New York’s Attorney General Letitia James has proposed landmark legislation entitled the Crypto Regulation, Protection, Transparency, and Oversight Act (CRPTO Act) in an attempt to tighten New York’s regulations on the cryptocurrency industry. The CRPTO Act aims to stop conflicts of interest, require public reporting of financial statements, and bolster investor protections. The Attorney General would have jurisdiction to enforce any violation of the CRPTO Act, including the authority to shut down businesses engaging in fraud, and impose civil penalties of up to $10,000 per violation, per individual and up to $100,000 per violation, per firm.

If enacted, common ownership of crypto issuers, marketplaces, brokers, and investment advisors would be prohibited, as any one person or affiliate would be unable to engage in more than one of those activities. Brokers would be prohibited from borrowing or lending customer assets and from trading for their own accounts, and marketplaces and investment advisors would be prohibited from keeping customer funds.

To increase transparency, crypto platforms would be required to undergo mandatory independent auditing, publish audited financial statements, and provide investors with material information about issuers, including risks and conflict-of-interest disclosures. Cryptocurrency promoters would also be required to register and report their interest in any issuer whose crypto assets they promote. It would illegal under the bill for any person to make untrue or misleading statements to induce sales of digital assets, which often occurs in connection with “pump and dump” schemes.

Due to the lack of cybersecurity measures, as well as the lack of oversight and insurance for customer deposits, the CRPTO Act attempts to protect investors by requiring crypto platforms to reimburse customers who are the victims of unauthorized asset transfers and transfers resulting from fraud. At the time a customer opens an account with a crypto platform, the platform would be required to provide customers with a disclosure, summarizing the customer’s liability for any potential unauthorized digital asset transfers, as well as the telephone number and address of the person to notify if the consumer believes that such a transfer occurred. Additionally, every crypto platform would have to create and implement an effective cybersecurity program.

The proposed legislation is just the latest action by the Attorney General to regulate cryptocurrency. As discussed here, in February Attorney General James filed an enforcement action against digital asset exchange, CoinEx, for failing to register as a securities and commodities broker-dealer and for falsely representing itself as a crypto exchange without appropriate registration in violation of New York law.

The bill will be submitted by the Attorney General to the New York State Senate and Assembly during the 2023 legislative session. We will continue to monitor the legislation and post an update when the bill is introduced.