Mon 05/08/2023 12:33 PM
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New York Attorney General Letitia James announced proposed cryptocurrency legislation that seeks to eliminate conflicts of interest and require independent audits of cryptocurrency companies operating in the state. James said that the Crypto Regulation, Protection, Transparency and Oversight, or CRPTO, Act would be “the strongest and most comprehensive set of regulations on cryptocurrency in the nation.”

The bill targets conflicts of interest by preventing common ownership of crypto token issuers, marketplaces, brokers and investment advisors. Market participants operating in New York state would be allowed to engage in only one of those four activities, according to James.

The bill would also prohibit crypto marketplaces and investment advisors from serving as custodians of customer funds and would stop brokers from borrowing or lending customer assets, says James. Crypto brokers and marketplaces would be unable to to trade for their own accounts if the law is enacted.

Additionally, James notes the proposal would require cryptocurrency companies operating in New York state to undergo mandatory independent auditing and to publish their audited financial statements. Crypto marketplaces would also be required to provide investors with material information about issues related to risk and potential conflicts of interest as well as establishing clear listing standards. Under the legislation, “digital asset influencers” would also be required to register and report their interests in any asset that they promote.

The requirements seek to prevent companies from taking actions like Celsius Network, which “bought up its own token, Cel, resulting in an inflated price of Cel and an appearance of demand for Cel, which did not actually exist,” James says. “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,” James adds.

The N.Y. Attorney General’s Office in January sued Mashinsky, alleging he defrauded more than 26,000 New Yorkers for “using false and misleading representations to induce them to deposit billions of dollars in digital assets” at Celsius.

The bill also seeks to bolster investor protections by “requiring platforms to reimburse customers who are the victims of unauthorized asset transfers and transfers resulting from fraud.” Additionally, marketplaces would only be allowed to transact with firms that comply with know-your-customer provisions.

Additionally, the bill would allow crypto companies to use the term “stablecoin” only to refer to digital assets that “are backed 1:1 with U.S. currency or high-quality liquid assets as defined in federal regulations.”

If enacted, the proposal would give the N.Y. Attorney General’s Office jurisdiction to “shut down businesses engaging in fraud and illegality” and impose civil penalties of $100,000 per violation per firm in addition to restitution, damages and penalties.

Additionally, the proposal would strengthen and codify the N.Y. Department of Financial Services’, or DFS’, authority to license digital asset brokers, marketplaces, investment advisors and issuers.

DFS Superintendent Adrienne Harris said a recent hearing before the House Financial Services Subcommittee on Digital Assets, that DFS’ existing crypto regulatory and supervisory framework “is frequently cited by domestic and foreign regulators as the gold standard, are robust capital and financial standards, strong consumer protections, sophisticated cybersecurity requirements, and strong anti-money laundering provisions.”

DFS announced in January that Coinbase agreed to pay a $50 million penalty to settle a compliance investigation brought by the DFS as well as a separate commitment to invest $50 million in its compliance programs by the end of 2024.

James said her office will submit the proposed legislation to the state senate and assembly for consideration during the 2023 legislative session.

James highlighted that the proposal is supported by numerous state lawmakers including the leadership of key committees.

Assembly member Pamela Hunter, who chairs the Assembly Banks Committee, lauded the DFS’ existing regulations, saying that “everyday New Yorkers were largely spared by the collapse of FTX,” which was not registered to operate in the state. Hunter added, however, that “there is still a need to update our laws to adjust and acknowledge the sustained presence of this new asset class” and that she looks forward to updating existing laws on cryptocurrencies and blockchain technology.

State Sen. James Sanders Jr., who chairs the upper chamber’s Banks Committee, indicated support for the proposal, saying that the bill would be “beneficial for our communities as it will shield even the most vulnerable investors from financial exploitation.”

The U.S. Congress is also considering legislation for the digital asset industry at the federal level, with recent hearings focusing on whether most digital assets should qualify as securities or commodities. The House Financial Services and House Agriculture committees are holding a joint hearing on the matter on Wednesday, May 10.
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