NYAG attempts to “rein in the cryptocurrency industry” with the wide-sweeping CRPTO Act

On May 5, 2023, New York Attorney General Letitia James released a proposed bill—the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act—that could have a wide-reaching (and potentially chilling) effect on any crypto company operating in or having customers in the state of New York. The proposed bill attempts to "increase transparency, eliminate conflicts of interest, and impose commonsense measures to protect investors."

Important components of the proposed bill include the following:

Registration

Multiple players in the crypto ecosystem would be required to register and obtain a license from the New York Department of Financial Services before operating in New York. Digital asset issuers would be required to file a registration statement, publish and distribute an offering prospectus and send to the state's department of law information about any recent sales of digital assets. An "influencer" advertising and/or promoting any digital asset would also need to file a disclosure statement with the state, at least 10 days prior to any advertising, that describes the influencer's ownership interest, compensation, conflicts of interest, wallet addresses, social media handles, educational background, business background and criminal history.

Conflicts of interest

The proposed bill would make it "illegal and prohibited for any person or affiliate to act as more than one of the following: a digital asset issuer, a digital asset broker, a digital asset marketplace, or a digital asset investment adviser." Digital asset brokers would need to maintain net capital similar to securities broker-dealers and impose restrictions on physical control of digital assets. They would also be prohibited from lending, borrowing "or in any way encumber[ing]" customer assets. Digital asset marketplaces and investment advisers would also be prohibited from keeping custody of customer funds, presumably needing to use a digital asset broker or other service provider for such purpose.

Increased transparency

The proposed bill would require all digital asset issuers, brokers, marketplaces and advisers to undergo mandatory independent financial audits and circulate such audited financial statements to the public. It would require digital asset issuers to provide investors with all material information about the issuer, including financial conditions, risks and conflict of interest disclosures. Issuers would also have to publish an offering prospectus, as noted above, and submit it for review. Each digital asset marketplace would have to adopt and publish listing standards for any digital asset it lists, and for any such asset, the marketplace would need to verify that the digital asset software code is consistent with the issuer's disclosure.

Investor protection measures

The proposed bill would attempt to increase investor protection by imposing "know-your-customer" (KYC) provisions on brokers and prohibiting brokers and marketplaces from doing business with firms that do not comply with such KYC provisions. The proposed bill would prohibit digital assets from being labeled as "stablecoins" unless they are backed one-to-one with the US dollar or another high-quality liquid asset. Further, digital asset brokers and digital asset advisers would be required to reimburse customers for any unauthorized or fraudulent digital asset transfer, subject to certain limitations.

Conclusion

The bill also provides the NYAG with new enforcement authority, a new antifraud statute and broad rule-writing authority. The full text of the proposed bill includes extensive definitions that may or may not work together with federal and/or other state definitions and laws. While New York attempts to “rein in the cryptocurrency industry” with this bill, if it is enacted, it remains to be seen whether this changes the landscape for the cryptocurrency industry within New York.