exchanges turn over dormant accounts under unclaimed property laws.

Industry response has been overwhelmingly positive, with Coinbase’s legal team welcoming the signing and commentators noting that the in-kind requirement aligns state treatment of crypto with existing handling of securities and bank accounts. By treating digital assets similarly to traditional financial instruments, California is setting a precedent that acknowledges the unique characteristics of cryptocurrency while providing clearer regulatory frameworks for both custodians and consumers.

SB 822 establishes a comprehensive operational framework for handling unclaimed digital assets. The statute sets a three-year inactivity threshold for escheatment and requires holders to send pre-escheat notices using Controller-approved forms 6 to 12 months before reporting. These notifications serve as a critical consumer protection measure—responding to the notice restarts the three-year dormancy clock, giving account owners ample opportunity to prevent their assets from being transferred to state custody.

Once assets escheat to the state, the California State Controller places them with custodians licensed by California’s Department of Financial Protection and Innovation. The law includes specific provisions for handling complex custody arrangements, including assembling multi-signature keys to effect transfers. Claimants who later prove ownership receive the digital financial asset itself if it remains in custody, or the net sale proceeds if conversion has already occurred. This in-kind recovery option is available for at least 18 months after escheatment.

The conversion authority serves as an administrative backstop for scenarios where holding volatile assets becomes impractical. The Controller may convert assets to fiat no sooner than 18 months and no later than 20 months after the escheatment report, providing a substantial window for owners to reclaim their original digital assets. This structured approach balances the need for practical administration with the goal of preserving asset value for rightful owners.

One of the most significant benefits of SB 822 is the elimination of potential tax friction for cryptocurrency owners. Under previous systems where states immediately sold crypto and returned fiat, the transaction could trigger capital gains obligations for the owner based on the state’s sale price and timing. By holding assets in kind until claimed, SB 822 avoids creating taxable events that owners didn’t initiate or control. This harm reduction measure ensures that if assets do escheat, owners can recover the original coins rather than facing unexpected tax consequences from forced liquidation.

The legislation carefully defines its scope through strategic exclusions. Self-custody wallets sit entirely outside the law’s coverage since SB 822 only binds holders of property belonging to others. Items carved out from the definition of digital financial asset also escape coverage, including loyalty points, rewards program balances, in-game currencies used solely within a platform, and SEC-registered or exempt securities. Jurisdictional rules still apply, meaning intangible property without a California nexus doesn’t escheat to the state, and private disputes like bankruptcies operate under separate frameworks.

California’s approach to crypto custody demonstrates unprecedented specificity in state unclaimed property statutes, acknowledging multi-signature requirements, licensing standards for custodians, and the critical distinction between self-custody and third-party holding. As the first state to codify in-kind holding as the default for unclaimed digital assets, California’s prioritization of owner recovery over administrative simplicity may influence how other jurisdictions structure their rules, potentially setting a new national standard for digital asset protection.