New York State Attorney General Letitia James has announced new proposed amendments to the state’s General Business Law that would roll out a number of protections to cryptocurrency investors that are currently enjoyed by traditional securities investors. [1] The bill, dubbed the Crypto Regulation, Protection, Transparency, and Oversight Act (or CRPTO Act), [2] seeks to address a wide range of issues in the industry from conflicts of interest to a lack of investor protections.

New York has played a leading role in establishing a regulatory framework for cryptocurrencies, such as Bitcoin and Ethereum, which State regulations generally refer to as “digital assets” or “virtual currencies.” In 2015, New York’s Department of Financial Services (“DFS”) issued regulation 23 NYCRR Part 200 under the New York Financial Services Law, which established the “BitLicense,” a license for those conducting “virtual currency business activity” “involving New York or a New York resident.” [3] The DFS has since pursued a number of enforcement actions, seeking among other things, to curb the use of digital assets to skirt anti-money laundering laws by ensuring compliance with federal and state requirements. [4]

While Gary Gensler, Chair of the Securities and Exchange Commission, has made clear that his agency believes that existing SEC rules provide sufficient guidance for the cryptocurrency industry, [5] with the CRPTO Act, New York seeks to codify much of the enforcement that Attorney General James’ office and the DFS have undertaken with digital asset-specific regulations. This enforcement has included legal actions for failure to register as a securities broker, [6] defrauding investors regarding the finances of the platform, [7] and improperly operating digital asset lending platforms. [8]

For securities lawyers, the text of the proposed provision of GBL Article 23-C § 359-p(2) Anti-fraud and manipulation will be familiar:

It shall be illegal and prohibited for any person, in connection with the offer or sale of any digital asset, to make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading. [9]

If enacted, the similar construction of the new § 359-p(2) to Section 10(b) of the federal Securities and Exchange Act of 1934 and the SEC’s Rule 10-b(5) [10] could serve to import a well-developed body of judicial interpretation to an area of law with little published precedent.

An open question is whether the proposed CRPTO Act may offer aggrieved digital asset investors a private right of action for fraud, rather than simply codifying New York’s enforcement authority. Article 23-A of New York’s GBL, commonly referred to as the Martin Act [11], is among the most stringent state blue sky laws, providing the Attorney General with extensive authority to combat securities fraud. However, no private right of action is available under the Martin Act, [12] requiring private investors to pursue claims under federal statutes. [13] Whether the CRPTO Act’s language, modeled on those federal statutes held to confer a private right of action, does so for New York State plaintiffs is yet to be decided.

Commenting on the proposed CRPTO Act, Attorney General James said:

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. [14]

A copy of the proposed text of the CRPTO Act is available at the NY Attorney General’s website.

[1] Office of the New York State Attorney General, Attorney General James Proposes Nation-Leading Regulations on Cryptocurrency Industry (“NYAG Statement”), May 5, 2023, available at https://ag.ny.gov/press-release/2023/attorney-general-james-proposes-nation-leading-regulations-cryptocurrency.

[2] Legislative Bill Drafting Commission 10985-06-3, available at https://ag.ny.gov/sites/default/files/2023-05/Crypto%20Bill%2010985-06-3.PDF.

[3] See 23 NYCRR 200.2(q) (setting forth business activities subject to BitLicense requirement).

[4] See, e.g., In the Matter of Robinhood Crypto, LLC, Consent Order (Aug. 1, 2022), available at https://www.dfs.ny.gov/system/files/documents/2022/08/ea20220801_robinhood.pdf.

[5] T. Amure, Most Cryptocurrencies Are Securities, Says SEC Chair, Investopedia, Sept. 8, 2022, available at https://www.investopedia.com/gensler-on-crypto-6544288.

[6] Office of the New York State Attorney General, Attorney General James Continues Crackdown on Unregistered Cryptocurrency Platforms, March 9, 2023, available at https://ag.ny.gov/press-release/2023/attorney-general-james-continues-crackdown-unregistered-cryptocurrency-platforms.

[7] Office of the New York State Attorney General, Attorney General James Sues Former CEO of Celsius Cryptocurrency Platform for Defrauding Investors, Jan. 5, 2023, available at https://ag.ny.gov/press-release/2023/attorney-general-james-sues-former-ceo-celsius-cryptocurrency-platform-defrauding.

[8] Office of the New York State Attorney General, Attorney General James Directs Unregistered Crypto Lending Platforms to Cease Operations In New York, Announces Additional Investigations, Oct. 18, 2021, available athttps://ag.ny.gov/press-release/2021/attorney-general-james-directs-unregistered-crypto-lending-platforms-cease.

[9] Legislative Bill Drafting Commission 10985-06-3, supra, at 15.

[10] Cf. 17 C.F.R. § 240.10b-5(b) (“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange … [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading … in connection with the purchase or sale of any security.”)

[11] N.Y. Gen. Bus. L. §§ 352-359.

[12] See, e.g., Vermeer Owners, Inc. v. Guterman, 78 N.Y.2d 1114, 1116 (1991) (citing CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 276-277).

[13] See, e.g., Superintendent of Ins. of State of N. Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13, 92 S. Ct. 165, 169, 30 L. Ed. 2d 128 (1971) (recognizing the “a private right of action [ ] implied under § 10(b)” as “established”); Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 166 (2008).

[14] NYAG Statement, supra.