New York Attorney General Letitia James announced "landmark" legislation to regulate the cryptocurrency industry. The proposals would "increase transparency, eliminate conflicts of interest, and impose commonsense measures to protect investors, consistent with regulations imposed on other financial services."
The bill, called The Crypto Regulation, Protection, Transparency, and Oversight Act (CRPTO), sets out requirements for independent public audits of cryptocurrency exchanges and preventing individuals from owning the same companies, such as brokerages and tokens, to stop conflicts of interest. Crypto platforms "would have responsibilities 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 strengthen the New York State Department of Financial Services’ (DFS) regulatory authority of digital assets.
Overview of CRPTO
1. Stopping conflicts of interest
The bill would stop conflicts of interest by:
- preventing common ownership of crypto issuers, marketplaces, brokers, and investment advisers and preventing any participant from engaging in more than one of those activities;
- preventing crypto brokers and marketplaces from trading for their own accounts;
- prohibiting marketplaces and investment advisers from keeping custody of customer funds;
- prohibiting brokers from borrowing or lending customer assets; and
- prohibiting referrals from marketplaces to investment services for compensation.
2. Requiring public reporting of financial statements
The bill would increase transparency in the industry by requiring companies to:
- undergo mandatory independent auditing and 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 cryptoassets they promote.
3. Bolstering investor protections
At present, the law does not protect investors’ cash or provide a means for returning an investor’s crypto holdings if a crypto exchange, broker, or platform fails.
The bill would bolster investor protections by:
- enacting and codifying 'know-your-customer' provisions, meaning brokers would have to know essential facts about their customers, and requiring crypto brokers and marketplaces to only conduct business with firms that comply with KYC provisions;
- banning the use of the term 'stablecoin' to describe or market digital assets unless they are backed 1:1 with U.S. currency or high-quality liquid assets as defined in federal regulations; and
- requiring platforms to reimburse customers who are the victims of unauthorised asset transfers and transfers resulting from fraud.
The CRPTO Act gives the Attorney General 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 bill would also codify DFS’ authority to license digital asset brokers, marketplaces, investment advisors, and issuers prior to engaging in business in New York and allow DFS to oversee the digital asset licensing regime.
Attorney General James said: “Rampant fraud and dysfunction have become the hallmarks of cryptocurrency and it is time to bring law and order to the multi-billion-dollar industry. New York investors should have the peace of mind that there are safeguards in place to protect them and their money. All investments are regulated to account for every penny of investors’ money — cryptocurrency should be no exception. These commonsense regulations will bring more transparency and oversight to the industry and strengthen our ability to crack down on those that don’t pay respect to the law.”
This bill will be submitted to the State Senate and Assembly for their consideration during the 2023 legislative session.