New York Attorney General Proposes “Crypto Regulation, Protection, Transparency and Oversight Act” (CRPTO)
New York Attorney General, Letitia James today proposes the Crypto Regulation, Protection, Transparency and Oversight Act (CRPTO) bill to further regulate rules over cryptocurrency companies operating in the state. Letitia James said rampant fraud and dysfunction have become the hallmarks of cryptocurrency.
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“It is time to bring law and order to the multi-billion-dollar industry,” said Attorney James. “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.”
The CRPTO bill will increase the New York Attorney General Office’s enforcement authority of cryptocurrency firms in the state and also increase the New York State Department of Financial Services’ jurisdiction to license crypto firms and oversee the state’s digital asset licensing regime.
The CRPTO bill would require independent public audits of crypto exchanges and prevent individuals from owning the same companies, such as brokerages and tokens, to stop conflicts of interest. Crypto platforms would also have responsibilities to customers similar to financial institutions 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.
The bill will be submitted for consideration in the New York State Senate and Assembly legislative session starting June 8, 2023.
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General Letitia James’s CRPTO bill is meant to control the crypto industry that will broaden the New York State Attorney General Office’s authority over crypto firms operating in the state.
Under the CRPTO Act, crypto exchanges and firms will be required to publish audited financial statements, reimburse customers in case of fraud, keep custody of customers’ funds, and lend out or borrow customers’ funds. In case of violations, issue subpoenas and impose civil penalties of $10,000 per violation for each individual or $100,000 per violation for each crypto firm.
Attorney General James’ Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act seeks to protect New York investors by bringing regulations and oversight that are applied to other financial services to the cryptocurrency industry and addressing risky practices that are unique to crypto.
1 . Stops Conflicts of Interest
The bill would stop conflicts of interest in the industry 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. Require Public Reporting of Financial Statements
The bill would increase transparency in the industry by requiring companies to, among other things:
- 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 crypto assets they promote.
3. Bolster Investor Protections
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 unauthorized asset transfers and transfers resulting from fraud.
“As the cryptocurrency industry grows and captures the interest of investors across the state, it is imperative that our constituents are appropriately safeguarded against the threats at hand,” said State Senator James Sanders Jr. “
As the Chairman of the Committee on Banks in the New York State Senate, it is no mystery to me that regulated financial markets are essential to avoid consumer fraud and conflicts of interest. Furthermore, with people of color investing in the crypto market at higher rates, the potential for financial harm is greater amongst communities of color.
“The proposed bill’s measures, including cracking down on conflicts of interest, enhancing transparency, and enforcing strict cybersecurity requirements, will create a level playing field for crypto firms and traditional financial institutions,” said Assembly member Michaelle Solages.
“As the digital asset space continues to grow and evolve, it is critical that we establish a legal framework that provides clarity and consumer protection while promoting innovation,” said Assembly member Anna Kelles. “
Attorney General James’ proposed bill does just that by requiring digital asset brokers, marketplaces, investment advisers, and issuers to obtain a license from the Department of Financial Services and comply with reporting requirements
The cryptocurrency industry needs regulation and oversight. However, over-regulation and burden will restrict the growth of the crypto industry. The innovative crypto industry had criticized New York’s BitLicense and moratorium on cryptocurrency mining.
Attorney General Letitia James’ CRPTO bill will be submitted by OAG to the State Senate and Assembly for their consideration during the 2023 legislative session.