On May 5, 2023, New York Attorney General Letitia James released proposed legislation entitled the Crypto Regulation, Protection, Transparency, and Oversight Act (“CRPTO Act”) that seeks to eliminate conflicts of interest, increase transparency, and bolster protections for cryptocurrency investors in New York State. Essentially, businesses involved in cryptocurrency from or within New York would no longer be permitted to simultaneously act in separate roles such as issuers, brokers, and investment advisors. If taken up by the state legislature and enacted, it would expand New York’s surveillance of cryptocurrency enterprises conducting business within the state. The CRPTO Act would significantly change the way digital asset businesses operate from or within New York.

Under the CRPTO Act, a “digital asset” is defined broadly as any “type of digital unit, whether labeled as a cryptocurrency, coin, token, virtual currency, or otherwise, that can be used as a medium of exchange, a form of digitally stored value, or a unit of account.”[1] Therefore, businesses that utilize or engage with digital assets would be subject to the new restrictions. Most notably, the CRPTO Act would prevent:

  • common ownership of cryptocurrency issuers, marketplaces, brokers, and investment advisors and prevent any participant from participating in more than one of these activities.
  • cryptocurrency brokers and marketplaces from trading for their own accounts.
  • cryptocurrency brokers and marketplaces from keeping custody of customer funds.
  • brokers from borrowing or lending customer assets.
  • referrals from marketplaces to investment services for compensation.[2]

To increase transparency, cryptocurrency platforms would be required to undergo mandatory independent auditing, publish audited financial statements, and provide investors with information regarding issuers of digital assets, including but not limited to risks and conflicts of interest. Cryptocurrency influencers and promoters would also be mandated to register and report their interest in any issuer whose cryptocurrency assets they promote. Similarly, it would be against the law to induce the sale of digital assets, which often occurs in connection with fraudulent financial schemes, such as “pump and dump” schemes.[3]

Additionally, the CRPTO Act aims to protect investors by requiring cryptocurrency platforms to reimburse their customers who become victims of unauthorized transfers or transfers due to fraud. When a customer opens an account with any cryptocurrency platform, the platform would be required to furnish the customer with a disclosure outlining the customer’s liability for any potential unauthorized transfer of digital assets. Moreover, every digital issuer, broker, marketplace, and investment advisor must create, implement, and maintain an effective cybersecurity program that satisfies requirements of applicable state and federal data privacy and cybersecurity laws.

If the CRPTO Act is passed and signed into law, the bill would permit the Attorney General to enforce the law by issuing subpoenas, imposing civil penalties of $10,000 per violation per person or $100,000 per violation per firm, collect restitution and damages, and shut down businesses that participate in fraud.  Additionally, the New York Division of Financial Services would have authority to oversee the licensing of digital assets and license digital asset brokers, marketplaces, investment advisors and issuers before they are allowed to conduct business within New York.[4] Unlike the New York “BitLicense,” which permits New York businesses to apply for a license to engage in virtual currency activity, such as the transmission of money, the CRPTO Act would be applicable to all virtual currencies, other coins, tokens, and digital assets simply by operation of law.

The CRPTO Act will be submitted to the New York State Senate and Assembly during the 2023 legislative session. We will continue to monitor the legislation. If you have any questions, please speak with one of our attorneys.

Thank you to Keith O’Brien for his research and writing assistance.

[1] https://ag.ny.gov/press-release/2023/attorney-general-james-proposes-nation-leading-regulations-cryptocurrency

[2] See note 1.

[3] A “pump and dump” scheme involves fraudsters spreading false or misleading information to create a buying frenzy that will “pump” up the price of a stock, and then the fraudsters will “dump” the shares by selling their own shares at that inflated price. 

[4] See  https://spectrumlocalnews.com/nys/central-ny/politics/2023/05/05/ag-james-pushes-bill-to-create-cryptocurrency-regulations