On May 3, 2023, New York Attorney General Letitia James introduced legislation that, if passed, would substantially increase oversight and regulation of the cryptocurrency industry in New York. James touts the bill as the “Crypto Regulation Protection, Transparency and Oversight Act,” also to be known as the “CRPTO Act.” (the “Bill”).

Its purpose is to “amend the general business law, in relation to the regulation of digital assets and the transfer of such assets; to amend the financial services law in relation to the authority of the department of financial services.” The Attorney General’s office intends to submit the bill to the New York legislature for consideration during the current legislative session, which is scheduled to run until June 8, 2023.

In her press release, James contended that the proposed regulations are the “strongest and most comprehensive in the nation” and that it will “bring order to a multibillion-dollar industry whose ‘hallmarks’ include rampant fraud and dysfunction.

The Bill includes a number of regulation and enforcement measures such as additional registration requirements for digital assets, as well as heightened disclosures and protections against fraud as well as a number of proposed prohibitions.

I. Who should be concerned about the CRPTO Act?

The Bill seeks to increase supervision of the business of digital asset brokers, digital asset marketplaces, digital investment advisers, and digital asset issuers. In addition to these traditional market actors, the Bill also seeks to reach the conduct of “digital asset influencers,” celebrities or social media personalities who receive compensation for promoting investment into digital assets.

II. What will change if the CRPTO Act is passed?

Registration Requirements: Section 359-q of the Bill states that:

Every digital asset broker, digital asset marketplace, digital asset investment adviser, and digital asset issuer shall file a registration statement (the ‘digital asset statement’) with the department of law prior to engaging in business within or from New York. Digital asset statements are effective for one year from the date of filing. Renewal filing must be made within 60 days prior to registration.

Like traditional financial organizations, digital-asset firms will be required to have anti-money laundering programs in place, meet strict record-keeping standards and maintain effective cybersecurity programs.

Disclosure Requirements: The Bill also substantially expands disclosure requirements in the crypto-industry with regard to fee collections and financial standing. Specifically, the Bill requires that every digital asset issuer, broker, marketplace and investment adviser “publicly post and make publicly accessible independently audited annual financial statements” on a quarterly basis and at the end of each fiscal year. Digital asset issuers will also be required to publish and distribute a prospectus stating material information with regards to its business operations, financial condition, risk factors and any conflicts of interest. Digital asset marketplaces must publicly disclose in a schedule posted in an easily accessible manner any fees to be received “from any source whatsoever” related to a digital asset transaction.

Express Prohibitions: The Bill sets forth a number of prohibitions. First, the Bill prohibits any person or affiliate to act in more than one of the following roles: a digital asset issuer, broker, asset marketplace or investment adviser. The Bill also precludes any of the named persons from acting as, employing, or otherwise using the service of any proprietary trading agent. ^[1] Last but certainly not least, the Bill prohibits digital asset issuers from issuing to an investor any note or other debt instrument that: (a) offers interest or a similar expected payment and (b) is payable on demand or otherwise has features of a demand deposit as defined in 12 C.F.R. § 204(b) or that would permit the investor to withdraw cash or digital assets within seven days.

Conclusion

If passed, the CRPTO Act will vastly expand regulation of the growing crypto industry. These changes are likely to be disruptive as they will affect every aspect of the digital asset market.

FOOTNOTES

[1] A proprietary trading agent is any person who engages in the business of offering, buying or selling digital assets for the benefit of the account of a digital asset issuer, broker, marketplace or investment adviser.