NY AG Proposes Comprehensive Crypto Regulation – Fin Tech

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May 15, 2023

Carter Ledyard and Milburn

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As part of Carter Ledyard’s Crypto, Digital Assets and Blockchain practice group advisory series, this advisory summarizes the CRPTO (Crypt Regulation, Protection, Transparency and Oversight) Act proposed by New York Attorney General Letitia James , May 5, 2023. A groundbreaking bill1 aims to strengthen regulation of the crypto industry to protect investors, consumers, and the broader economy through increased transparency and oversight. Calling the “fraud and dysfunction rampant” in the cryptocurrency industry, James proposed the strongest and most comprehensive set of crypto regulations in the United States.

The proposed legislation, adding Section 23-C (Digital Assets) to New York’s General Business Law, would impact crypto issuers, brokers and investors, as well as others involved in the cryptocurrency industry, in several ways.

Licensing and oversight: The CRPTO Act would require all cryptocurrency businesses operating in New York to obtain a license from the state Department of Financial Services. This would apply to entities that buy, sell, transfer, or store cryptocurrencies on behalf of customers, as well as those that provide financial services related to cryptocurrencies. The Attorney General would be empowered to impose civil penalties of up to $10,000 per violation per individual, or $100,000 per violation per company, or the gain or loss obtained as a result of the violation.

Consumer Protection: The CRPTO Act would prohibit material inaccuracies or omissions or other fraudulent activity in connection with the offer or sale of cryptocurrency and would require investors to have access to material information. In order to control potential conflicts of interest, the legislation prohibits the “cumulation” of different functions through common ownership or joint ownership of crypto issuers, exchanges, brokers or crypto advisors. investment. In addition, issuers would be required to distribute a prospectus containing accurate information about the issuer and the assets, including clear and concise information about the company’s financial condition and the fees and risks associated with crypto transactions.

The CRPTO Act would impose certain minimum capital requirements on cryptocurrency businesses and require them to maintain and establish policies and procedures (for example, relating to segregation and prohibition on the use of customer assets ) to protect customer assets from theft or loss. Additionally, crypto platforms would be required to reimburse customers who have lost assets due to fraudulent transfers made by criminals breaching personal accounts. The regulations would further require companies to comply with know-your-customer and anti-money laundering regulations, maintain books and records and properly safeguard customer property, and maintain effective cybersecurity. The CRPTO Act would also regulate the activities of “influencers” (such as celebrities who have come under fraud allegations and scrutiny for their involvement in crypto marketing), requiring the disclosure of their financial interests in the assets they promote.

Proposal Overview: Potential Impacts on State and Federal Laws

The proposed CRPTO law in New York will likely impact the regulation of cryptocurrencies by other states. New York is a major financial center and its regulatory framework for cryptocurrencies has historically had an influence on the development of regulatory policy across the country. The CRPTO Act could serve as a model for other states looking to develop their own regulatory frameworks for cryptocurrencies.

At the federal level, the CRPTO Act could also impact proposals for regulation of the cryptocurrency industry. While the Securities and Exchange Commission and other regulators have taken steps to regulate and restrict illegal activity in the crypto industry, there is no comprehensive federal regulation of cryptocurrencies, and regulators have taken an approach largely fragmentary of the industry. The CRPTO Act could spur the development of comprehensive federal regulations.

However, CRPTO implementation and enforcement can also present challenges. Cryptocurrencies are a decentralized, borderless technology, and it can be difficult to enforce state-level regulations for businesses that operate in multiple jurisdictions. Additionally, there may be concerns about regulatory fragmentation if other states or the federal government have different regulatory frameworks, which could create confusion and inefficiencies for companies operating in the industry.

The CRPTO Act represents a significant step forward in the regulation of the cryptocurrency industry. Although its adoption and implementation may present challenges, the development of comprehensive and consistent regulatory frameworks should benefit both businesses and consumers by promoting greater stability and transparency in the industry. The bill is expected to go to the New York legislature for consideration this year.

For more information regarding the CRPTO Act or other developments related to crypto and digital assets, contact one of the members of the firm’s Crypto, Digital Assets and Blockchain practice group or your usual Carter Ledyard contact.

Footnote

1. Available at https://ag.ny.gov/press-release/2023/attorney-general-james-proposes-nation-leading-regulations-cryptocurrency.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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