NYAG Bill Seeks To Bring Order To The Crypto Industry

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On May 3, 2023, New York Attorney General Letitia James introduced legislation that, if passed, would significantly increase oversight and regulation of the cryptocurrency industry in New York. James introduces the bill as the Crypto Regulation Protection, Transparency and Oversight Act, also known as the CRPTO Act. (The law project).

Its purpose is to modify general business law, with regard to the regulation of digital assets and the transfer of these assets; amend the Financial Services Act with respect to the authority of the Financial Services Department. The Attorney General’s office intends to submit the bill to the New York Legislature for consideration during the current legislative session, which is scheduled to end on June 8, 2023.

In his press release, James claimed that the proposed regulations are the strictest and most comprehensive in the country and will bring order to a multi-billion dollar industry whose hallmarks include rampant fraud and dysfunction. .

The bill includes a number of regulatory and enforcement measures such as additional registration requirements for digital assets, as well as increased disclosures and protections against fraud, as well as a number of prohibitions proposed.

I. Who should be concerned about the CRPTO law?

The bill aims to strengthen oversight of the activities of digital asset brokers, digital asset marketplaces, digital investment advisers and digital asset issuers. In addition to these traditional market players, the bill also aims to address the behavior of digital asset influencers, celebrities or social media personalities who receive compensation for promoting investments in digital assets.

II. What will change if the CRPTO law is passed?

Registration requirements: Article 359-q of the bill states that:

Each Digital Asset Broker, Digital Asset Marketplace, Digital Asset Investment Advisor, and Digital Asset Issuer must file a Registration Statement (the Digital Asset Statement) with the Legal Department before engaging in business within or from New York. Digital asset declarations are effective for one year from the date of filing. The renewal request must be made within 60 days prior to registration.

Like traditional financial organizations, digital asset companies will need to implement anti-money laundering programs, adhere to strict record-keeping standards, and maintain effective cybersecurity programs.

Disclosure Requirements: The bill also significantly expands disclosure requirements in the crypto industry regarding fee collection and financial status. Specifically, the bill requires every digital asset issuer, broker, marketplace, and investment adviser to publish and make publicly available independently audited annual financial statements on a quarterly basis and at the end of each fiscal year. Issuers of digital assets will also be required to publish and distribute a prospectus containing material information regarding its business activities, financial condition, risk factors and any conflicts of interest. Digital asset exchanges must publicly disclose in an easily accessible posted schedule all fees receivable from any source related to a digital asset transaction.

Express prohibitions: The bill sets out a number of prohibitions. First, the bill prohibits any person or affiliate from performing more than one of the following roles: a digital asset issuer, broker, asset market, or investment adviser. The bill also prohibits any of the named persons from acting as, employing or otherwise using the services of a commercial agent on their own account. [1] Last but not least, the bill prohibits issuers of digital assets from issuing to an investor any note or other debt obligation that: (a) offers interest or similar expected payment and (b) is payable on demand or otherwise exhibits the characteristics of a demand deposit as defined in 12 CFR 204(b) or which would allow the investor to withdraw cash or digital assets within seven days.

Conclusion

If passed, the CRPTO Act will significantly expand regulation of the growing crypto industry. These changes are likely to be disruptive as they will affect all aspects of the digital asset market.

FOOTNOTES

[1] A proprietary trading agent is anyone who engages in the business of offering, buying, or selling digital assets on behalf of a digital asset issuer, broker, marketplace, or of an investment adviser.

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