New York AG demands that crypto platforms cease operations | Shearman & Sterling LLP

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On October 18, 2021, the New York Attorney General (NYAG) sent cease and desist letters to two cryptocurrency platforms, demanding that they cease all operations in New York within ten days for violations. presumed under Martin law. The NYAG office also sent inquiries to three other cryptocurrency companies focused on ‘ties’, a type of ‘stablecoin’ cryptocurrency tied to the U.S. dollar.

The cease and desist letters were reportedly sent to Nexo Financial LLC and another limited company. The NYAG alleged that it offered securities and merchandise for sale to New York residents and was not registered to do so as required by the Martin Act, which imposes registration requirements in the part of the sale of securities and commodities in New York. The letters referred to the failure to register with respect to the supply of interest-bearing products and securities and unrecorded transactions in virtual currencies. Nexo has disputed the NYAG’s claims and notes that it has put controls in place to prevent prohibited transactions with New York residents. According to Nexo, it does not allow New York residents to participate in its “Earn and Exchange Program” and has implemented IP blocking technology designed to block access based on a user’s geographic location. in order to facilitate the application of its policy. NYAG’s actions against these two crypto companies appear likely to further define the nature of the controls that companies operating in cryptocurrency should adopt by federal and state financial regulators.

NYAG’s requests for information to the other three crypto companies were not accompanied by cease-and-desist orders. Instead, these letters seek a general description of company practices and make a specific request for information as to whether companies are offering fasteners for sale on their own platforms. Stable coins in general, and in particular those issued by Tether Holdings Ltd. (known as “tethers” or “USDT”), which represent more than half of the stable coin market, have recently fallen under the radar of regulators. This type of cryptocurrency is tied to stable assets, such as the US dollar or gold, in order to avoid the volatility characteristic of other cryptocurrencies. This stability allegedly allows coins to function as a bridge between traditional currencies and cryptocurrencies. Stablecoins are also marketed to allow cryptocurrency owners to cash out other crypto holdings at a USD-based exchange rate without ever having to transfer their positions in the traditional currency.

The NYAG has entered into an agreement with Tether Holdings Ltd. earlier this year that banned the sale of the company’s fasteners in New York. As recently as last week, Tether Holdings signed an agreement with the CFTC to settle charges that it made misleading statements to investors in connection with its sale of ties, allegedly saying the ties were related to fiat currency and fully asset-backed.

Regulators have raised several concerns about stablecoins and, in recent enforcement action against Tether, allege that the coins are not as stable as they claim, giving investors a false sense of security. Highlighting these efforts by regulators, there is uncertainty as to whether stablecoins should be treated as bank deposits or as securities for regulatory purposes. Until Congress or regulators clarify their expectations for stablecoins, issuers and holders must prepare for further scrutiny against uncertain standards.

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