New York Attorney General Letitia James today announced landmark legislation to tighten regulations on the cryptocurrency industry to protect investors, consumers, and the broader economy. The multi-billion-dollar industry lacks robust regulations, making it prone to dramatic market fluctuations, and has been used to hide and facilitate criminal conduct and fraud. Attorney General James’ program bill, which proposes the strongest and most comprehensive set of regulations on cryptocurrency in the nation, would increase transparency, eliminate conflicts of interest, and impose commonsense measures to protect investors, consistent with regulations imposed on other financial services.
The bill would require independent public audits of cryptocurrency exchanges and prevent individuals from owning the same companies, such as brokerages and tokens, to stop conflicts of interest. Crypto platforms would also have responsibilities to customers similar to banks under the federal Electronic Fund Transfer Act by requiring platforms to reimburse customers who are the victims of fraud. The bill would also strengthen the New York State Department of Financial Services’ (DFS) regulatory authority of digital assets.
“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,” said Attorney General James. “New York investors should have the peace of mind that there are safeguards in place to protect them and their money. All investments are regulated to account for every penny of investors’ money — cryptocurrency should be no exception. These commonsense regulations will bring more transparency and oversight to the industry and strengthen our ability to crack down on those that don’t pay respect to the law.”
Overview of the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act:
Millions of investors have lost hundreds of billions in the value of their cryptocurrency investments because of rampant fraud, including market manipulation, hacking, and opaque business practices. Currently, the cryptocurrency industry lacks a robust regulation regime that would prevent or intercept fraud and market failures. While there are millions of investors who have lost significant investments because of these failures, lower income investors and people of color have been disproportionately harmed by the risks of crypto. A study by the JPMorgan Chase Institute on investments made before the 2022 collapse in cryptocurrency values found that lower income households bought crypto at substantially higher prices, and as a result, those lower income households bore a disproportionate share of the losses when the bubble burst.
Additionally, as cryptocurrency investments have been marketed directly to minority communities, the people most susceptible to fraud and losing significant funds due to financial collapses are disproportionately vulnerable and marginalized Americans. Attorney General James’ bill seeks to protect New York investors by bringing regulations and oversight that are applied to other financial services to the cryptocurrency industry and addressing risky practices that are unique to crypto.
1. Stop Conflicts of Interest
The cryptocurrency industry is rife with conflicts of interest that harm investors and reduce competition. In one example, crypto company Terraform Labs created a token, Luna, and also created a lending platform, Anchor, that promised 20 percent interest to customers who invested in Luna on Anchor. But investors could only access the 20 percent returns if they purchased another token created by Terraform Labs called Terra. Because Terraform Labs owned Luna and Terra and promised these unsustainable high interest rates, the actual value of the digital assets was masked from everyday investors and set the table for market disaster. Under current law, there is no regulation or prohibition against these obvious conflicts of interest that put crypto investors at risk.
The bill would stop conflicts of interest in the industry by:
- Preventing common ownership of crypto issuers, marketplaces, brokers, and investment advisers and preventing any participant from engaging in more than one of those activities;
- Preventing crypto brokers and marketplaces from trading for their own accounts;
- Prohibiting marketplaces and investment advisers from keeping custody of customer funds;
- Prohibiting brokers from borrowing or lending customer assets; and
- Prohibiting referrals from marketplaces to investment services for compensation.
2. Require Public Reporting of Financial Statements
Too often investors are unaware of the real risks of investing in cryptocurrencies because crypto companies are not required to make critical public disclosures of their financial condition. As a result, most companies do not make any public disclosures and some companies have even publicly misrepresented their financial condition. For example, Celsius, a cryptocurrency lending platform, 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. 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.
The bill would increase transparency in the industry by requiring companies to, among other things:
- Undergo mandatory independent auditing and publish audited financial statements;
- Provide investors with material information about issuers, including risks and conflict-of-interest disclosures;
- Require marketplaces to establish and publish listing standards; and
- Require cryptocurrency promoters to register and report their interest in any issuer whose crypto assets they promote.
3. Bolster Investor Protections
Cryptocurrency companies — unlike banks — lack insurance for customer deposits, which makes these companies at significant risk of an old-fashioned “bank run” if they get into trouble. At the same time, crypto companies often lack comprehensive oversight and reserve requirements to ensure they can meet consumer demand or obligations. Multiple cryptocurrency companies have gone bankrupt, losing billions of dollars in investments with no recourse for investors. Additionally, due to inadequate cybersecurity measures, many crypto brokers and marketplaces have lost billions of dollars of customers’ crypto assets. In 2021, cybercriminals raked in at least $14 billion in stolen digital assets. Currently, the law does not protect investors’ cash or provide a means for returning an investor’s crypto holdings if a crypto exchange, broker, or platform fails.
The bill would bolster investor protections by:
- Enacting and codifying “know-your-customer” provisions, meaning brokers would have to know essential facts about their customers, and requiring crypto brokers and marketplaces to only conduct business with firms that comply with KYC provisions;
- Banning the use of the term “stablecoin” to describe or market digital assets unless they are backed 1:1 with U.S. currency or high-quality liquid assets as defined in federal regulations; and
- Requiring platforms to reimburse customers who are the victims of unauthorized asset transfers and transfers resulting from fraud.
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. The bill would also codify DFS’ authority to license digital asset brokers, marketplaces, investment advisors, and issuers prior to engaging in business in New York and allow DFS to oversee the digital asset licensing regime.
“The cryptocurrency industry is in need of regulation and oversight,” said New York State Comptroller Thomas P. DiNapoli. “As the financial capital of the world, New York must lead these efforts. I applaud Attorney General James for taking decisive action to protect the public.”
“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,” said New York City Comptroller Brad Lander. “We cannot let the crypto industry operate without a basic infrastructure for accountability. With this bill, Attorney General Letitia James is addressing the urgency for greater oversight of the crypto industry and building a legal framework to protect New Yorkers and the economy from predatory companies.”
“Thank you, Attorney General James, for taking steps to bring greater oversight to the crypto industry by proposing legislation to establish comprehensive regulations in New York,” said State Senator Kevin Thomas. “By raising the bar for this rapidly evolving market, we can ensure that consumers and their investments are secure in this space. We are grateful for your commitment to safeguarding the interests of New York consumers by pushing for fair and transparent practices.”
“I strongly support the efforts of Attorney General James to ensure the most robust and meaningful consumer and financial protections for those who use cryptocurrency,” said State Senator Cordell Cleare. “All financial products and instruments must be honest, transparent, and failsafe — this goes double for emerging industries.”
“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,” said State Senator Kevin Parker. “In the wake of the FTX collapse that tanked the price of Bitcoin to the lowest in years and cost investors over 8 billion, some of whom were New York depositors from Black and brown communities, the cryptocurrency industry must be held to the same macroprudential financial regulations as our traditional financial institutions to ensure accountability and market stability.”
“The failure to properly regulate cryptocurrency poses a real threat to low-income communities and communities of color in this state,” said State Senator Kristen Gonzalez. “I commend the Attorney General’s office for moving forward with legislation to better regulate cryptocurrency, and I look forward to working together to build on these regulations in the future.”
“As the cryptocurrency industry grows and captures the interest of investors across the state, it is imperative that our constituents are appropriately safeguarded against the threats at hand,” said State Senator James Sanders Jr. “As the Chairman of the Committee on Banks in the New York State Senate, it is no mystery to me that regulated financial markets are essential to avoid consumer fraud and conflicts of interest. Furthermore, with people of color investing in the crypto market at higher rates, the potential for financial harm is greater amongst communities of color. This simple fact calls for a framework to be established which promotes transparency and protections for crypto investors, similar to those which exist for other financial institutions. Only then will our residents be equipped to make fully informed and leveled financial decisions. Therefore, I believe the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act as proposed by the New York State Office of the Attorney General (OAG) in collaboration with the New York Department of Financial Services (DFS) will prove to be beneficial for our communities as it will shield even the most vulnerable investors from financial exploitation.”
“Attorney General James has crafted groundbreaking legislation to protect consumers considering investment in cryptocurrency transactions,” said Assemblymember Steve Otis. “The Attorney General’s proposal would increase transparency, address conflicts of interest, require needed disclosures, improve accountability, and impose cybersecurity requirements to protect those investing or offering cryptocurrency products. To protect consumers and our economy, it is important that legislatures across the country keep pace with changes in finance, technology, and the law. Attorney General James’ legislation builds on New York’s strong regulatory framework with new tools that will be a model for other states.”
“The proposed bill’s measures, including cracking down on conflicts of interest, enhancing transparency, and enforcing strict cybersecurity requirements, will create a level playing field for crypto firms and traditional financial institutions,” said Assemblymember Michaelle Solages. “With communities of color increasingly drawn to investing in crypto, it’s essential that we introduce common-sense protections to prevent them from facing higher financial risks. The legislation’s provision to hold institutions accountable for fraudulent activities and unauthorized transfers will empower customers to make informed investment decisions and safeguard their assets. This bill is a significant step toward creating a fair and secure environment for crypto investors in New York state.”
“On behalf of all New Yorkers, I stand in support of enacting legislation to protect the public when it comes to crypto currency,” said Assemblymember Inez E. Dickens. “This is a new investment, an investment in the future that many New Yorkers have already invested in and increased their net worth and then suddenly lost it all due to a lack of knowledge and information, which could have been provided through more regulations. Thank you, Madam Attorney General, for having the foresight and tenacity to recognize what must be done to protect public interest.”
“It’s no surprise that everyday New Yorkers were largely spared by the collapse of FTX. The New York State Department of Financial Services has established itself as a world leader in promulgating rules that establish a fair playing field for crypto businesses while proactively protecting retail investors that are interested in the space,” said Assemblymember Pamela J. Hunter. “While DFS has been proactive, there is still a need to update our laws to adjust and acknowledge the sustained presence of this new asset class. As Chair of the Assembly Banks Committee, I look forward to working with Attorney General James to build upon the foundation we have in place in a way that improves consumer protection while simultaneously providing a regulatory structure that creates stability for crypto businesses establishing themselves in New York. Our state has long been the financial capital of the world. Updating our laws to accommodate cryptocurrencies and blockchain technology is essential and ensures that New York will continue to be a place of great innovation and a leader in finance.”
“After multiple mega-crashes of crypto currencies, markets, and banks over the past year which cost thousands upon thousands of individuals and families their savings, it is more clear than ever that we need better regulation and oversight across the industry, and we need it now,” said Assemblymember Alex Bores. “I applaud the Attorney General for taking action to protect New Yorkers and to provide more transparency across the crypto industry.”
“I commend our Attorney General Letitia James for her dogged efforts to crack down on unregistered crypto platforms,” said Assemblymember Rebecca Seawright. “Her work is not only protecting New York investors from deceptive practices and misconduct; it is leveling the playing field by eliminating conflicts of interest and increasing transparency. New Yorkers and their hard-earned investments must be safeguarded in the new and changing virtual assets market.”
“As the digital asset space continues to grow and evolve, it is critical that we establish a legal framework that provides clarity and consumer protection while promoting innovation,” said Assemblymember Anna Kelles. “Attorney General James’ proposed bill does just that by requiring digital asset brokers, marketplaces, investment advisers, and issuers to obtain a license from the Department of Financial Services and comply with reporting requirements. By doing so, we can ensure transparency in cryptocurrencies and related blockchain technologies providing consumers with the protections they deserve. This bill represents an important step forward for New York State in embracing the future of finance and technology and I thank Attorney General James for her leadership.”
“When I held the first-ever oversight hearing on cryptocurrency and blockchain at the New York City Council this year, it was made clear by expert testimony that there is an urgent need for regulation of this fast-growing industry,” said New York City Council Member Jennifer Gutiérrez. “I commend New York State Attorney General Letitia James for her common-sense regulatory framework to ensure that her office and the Department of Financial Services can protect New Yorkers and the broader economy. This legislation will raise the bar for the crypto industry and safeguard the most vulnerable investors, especially investors of color. I look forward to joining this effort to ensure there is transparency and proper oversight of this industry, and to protect consumers from financial exploitation.”
“New York has been a national leader in strong financial services regulation, including through its model framework for the licensing and supervision of digital assets firms and its vigorous enforcement of the Martin Act,” said Maria T. Vullo, former New York State Department of Financial Services Superintendent and former Executive Deputy Attorney General for Economic Justice. “As recent events demonstrate, unregulated actors will exploit consumers and investors in their quest for outsized profits, damaging the market for those who seek to comply with the rules. It is time for New York to lead once again in the dual regulatory system with clear standards that address this evolving industry. By codifying the DFS BitLicense regulation, banning conflicts of interest, regulating affiliate relationships, and mandating transparency, the Attorney General’s proposed legislation assures that New York’s consumers and investors are protected from unregulated and improper practices by digital assets firms, while maintaining New York’s existing regulatory structure. I commend Attorney General Letitia James for taking this important step to introduce a comprehensive legislative proposal and look forward to its negotiation and passage.”
“The Attorney General’s proposed legislation positions New York to once again be a leader in developing sensible regulation of virtual currencies,” said Delicia Hand, Director of Financial Fairness for Consumer Reports. “By expanding New York’s General Business law to include specific oversight of stablecoin businesses and disclosure requirements for crypto brokers and influencers, this bill would strengthen the state’s ability to protect consumers and the broader financial system by improving transparency, addressing potential conflicts of interest, and establishing clear investor safeguards. We look forward to continuing to work with the Attorney General to strengthen the bill and ensure consumers are protected as the industry grows.”
“New York Attorney General Letitia James’ cryptocurrency legislation sets the standard for all U.S. states and territories on how to regulate the fledgling cryptocurrency industry,” said John Stark, former Founder and Chief of the Securities and Exchanges Commission’s (SEC) Office of Internet Enforcement. “This legislation brings much needed oversight to the industry and raises the bar, ensuring that investor protection remains paramount. I applaud Attorney General James and her team for this impactful legislation.”
“The cryptocurrency industry is deliberately targeting vulnerable communities of color, all in the service of lining the pockets of rich cryptobros,” said Alicé Nascimento, Campaigns Director of New York Communities for Change. “The industry is promoting itself as a means of financial empowerment and inclusivity, while downplaying the massive risks and drawbacks. Studies have shown that people of color are more likely to invest in cryptocurrency, and are therefore more vulnerable to the volatility and lack of regulation in the market. We commend the Attorney General for taking a critical step to bring accountability to the cryptocurrency industry and protect consumers and low-income communities of color across our state.”
“Every day, people in New York State suffer as financial institutions use predatory practices designed to extract working people’s money while padding profits and executive salaries. The rules are too often stacked against us and written by the industry to protect themselves rather than consumers,” said Sochie Nnaemeka, New York Working Families Party State Director. “We stand with Attorney General Letitia James as she advances a regulatory framework that’s focused on protecting consumers, and we look forward to fighting side-by-side with her to ensure these protections become state law.”