The New York Department of Financial Services would have stronger authority to regulate digital assets, with exchanges having to reimburse customers if they’re the victims of fraud, under a bill proposed by Attorney General Letitia James on Friday.
"We're proposing commonsense measures to protect investors and end the fraud and dysfunction that have become the hallmarks of cryptocurrency," James said.
The New York legislation could directly oppose some core tendencies of crypto companies to provide a range of activity, such as trading platforms, custody and brokerage services. That all-in-one approach would be counted as an illegal conflict of interests under the attorney general's proposal. The legislation also seeks to ban marketplaces from keeping custody of customer funds.
In recent months James has taken actions involving crypto companies Celsius, KuCoin and Nexo, claiming a number of crypto tokens are commodities or securities despite a considerable gray area over the scope of existing law, and the bill would also give her extra enforcement powers, James tweeted Friday. In the absence of federal oversight of crypto, New York has been a de facto leader in U.S. regulation of the industry – an approach that other states including California and Illinois have sought to follow but haven't yet established regulations.
The proposed legislation targets a range of stakeholders from crypto issuers and exchange platforms to digital asset influencers, with all to be held to detailed disclosure requirements. Investors would be offered details of risks and conflicts of interest, and crypto companies wouldn't be able to borrow or lend customers' assets, James' tweet said.
"The bill would grant the Attorney General jurisdiction to enforce any violation of the law, issue subpoenas, impose civil penalties of $10,000 per violation per individual or $100,000 per violation per firm, collect restitution, damages, and penalties, and shut down businesses engaging in fraud and illegality," a press statement from Friday said.
The state's crypto activities are regulated by the New York Department of Financial Services' (NYDFS), the supervisor of the controversial "BitLicense," but the support James' bill has received from several members of the state's legislature suggests the regulator may not have had sufficient authority to oversee the sector.
“I applaud New York State Attorney General Letitia James for the timely introduction of this legislation to protect New Yorkers from financial harm by establishing a comprehensive regulatory framework for the opaque cryptocurrency market,” State Senator Kevin Parker said in a press statement, while Steve Otis, state lawmaker representing Westchester County, called the legislation "groundbreaking."
“The lack of transparency plaguing the crypto industry causes immense harm to countless investors, especially low-income New Yorkers and people of color who carry a disproportionate share of the losses,” New York City Comptroller Brad Lander said.
An NYDFS spokesperson told CoinDesk in a statement that the regulator was currently the "only prudential regulator" that has crypto-specific authority in the U.S., and "it is DFS’s priority to ensure that consumers and markets are protected and New York continues to be the global financial center."
"Recent DFS guidance has made clear expectations around the use of blockchain analytics technology, U.S. dollar-backed stablecoin issuance, banks engaging in virtual asset activity, and consumer protections in light of insolvencies," the spokesperson said. "Earlier this year, the Department was the first regulator to address Binance, ordering Paxos to cease minting Paxos-issued BUSD, ameliorating risks before consumers were harmed. The Department also reached a $100 million settlement with Coinbase after an investigation found that the platform was vulnerable to serious criminal conduct, such as money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking."
In March, James’ suit against KuCoin claimed that tokens including ether (ETH) constitute securities that should have been registered with her office, and in a case against CoinEx made similar claims about the LUNA token connected with the now-defunct stablecoin terraUSD.
Earlier this week, Alex Mashinsky, the founder of Celsius, denied claims by James that he had misled investors about the crypto lender before it filed for bankruptcy last year, saying that James had cherry picked statements made to investors.
James' bill will codify NYDFS' authority to license and oversee crypto brokers, marketplaces, investment advisors and issuers prior to operating in the state.
Andrew Hinkes, a partner at law firm K&L Gates, tweeted that the bill was “destined to fail” because it misunderstood crypto. It won’t be possible to apply the provisions to decentralized organizations, and the market doesn’t exist to offer the kind of auditing or insurances James is proposing, Hinkes said.
The bill must still be passed by state lawmakers for it to become state law.
UPDATE (May 5, 2023, 14:00 UTC): Amends headline, adds details from James' tweet.
UPDATE (May 5, 2023, 14:10 UTC): Adds a quote from Andrew Hinkes.
UPDATE (May 5, 2023, 16:20 UTC): Updates sourcing, adds detail from bill and press statement.
UPDATE (May 5, 2023, 21:50 UTC): Adds statement from NYDFS.
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