On May 5, 2023, New York Attorney General Letitia James announced the Crypto Regulation, Protection, Transparency, and Oversight (“CRPTO”) Act, which aims “to protect customers and investors in digital assets from fraudulent practices, eliminate conflicts of interest and increase transparency.” In a press release, the New York Attorney General called the proposed bill “the strongest and most comprehensive set of regulations on cryptocurrency in the nation.”
As the nation’s financial services epicenter, New York has been a go-to jurisdiction for crypto litigation. It therefore comes as no surprise that New York would take a lead position in attempts to establish comprehensive consumer protections in the cryptocurrency market, which has been largely unregulated. Claims arising out of consumer protection laws and private law claims are on the rise in New York.
The proposed bill would make it unlawful for any person or entity, or affiliate thereof, to act or serve in more than one capacity among the possible roles of issuer, broker, marketplace, or investment adviser. The bill also requires the disclosure of all ownership interests and fees received from any source, requiring digital platforms to post their fees in a schedule to customers. It would preclude brokers from referring any person to any investment adviser or issuer if the broker thereby receives any potential or actual economic benefit. Digital marketplaces would be required to file detailed registration statements and comply with securities and banking laws. They would also be required to publish and distribute prospectuses similar to ones published in connection with securities prior to the issuance of any digital asset. Moreover, before the operation of any digital asset business, a certification of compliance with all requirements of the Act must be posted publicly. The proposed bill would also require independent public audits of cryptocurrency exchanges.
Digital brokers would be required to maintain physical possession or control of all fully paid digital assets carried by the broker for the accounts of customers, and restrict access to such accounts only to authorized persons. The proposed bill would also preclude brokers from borrowing, lending, re-hypothecating, or otherwise encumbering the digital assets from any customer. A digital marketplace would only be able to take physical possession or control of a customer’s digital asset for effecting a specific transaction.
The bill also would ban the term “stablecoin” unless a coin really is backed 1:1 with the US dollar or high-quality liquid assets. Cryptocurrency brokers and lenders would also be forced to reimburse customers who have lost assets due to fraudulent transfers.
To become law, the bill must be approved by both chambers of the legislature and signed by the governor, before the legislative session concludes in 2024. If passed, the CRPTO Act could provide a model framework for other states to follow.
As of now, 39 states have already introduced pending legislation regarding cryptocurrency, digital or virtual currencies and other digital assets in the 2023 legislative session. Florida, a crypto-friendly state, is not one of them. Last year, Governor Ron DeSantis signed new legislation, CS/HB 273, which defines and deregulates cryptocurrency by easing money service businesses restrictions and licensing requirements and clarifying definitions in Florida Statutes Chapter 560, specific to cryptocurrency. This legislation ultimately reduced restrictions on Florida’s crypto industry, in an apparent effort to increase crypto business and investment in the state. Therefore, there is no current expectation that regulation similar to the CRPTO Act will be proposed in Florida, even as high-profile crypto companies have recently collapsed and private litigation related to those failures proliferates.
