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NYAG Takes Action on Unregistered Crypto Lending Platforms
Practical Law Legal Update w-033-4158 (Approx. 5 pages)
NYAG Takes Action on Unregistered Crypto Lending Platforms
by Practical Law Finance
| Published on 17 Nov 2021 • USA (National/Federal) |
The New York Attorney General (NYAG) ordered two unnamed virtual currency (VC) lending platforms to cease unregistered and unlawful activities in New York State and directed three other unnamed VC lending platforms to provide detailed information about their New York operations.
On October 18, 2021, the New York Attorney General (NYAG) announced that the Office of Attorney General (OAG) issued:
- A cease-and-desist letter directing two unnamed VC lending platforms to cease their unregistered and unlawful activities in New York State within ten days from the date of the letter
- A request letter directing three other unnamed VC lending platforms to provide detailed information to the NYAG about their activities and products offered in New York State by no later than November 1, 2021.
According to the NYAG, VC and cryptocurrency lending platforms are essentially interest-bearing accounts that offer investors a rate of return on VCs that are deposited with the platform. The NYAG asserts that these VC lending platforms must register with the Office of the Attorney General (OAG) if:
- The platforms are operating within New York State; or
- Offering their products to New York residents.
As asserted in the letters, the New York Martin Act (N.Y. Gen. Bus. Law § 352 et seq.) requires entities selling securities from New York State or to New York residents to register as securities dealers and/or commodities broker-dealers (see Practice Note, Enforcement Proceedings Under New York's Martin Act). The NYAG asserts that the nature and function of the most common VC lending products or services demonstrate that the products or services fall squarely within any of several categories of "security" under the Martin Act. According to the NYAG, the VC lending products offered by the lending platforms subject to the letters promised a fixed or variable rate of return to investors and claimed to deliver those returns by, among other things, trading with, or further lending those virtual assets. As a result the NYAG determined that:
- The VC lending products or services offered by these platforms were securities under the Martin Act, in particular, those that accept VC in exchange for a rate of return.
- The entities offering such VC lending products from New York State or to New York residents must be registered with the OAG as brokers, dealers, or salespersons, unless exempted.
In both letters, the OAG states that it has previously expressed its concern that VC businesses, including VC trading platforms, issuers, and those engaging in purchase or sale of assets on behalf of clients are exposing New York residents to significant undisclosed risks. In November 2020, the OAG issued an industry alert to remind VC market participants that if they conduct activity within or from New York State they must be properly registered with the OAG and/or other applicable governmental authorities.
The NYAG notes that that the NYAG and OAG have taken a number of actions against cryptocurrency trading platforms and token issuers recently (see Legal Updates, New York Attorney General Settles with Bitfinex and Tether for Crypto Violations, Brings Unregistered Token Action Against Coinseed and New York Attorney General Obtains Judgment Against Crypto Trading App Coinseed).
For further information on regulation of digital assets, see Practice Notes:
See also Practical Law's Blockchain Toolkit.