NYAG Proposes Sweeping Crypto Framework | Practical Law

NYAG Proposes Sweeping Crypto Framework | Practical Law

The NYAG proposed the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act, which would, among other things, require independent public audits of cryptocurrency exchanges, strengthen the regulatory authority of the New York State Department of Financial Services (NYDFS) over digital assets, and require crypto platforms to reimburse customers who are victims of fraud, similar to requirements for banks under the federal Electronic Fund Transfer Act.

NYAG Proposes Sweeping Crypto Framework

Practical Law Legal Update w-039-4216 (Approx. 5 pages)

NYAG Proposes Sweeping Crypto Framework

by Practical Law Finance
Published on 10 May 2023 • USA (National/Federal)
The NYAG proposed the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act, which would, among other things, require independent public audits of cryptocurrency exchanges, strengthen the regulatory authority of the New York State Department of Financial Services (NYDFS) over digital assets, and require crypto platforms to reimburse customers who are victims of fraud, similar to requirements for banks under the federal Electronic Fund Transfer Act.
On May 5, 2023 the New York Attorney General (NYAG) proposed crypto legislation, the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act, which would, among other things:
  • Require independent public audits of cryptocurrency exchanges.
  • Strengthen the regulatory authority of the New York State Department of Financial Services (NYDFS) over digital assets.
  • Require crypto platforms to reimburse customers who are victims of fraud, similar to requirements for banks under the federal Electronic Fund Transfer Act.
To address conflicts of interest in the cryptocurrency industry, the CRPTO Act would:
  • Prevent common ownership of crypto issuers, marketplaces, brokers, and investment advisers and preventing any participant from engaging in more than one of those activities.
  • Prevent crypto brokers and marketplaces from trading for their own accounts.
  • Prohibit crypto marketplaces and investment advisers from keeping custody of customer funds.
  • Prohibit crypto brokers from borrowing or lending customer assets.
  • Prohibit referrals from crypto marketplaces to investment services for compensation.
To increase transparency in the cryptocurrency industry, the Act would require crypto businesses to, among other things:
  • Undergo mandatory independent auditing and publish audited financial statements.
  • Provide investors with material information about crypto issuers, including risks and conflict-of-interest disclosures.
  • Require crypto marketplaces to establish and publish listing standards.
  • Require cryptocurrency promoters to register and report their interest in any issuer whose crypto assets they promote.
To bolster investor protections, the CRPTO Act would:
  • Enact and codify know-your-customer (KYC) provisions that would require brokers to know essential facts about their customers and require crypto brokers and marketplaces to only conduct business with firms that comply with KYC provisions.
  • Prohibit by any digital asset issuer, digital asset broker, digital asset marketplace, or digital asset investment adviser from referring to any digital asset as a "stablecoin" or to represent that any product is similar to a "stablecoin" unless a stablecoin ratio equal to 1.0 or greater is maintained at all times. Under the legislation a stablecoin ratio would be equal to US currency, Level 1 liquid assets as defined in 12 C.F.R. § 249.20, or both, divided by the stated value of the stablecoin.
  • Require crypto platforms to reimburse customers who are victims of unauthorized asset transfers and transfers resulting from fraud.
The CRPTO Act would also grant the NYAG jurisdiction to enforce any violation of the law, issue subpoenas, impose civil penalties of $10,000 per violation per individual or $100,000 per violation per firm, collect restitution, damages, and penalties, and shut down businesses engaging in fraud and illegality. The CRPTO Act would also codify NYDFS’ authority to license digital asset brokers, marketplaces, investment advisors, and issuers prior to engaging in business in New York and allow NYDFS to oversee the digital asset licensing regime.
The proposed CRPTO Act follows the adoption on April 17, 2023 by the New York Department of Financial Services (NYDFS) of a final regulation effective April 19, 2023 that established how companies holding a NYDFS-issued virtual currency (VC) business activity license (BitLicense) will be assessed for annual costs of NYDFS supervision and examination (see Legal Update, NYDFS Adopts BitLicense Assessment Fees).