New York AG Proposes Landmark Legislation to Regulate Crypto: Making a Bold Statement 

On May 5, 2023, the New York Attorney General, Letitia James, proposed a “landmark” bill to increase regulations (again) on the cryptocurrency industry, thereby supposedly protecting investors, consumers, and the broader economy. 

The bill is called the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act. It purports to address the disproportionate impact of market failures and fraud on lower-income investors and people of color who have been marketed directly to minority communities.

The proposed regulations would require independent public audits of cryptocurrency exchanges and prevent individuals from owning the same companies to stop conflicts of interest. Crypto platforms would also owe duties 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 further empower the New York State Department of Financial Services’ regulatory authority of digital assets. 

The CRPTO Act has three main components:

  1. Stop Conflicts of Interest – Primarily, the bill aims to stop conflicts of interest in the industry, such as preventing common ownership of crypto issuers, marketplaces, brokers, and investment advisers, prohibiting marketplaces and investment advisers from keeping custody of customer funds, and prohibiting brokers from borrowing or lending customer assets.
  2. Require Public Reporting of Financial Statements – Additionally, the proposed regulations would increase transparency in the industry by requiring companies to undergo mandatory independent auditing, 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 – Finally, the bill addresses the lack of insurance for customer deposits, comprehensive oversight, and reserve requirements for crypto companies. It also aims to protect investors’ cash and provides a means for returning an investor’s crypto holdings if a crypto exchange, broker, or platform fails.

The full proposed regulations are very extensive and define many terms that are not defined on the federal level. You can find the full text of this proposed bill here. The new proposal begs the question: is New York leading the pack in the crypto space, or falling behind as an over-regulated outlier?

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