New York doubles regulatory review of crypto lending companies

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On October 18, New York Attorney General Letitia James issued cease and desist letters directing two virtual currency lending platforms to cease “unregistered and illegal” lending activities in the state of New York within 10 days, while also ordering three more digital currency platforms to provide information about their activities and products in the state by November 1. James’s office issued a press release the same day announcing the actions and attaching copies of the letters with the names of the recipients redacted.

The orders from the New York Attorney General’s Office (OAG) are just the latest in a series of actions taken by several state regulators against virtual currency lending companies, including those that specifically deal with cryptocurrency (a subset of virtual currency that uses cryptography to validate and secure transactions). As noted in our October 7 alert, several other states recently issued orders against New Jersey-based cryptocurrency company Celsius Network LLC (Celsius). Specifically, Alabama, Kentucky, New Jersey and Texas alleged that Celsius was illegally offering unregistered securities in the form of high interest accounts used to fund its lending and proprietary trading. Those same states also filed actions against BlockFi, another New Jersey-based cryptocurrency company, earlier this year.

New York Alleges Violations of Martin Law

In both cease and desist letters, New York alleges that under Section 23-A of the State’s General Business Law (the “Martin Law), certain interest-bearing products offered by coin companies Virtual Anonymous are considered to be securities because they promise a rate of return to investors and deliver that return through the company that trades or offered to and used by New York buyers. Finally, New York alleges that these companies did not register with the Attorney General’s office and / or other applicable government authorities as required by Martin Law. The Martin Act, originally passed in 1921, grants the Attorney General broad powers to investigate and prosecute securities fraud cases.

At the same time as the cease and desist letters were sent out, the attorney general’s office also sent written requests for information to three limited companies regarding their product offerings. Without alleging wrongdoing, New York has asked these companies to produce sufficient information to demonstrate compliance with the following New York laws: (1) the Martin Law registration requirement, (2) the ban fraudulent activities in connection with the purchase or sale of securities and commodities, (3) and the prohibition of repeated or persistent fraudulent or illegal activities in the conduct of business. Specifically, New York requested descriptions of all virtual currencies available for corporate lending products; detailed information on any virtual currency deposited on the platform; information about “unverified accounts” or accounts from which a user can deposit virtual currency on the platform using only an email address or virtual wallet; and whether the platforms or lending products accept “tethers”, a so-called “stablecoin” issued by the virtual currency company Tether Limited (Tether). Along with Bitfinex, another virtual currency trading platform, Tether was investigated by the New York attorney general’s office earlier this year.

In the press release announcing the issuance of the letters, James made it clear to other companies dealing with virtual currencies that his office was prepared to actively enforce New York’s investor protection laws. “Cryptocurrency platforms have to follow the law, like everyone else, which is why we are now ordering two crypto companies to shut down and forcing three more to immediately answer questions,” Attorney General James said. “My office is responsible for ensuring that industry players do not take advantage of unsuspecting investors. We have already taken action against a number of crypto platforms and coins that have engaged in fraud or are operating illegally in New York City. Today’s actions build on that work and send a message that we will not hesitate to take whatever action is necessary against any business that thinks it is above the law. ”Although New York has redacted the names companies in the copies of the publicly provided letters, cryptocurrency lender Nexo Financial LLC has since confirmed having received one of the OAG’s cease and desist letters, while Celsius has confirmed receiving a request to information.

Previous enforcement actions

New York has aggressively pursued virtual currency business through several enforcement actions brought by its Investor Protection Office in recent years. The October 18 letters closely follow the September 13 office judgment against virtual currency trading platform Coinseed, which shut down Coinseed’s operations and appointed a permanent receiver to manage investor funds. In February 2021, James’ office struck a deal with Bitfinex, Tether and related entities requiring companies to cease trading in New York and pay $ 18.5 million in penalties, as well as several measures to increase the transparency of companies. ‘operations.

In addition to enforcement actions and regulations, the OAG has made it clear its intention to pursue enforcement against virtual currency businesses that the bureau perceives as potentially non-compliant. In March 2021, James’ office issued an alert to industry which highlighted a “significant non-compliance” with registration requirements and warned that the OAG would act under its authority under the law. Martin to prohibit fraudulent practices in the service of investor and consumer protection. As the alert notes, courts in New York have already recognized certain virtual currencies as commodities under Martin Law,
[1] provide the Attorney General with sufficient legal support to investigate and prosecute companies that trade virtual currencies in the state.

Federal and state regulatory landscape

State attorneys general are hardly the only regulators seeking to assert their authority in the virtual currency arena. As we also discussed in our October 7 alert, popular cryptocurrency exchange Coinbase announced in late September that it had received a well notice from the Securities and Exchange Commission (SEC). Additionally, various SEC officials have publicly expressed significant concerns about cryptocurrency products. As we concluded then, these important developments suggest that all digital asset products – especially those linked to interest-bearing accounts – will come under increased regulatory scrutiny and enforcement at the federal and state levels.

In the meantime, state regulators are taking advantage of the lack of a comprehensive federal regulatory framework to challenge virtual currency lending products. New York’s recent actions put more emphasis on increased state regulatory control over the virtual currency industry and serve as a warning to all virtual currency companies that they must be prepared for requests for information and other enforcement actions on the horizon.

[1] James v. iFinex, 185 AD3d 22, 28 (1st Dep’t 2020).

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