What California ban on forced crypto liquidation really means

California Governor Gavin Newsom signed SB 822 into law on Oct. 11, making it the first state in the US to prevent the forced liquidation of unclaimed crypto.

The statute updates California’s Unclaimed Property Law to require that dormant crypto turned over to the state be held as crypto, not automatically converted to cash.

The policy addresses a friction point in digital asset escheatment, which is when exchanges or custodians turn over dormant accounts under existing unclaimed property laws. Most states immediately liquidate the crypto and hold fiat.

Owners who later reclaim their property receive the dollars at whatever price the state sold it for.

SB 822 changes that default. California will hold unclaimed digital financial assets in kind, appoint licensed crypto custodians to manage them, and return the original asset to claimants, unless narrow circumstances force conversion to fiat.

Coinbase’s legal team welcomed the signing, and industry commentary framed the in-kind requirement as aligning state treatment of crypto with existing handling of securities and bank accounts.

The policy removes a potential tax friction. When a state sells crypto and returns fiat, the transaction may trigger capital gains obligations for the owner based on the state’s sale price and timing. Holding assets in kind until claimed avoids that outcome.

SB 822’s in-kind requirement was presented as a harm reduction measure. If assets do escheat, owners can recover the original coins rather than liquidation proceeds.

The conversion authority serves as an administrative backstop for scenarios where holding volatile assets becomes impractical.

Who’s protected

The law applies to “digital financial assets” as defined by California Financial Code §3102(g), cryptocurrencies and stablecoins held by third-party custodians for California residents or accounts with a California nexus.

The new rules apply to digital financial assets held by business associations or financial organizations acting as custodians for others.

If a centralized exchange, hosted wallet provider, or other holder maintains an inactive California-nexus account beyond the dormancy period, it must transfer the asset itself to the State Controller rather than liquidating first.

The statute sets a three-year inactivity threshold for escheatment and requires holders to send pre-escheat notices 6 to 12 months before reporting.

Those notices follow a Controller-approved form and can restart the dormancy clock if the owner responds.

Once assets escheat, the Controller places them with custodians licensed by California’s Department of Financial Protection and Innovation.

The law includes provisions for assembling multi-signature keys to effect transfers. Claimants who later prove ownership receive the digital financial asset, if it is still held in custody, or the net sale proceeds if the conversion has already occurred.

The Controller may convert assets to fiat no sooner than 18 months and no later than 20 months after the escheatment report.

What’s excluded

Self-custody wallets sit outside the law’s scope. SB 822 binds holders of property belonging to another; if no third-party custodian exists, there’s nothing to report or transfer.

Items carved out of the definition of digital financial asset also escape coverage, such as loyalty points, rewards program balances, in-game currencies used solely within a platform, and SEC-registered or exempt securities.

Legislative analyses list these exclusions. Jurisdictional rules still apply, as intangible property without a California nexus doesn’t escheat to the state.

Private disputes, including bankruptcies and creditor liquidations, operate under separate frameworks. The SB 822 governs only how the state handles dormant assets that escheat through the Unclaimed Property Law.

What changes for account holders

For California residents with exchange accounts or custodial wallets, SB 822 establishes a defined process before escheatment and a pathway for in-kind recovery afterward.

Holders must send pre-escheat notices using Controller-approved forms 6 to 12 months before reporting. Responding to that notice restarts the three-year dormancy clock.

The standardized notification requirement aims to reduce surprise escheatment from accounts that users have temporarily forgotten or lost access to.

If assets are transferred to state custody, claimants can file for the return of the digital financial asset itself for at least 18 months after escheatment. If a conversion occurs, owners receive the net sale proceeds.

The law addresses crypto custody with specificity uncommon in state unclaimed property statutes, acknowledging multi-signature requirements, licensing standards for custodians, and the distinction between self-custody and third-party holding.

No other US state has codified in-kind holding as the default for unclaimed digital assets.

As a result, California’s prioritization of owner recovery of original assets over administrative simplicity may influence how other jurisdictions structure their rules.