New York Attorney General Letitia James earlier this month introduced what she called “nation-leading” regulations on cryptocurrency that would protect investors, consumers and the economy.
But observers are skeptical that the legislation will meet its goals. Some expressed concerns about the lack of concrete details despite the bill’s reasonable ambitions, and others questioned whether federal cryptocurrency legislation might be a better option so as to avoid a patchwork of state laws.
The Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act would “protect customers and investors in digital assets from fraudulent practices, eliminate conflicts of interest and increase transparency,” according to the bill text.
To prevent conflicts of interest in the crypto industry, the bill would prohibit common ownership of tokens, lending platforms, brokers and investment advisors and prevent any participant from engaging in more than one activity. Brokers also would be banned from borrowing or lending their customers’ assets, while marketplaces and advisors would be barred from holding customers’ funds. Marketplaces would be prevented from receiving compensation for referrals to investment services.
James’ bill would require crypto companies to make public disclosures about their financial condition—something that is not required now—as well as undergo mandatory independent auditing. Companies would also be required to disclose any conflicts of interests and risks, similar to the requirements placed on publicly traded companies.
On the heels of various high-profile fraud and cybersecurity incidents, the bill would give investors more protections. The term “stablecoin,” which refers to digital assets that are pegged to another asset and so not subject to the wild market fluctuations other cryptocurrencies face, would be banned from use, unless the asset is backed by physical currency or liquid assets.
Platforms would be required to reimburse customers who are hit by unauthorized asset transfers or fraud, while brokers would be expected to know essential facts about their customers to ensure they are not bad actors.
Under the proposed legislation, the attorney general’s office could issue subpoenas, impose civil penalties of $10,000 per violation per individual or $100,000 per violation per firm, collect restitution, damages and penalties and shut down businesses engaging in fraud and illegality. The New York Department of Financial Services would also have its authority codified as the licensor of digital asset brokers, marketplaces, investment advisors and issuers prior to engaging in business in New York. DFS would also oversee the digital asset licensing regime.
In a statement, James said that “rampant fraud and dysfunction have become the hallmarks of cryptocurrency.” She said the industry needs “law and order,” adding that the regulations “will bring more transparency and oversight to the industry and strengthen our ability to crack down on those that don’t pay respect to the law.”
In the last year alone, James has been at the forefront of enforcement action against cryptocurrency platforms, including CoinEx and KuCoin for failing to register with the state. She also has helped recover millions for defrauded customers and sued the former Celsius CEO for misleading investors about the company’s financial condition.
Miles Fuller, head of government solutions at tax compliance software company TaxBit, said the legislation is “another step in the correct direction,” but said some details still must be ironed out. He noted that the provision for customers to be fully reimbursed in the event of fraud or otherwise unauthorized transfers would likely require New York to back those assets itself, the way the Federal Deposit Insurance Corporation does for big banks.
Other aspects might be a “little bit redundant,” he said, especially the consumer protection provisions aimed at brokers, as they are already required to work with the Financial Crimes Enforcement Network under the U.S. Treasury Department.
While greater federal regulation on cryptocurrency has been debated for some time, Fuller said this state-level action could be the “impetus” for Congress to act, especially as other countries and the European Union are trying to work out a global framework. He warned that with uneven enforcement between states and countries, it could be “like playing whack a mole.”
Others suggested that these rules might put New York behind other states encouraging innovation in the cryptocurrency space. Jessica Livingston and Felix Shipkevich, attorneys at law firm Shipkevich PLLC, said in a statement that James’ plan “begs the question: is New York leading the pack in the crypto space, or falling behind as an over-regulated outlier?”
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