On May 5, 2023, New York Attorney General Letitia James announced a landmark bill — the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act — that, if passed, would dramatically tighten regulation on digital assets issuers, brokers, advisors, and marketplaces operating in New York.

Focus of CRPTO Act

In announcing the CRPTO Act, AG James stated that it is meant to bring peace of mind to New York investors by providing safeguards to protect them and their money. AG James went on to call the Act’s provisions “commonsense regulations” and to emphasize that cryptocurrency investments should be regulated “to account for every penny of investor’s money,” just as all other investments are. Overall, this first-of-its-kind CRPTO Act aims primarily to: (1) protect customers and investors in digital assets from fraudulent practices; (2) eliminate conflicts of interest; and (3) increase transparency.

Protection from Fraudulent Practices

To prevent fraud, the CRPTO Act would require all digital asset brokers and investment advisors to maintain an anti-money laundering program in accordance with applicable state and federal laws. Digital asset brokers and marketplaces would also need to establish, maintain, and enforce written procedures and supervisory systems meant to prevent market manipulation, wash trading, insider trading, and/or any other fraudulent trading. The CRPTO Act would require that such brokers and advisors use reasonable diligence to retain certain “essential facts” concerning customers and the authority of any person acting on behalf of such customer(s).

In further effort to prevent fraud, the CRPTO Act would prohibit any digital asset issuer, digital asset broker, digital asset marketplace, or digital asset investment advisor, to refer to or represent that any product is similar to a “stablecoin,” unless a stablecoin ratio equal to 1.0 or greater is maintained at all times.

Conflicts of Interest

The CRPTO Act would also prohibit any person or affiliate from playing more than one of the following roles — digital asset issuer, digital asset broker, a digital asset marketplace, or a digital asset investment advisor — and from utilizing the services of a proprietary trading agent. Additionally, it would ban such brokers and marketplaces from engaging in “cross transactions,” i.e., transactions in which the same individual or affiliate acts as the digital asset broker for both the buyer and the seller, and it would prohibit digital asset brokers from making referrals to digital asset issuers or investment advisors if such a referral would result in either a direct or indirect economic benefit for the broker. Finally, the CRPTO Act would outlaw digital asset marketplaces from taking physical possession or control of a customer’s digital asset for reasons other than effecting a specific transaction, however, digital asset brokers under the Act would need to obtain and maintain the physical possession or control of all fully paid digital assets that they carry, and access to such accounts must be restricted by the brokers to authorized persons only.

Increasing Transparency

The CRPTO Act, if passed, would also implement requirements to promote transparency. For starters, the Act would require (1) every digital asset issuer, digital asset broker, digital asset marketplace and digital asset investment advisor publicly provide independently audited annual financial statements, (2) all digital asset marketplaces to adopt and publish listing standards for those digital assets it lists, including capital requirements for issuers, prospectus requirements and public disclosure of the source code for its listed digital assets, and (3) such marketplaces to publish any fees it is to receive for listing assets or for facilitating a digital asset transaction.

Takeaways

The CRPTO Act comes on the heels of a lawsuit filed by the New York Attorney General’s office against KuCoin and is further evidence of AG James’ continued interest in and scrutiny of the digital assets industry. While no action has been taken on the legislation in the state Senate or Assembly, its enactment would have profound impacts on New York’s crypto and digital assets businesses.