New York Attorney General Proposes Comprehensive Cryptocurrency Regulations

Crypto regulation could soon take a step forward in the Empire State as lawmakers are weighing new rules proposed by New York Attorney General Letitia James. The goal is to make a fledgling industry a bit more like Wall Street, at least when it comes to oversight.

The state has already built a reputation for having a robust compliance framework under the New York State Department of Financial Services (DFS), which has regulated cryptocurrencies under its BitLicense regime since 2015.

Legislation proposed by James would further strengthen the authority of the DFS, the New York State Attorney General’s Office (OAG) said in a Press releaseestablishing rules focused on conflicts of interest, transparency and investor protection.

“The multi-billion dollar industry lacks robust regulation,” he said, adding that the proposal presents the “strongest and most comprehensive set of cryptocurrency regulations in the country.”

The proposal comes amid heightened regulatory scrutiny across the country and after a turbulent year for the sector, defined by several high-profile bankruptcies and thousands of investors burned. The office pointed to the conduct of several companies, such as defunct cryptocurrency lender Celsius and Terraform Labs, as examples of conduct that would be outlawed.

The OAG said it will submit the bill—the Cryptocurrency Regulation, Protection, Transparency, and Supervision Act, or CRPTO Act—to state legislators for consideration during the 2023 legislative session, which ends on June 8. .

The bill builds on regulations that already exist in traditional finance, which could be considered remarkable in terms of legitimizing the digital asset space, he told Decrypt Hashflow General Counsel Rahsan Boykin.

“This is a positive step towards greater transparency and accountability,” he said. “The new legislation […] seeks to hold cryptocurrencies to the same standards that many current players in the security industry must adhere to.”

However, Boykin noted that regulation by states has the potential to backfire, pushing companies out of heavily regulated areas or creating an “uneven playing field” for those that stay.

And while Boykin thinks New York’s CRPTO bill is a good one, he added that ultimately a national regulatory structure would be best, ensuring consistent regulation of the industry.

A significant part of the bill is dedicated to preventing conflicts of interest. Some measures include preventing market participants from being token issuers, exchanges, and brokers at the same time—by forcing them to limit themselves to a single position.

Overall, though, it’s unclear how effective the new rules would be or if they could prevent the next cryptocurrency crash, he told Decrypt Timothy Cradle, Head of Compliance for Zeebu and Valuit.

“I like what the DFS is up to,” he said. “However, they are not novel rules, and I am concerned that they will not be effective in achieving their intended goals.”

The OAG claims in a blog post that public reporting requirements could have prevented, for example, Celsius customers from being blindsided last summer. Cradle contends that Celsius’s audited financial statements were publicly available and pre-bankrupt through the Chamber of Societies from United Kingdom.

Requiring private companies to open their books when they otherwise wouldn’t have to could also be unpalatable, Cradle said, describing it as a kind of “ultimatum” for digital asset companies to either comply or stay out.

“I support the requirement,” he said. “But I don’t think it really protects consumers.”

The CRPTO bill also includes new rules regarding stablecoins, prohibiting the term from being used to describe digital assets that are not fully backed by US dollars or high-quality assets that can be easily converted to cash.

Cradle said it sounds like an interesting concept, but questioned its effectiveness in protecting consumers, stating that crafty cryptocurrency sellers could come up with a new similar term, like “dollar coin,” for example.