New York Attorney General Proposes Comprehensive and Restrictive Digital Assets Bill

LawFlash

June 21, 2023

New York Attorney General Letitia James launched on Could 5, 2023 a proposed invoice that, if enacted, would considerably tighten regulation over digital asset market contributors and exchanges. Whereas the New York State legislative session ended on June 8 with out the introduction or passage of the proposed laws, we anticipate that the present proposal or a brand new model will likely be launched throughout the subsequent legislative session or mentioned with legislators in different states (i.e., shopped round).

The CRPTO Act

In accordance with Attorney General James, the Crypto Regulation, Safety, Transparency, and Oversight Act (CRPTO Act) is meant to guard buyers, improve monetary transparency and oversight, and rein in “rampant fraud and dysfunction” within the cryptocurrency trade.

The CRPTO Act expands on the BitLicense framework below the 2015 New York Division of Monetary Providers (NYDFS) regulation, going past simply “virtual currencies.” Pursuant to the present BitLicense regime, firms and people that have interaction in “virtual currency business activity” should acquire a BitLicense in an effort to function throughout the State of New York or with New York residents.

Beneath that framework, a licensee should, amongst different issues, (1) keep an ample compliance program, (2) meet sure capital and custody necessities, (3) maintain books and information, and (4) ship monetary reviews to the NYDFS superintendent.

The CRPTO Act, in distinction, goes past digital currencies and applies broadly to incorporate all digital belongings, together with digital currencies, cryptocurrencies, cash, tokens, and different digital items that might be used as a medium of trade with a digitally saved worth or unit of account. If adopted, the CRPTO Act would apply to the next trade contributors engaged in digital belongings actions from or inside New York State:

Digital asset brokers
Digital asset influencers
Digital asset funding advisers
Digital asset issuers
Digital asset marketplaces

The proposed invoice would require a “digital asset influencer” to reveal their possession curiosity or compensation in reference to the digital asset they’re selling. The invoice defines a digital asset influencer as “any person who, in connection with the offer or sale of any digital asset, widely promotes, publishes, publicizes or circulates any notice, circular, advertisement, newspaper, article, letter, investment service, electronic posting or communication which, though not purporting to offer a digital asset for sale, encourages investment in such digital asset, where such person receives compensation of any sort or owns or expects to own such digital asset, unless such ownership or expected ownership amounts to less than $25,000 in value” (excluding a writer of any bona fide newspaper or information journal of basic distribution).

All digital asset issuers, brokers, marketplaces, and funding advisers can be topic to registration necessities and be required to publicly submit a certification of compliance with the necessities of the CRPTO Act, which would come with subjects similar to conflicts of curiosity, reporting and disclosure, and client safety.

Conflicts of Curiosity

The CRPTO Act would search to remove conflicts of pursuits by prohibiting any individual or affiliate from appearing as greater than one of many following on the identical time, which may seriously change how companies are at the moment structured:

a digital asset issuer;
a digital asset dealer;
a digital asset market; or
a digital asset funding adviser.

Whereas banks not appearing “primarily” as a digital asset dealer, issuer, or funding adviser can be exempt from this requirement, these working a digital asset market wouldn’t have the ability to act as digital asset issuers, brokers, or funding advisers. Beneath the proposal, digital asset broker-dealers wouldn’t have the ability to refer any buyer to an issuer or funding adviser if doing so would end in any potential or precise financial profit for the digital asset dealer.

The proposal would additionally impose custody necessities on digital asset brokers, just like Rule 15c3-3 below the Securities Trade Act of 1934. Extra particularly, below the CRPTO Act, digital asset brokers can be required to promptly acquire and keep bodily possession or management of totally paid buyer belongings. As well as, digital asset marketplaces and funding advisers would each be prohibited from taking custody of any buyer’s digital belongings.

Nevertheless, the invoice supplies an exception for marketplaces if they’re taking custody for the aim of effecting a particular transaction. Funding advisers can be permitted to direct discretionary buying and selling by way of a digital asset dealer as a result of they might not be thought of to have bodily possession or management of digital belongings in that situation.

Disclosure of Monetary Info and Itemizing Requirements

The proposal additional goals to enhance transparency to clients by requiring numerous disclosures, as summarized beneath:

Digital asset issuers, brokers, marketplaces, and funding advisers can be required to publish independently audited annual and quarterly monetary statements.
A digital asset market can be required to undertake and publish itemizing requirements for each digital asset that it lists. The itemizing requirements can be required to impose capital necessities for issuers and the requirement that issuers publicly disclose every digital asset’s supply code. A market would wish to vet the digital asset software program code in opposition to the issuer’s disclosure for consistency.
Previous to issuing a digital asset, a digital asset issuer can be required to publish and distribute a prospectus that incorporates materials details about the issuer and digital asset. At a minimal, the CRPTO Act would require that the prospectus embrace an outline of the issuer’s enterprise, the issuer’s monetary situation, outcomes of the issuer’s operations, danger elements associated to the digital asset, conflicts of curiosity, the issuer’s monetary assertion schedules, and the identities of all administrators, government officers, and key staff who make or are anticipated to make important contributions to the event of the digital asset.
A digital asset dealer can be required to speak in confidence to clients any charges that they obtain from any supply.
A digital asset market can be topic to the manufacturing of a disclosure schedule itemizing all charges obtained from facilitating any digital asset transaction, together with itemizing charges or commissions.

Proposed Anti-Fraud Measures

Beneath the proposal, digital asset brokers and funding advisers can be required to reimburse clients for self-reported unauthorized transfers, with the burden of proof positioned on brokers and funding advisers to point out {that a} switch was in actual fact licensed. The CRPTO Act defines unauthorized transfers as any digital asset transaction “effected without the customer’s actual authorization” or “effected with the customer’s authorization due to fraudulent inducement.”

Digital asset brokers and funding advisers would even be required to enact know-your-customer provisions and keep anti-money laundering packages. Moreover, the proposal would prohibit any digital asset from being labeled a “stablecoin” except the stablecoin is backed by not less than a 1:1 reserve. In accordance with the invoice, the stablecoin ratio “shall equal U.S. currency, Level 1 liquid assets (as defined in 12 C.F.R. § 249.20), or both[,] divided by the stated value of the stablecoin.”

Enforcement Powers

Attorney General James’s proposed laws represents the State of New York’s efforts to strengthen its regulatory framework over cryptocurrency and digital belongings. If enacted, it could additionally broaden the Attorney General’s enforcement energy to hunt civil penalties of (1) $10,000 per violation per pure individual or (2) $100,000 per violation per another individual or entity.

Subsequent Steps

Though no consultant of the New York Meeting launched the invoice earlier than the 2023 legislative session ended on June 8, 2023, the CRPTO Act or a model of the CRPTO Act might be launched throughout the subsequent legislative session in New York or in different states. States’ curiosity in digital belongings has elevated during the last 12 months in gentle of bankruptcies and different occasions within the digital asset trade, in addition to Congress’s failure to beat its inertia on digital asset laws.

That mentioned, the Safety and Trade Fee’s more and more hostile method to regulating digital asset issuers and exchanges by enforcement may have a chilling impact on the US digital asset trade, making state efforts to control the trade futile.

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