New York Targets ’Most Comprehensive’ Crypto Regulation In The US

May 15, 2023
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The New York attorney general has proposed new legislation that aims to provide the “strongest and most comprehensive” regulatory framework for crypto users, businesses and investors in the US.

The New York attorney general has proposed new legislation that aims to provide the “strongest and most comprehensive” regulatory framework for crypto users, businesses and investors in the US.

Through the “landmark” legislation, New York will aim to provide a model for other states to follow, as it seeks to eliminate conflicts of interest, increase transparency and protect investors.

Introducing the Crypto Regulation, Protection, Transparency and Oversight (CRPTO) Act, attorney general Letitia James said the bill offers “common-sense” measures that will strengthen the state’s ability to crack down on non-compliant crypto firms.

“Rampant fraud and dysfunction have become the hallmarks of cryptocurrency, and it is time to bring law and order to the multi-billion-dollar industry,” she said.

“New York investors should have the peace of mind that there are safeguards in place to protect them and their money.”

The bill, which will be introduced to the New York State Senate and Assembly in June, would implement 23 pages of amendments to the state’s existing tax, business and financial services laws.

Since 2015, New York’s regulatory framework for crypto-assets and firms has been built around the so-called BitLicense regime, which is overseen by the Department of Financial Services (DFS).

Last month, during a hearing at the House Financial Services Committee, DFS superintendent Adrienne Harris noted that New York’s crypto-asset regulations are already the “most comprehensive” in the country.

She added that the DFS is regularly in touch with other regulators that are developing crypto-asset frameworks, including Illinois, California, the UK, Singapore and the United Arab Emirates.

Attorney general seeks greater crypto oversight

While the EU voted to approve the Markets in Crypto-Assets (MiCA) Regulation last month, New York has had MiCA-like provisions in place since 2015, and the CRPTO Act represents its latest attempt to enhance those provisions.

In several areas, the bill goes far beyond the provisions of MiCA, creating much higher standards for firms operating in New York as opposed to in Europe.

For example, the bill would introduce new regulations that would require crypto platforms to reimburse customers for losses due to fraud or unauthorised transfers.

As stated by James, this will impose similar obligations on crypto platforms to which are imposed on banks under the Electronic Fund Transfer Act.

Similarly, the bill would impose major restrictions on common ownership of related crypto companies, brokerages and tokens.

For example, a single market participant would be prohibited from having beneficial ownership of more than one of the following entities: a crypto issuer, exchange, brokerage or investment advisor.

Those who own crypto exchanges would also be prohibited from trading for their own accounts and would be prohibited from borrowing, lending or custodying customer assets.

Likewise, brokers would be prohibited from borrowing or lending customer assets and crypto exchanges would be prohibited from offering referral incentives to investors.

As covered by VIXIO, many of the practices the bill seeks to outlaw have appeared repeatedly in lawsuits against major crypto firms over the last two years.

In the Commodities Futures Trading Commission (CFTC) lawsuit against Binance, the regulator alleges that Binance engages in widespread market manipulation by trading against its own customers on its own platform.

According to the CFTC, Binance has about 300 accounts that are used for this purpose, and all of these accounts are either controlled by Binance CEO Changpeng Zhao or by market-making firms that are also owned by Zhao.

Similarly, following the bankruptcy of Celsius, it emerged that Celsius had used customer funds to purchase its own token (CEL), and that these purchases had allowed Celsius to disguise its insolvency for several years.

According to James: “When Celsius ultimately froze customer withdrawals and filed for bankruptcy, many investors were caught by surprise, especially in light of repeated statements by the company and its CEO Alex Mashinsky that Celsius had billions of dollars of liquidity.”

To ensure that investors are aware of these risks, the bill would require that all crypto issuers, exchanges, brokers and investment advisors undergo mandatory independent auditing and publish audited financial statements.

Make stablecoins stable again

In addition to transparency requirements, stablecoin issuers would be subject to further marketing and prudential rules.

For example, the bill would prohibit firms from using the term “stablecoin” unless the firm can prove that the asset it describes as such is backed 1:1 with US currency or high-quality liquid assets, as defined by federal regulations.

Additionally, the bill would grant the attorney general jurisdiction to enforce any violation of these rules directly, as well as issue subpoenas and impose civil penalty fines.

Individuals could be fined up to $10,000 and firms could be fined up to $100,000 per violation, and the attorney general would be authorised to collect restitution and damages, and shut down non-compliant firms.

As covered by VIXIO last year, the US Congress is currently debating a bipartisan bill that would bring payment stablecoins under federal regulation.

While appearing before the House Financial Services Committee last month, Harris said that New York is keen to lend its “expertise and experience” to the debate — the next of which will take place this week.

“Ultimately, we share the goal of establishing a national framework to protect consumers across the country without preempting the states’ ability to regulate innovative financial services,” she said.

“I am proud of the work DFS has done to develop a comprehensive supervisory framework and to foster a well-regulated virtual currency industry in the state, and we would welcome further collaboration with you to take advantage of our lessons learned and develop a comprehensive national regulatory framework.”

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