On May 5, 2023, New York Attorney General Letitia James introduced the Crypto Regulation, Protection, Transparency and Oversight (CRPTO) Act (the “bill”). We commend the Attorney General for prioritizing cryptocurrency regulation with the aim of protecting consumers and investors. However, as advocates for a balanced approach to cryptocurrency regulation, we have significant concerns about the bill.
The bill lacks clear guidance on essential regulatory questions, such as the distinction between securities and commodities in the crypto realm. Without clear definitions and rules in this area, businesses and investors are left to navigate a regulatory gray area, creating uncertainty and discouraging both domestic and foreign investment in New York’s cryptocurrency market.
Additionally, the bill’s imposition of broad rule-writing authority to the Attorney General raises concerns about over centralization of power and a potential lack of checks and balances in the regulation of this vital industry.
Moreover, The CRPTO Act, in its current form, imposes extensive requirements on a wide range of parties involved in digital asset transactions, from issuers and brokers to investment advisers and even social media influencers. Such broad regulation risks stifling innovation and inhibiting the growth of a sector that has the potential to transform financial services, create jobs, and promote economic growth. These new rules, including extensive registration, disclosure, audit, and business conduct stipulations, could disproportionately impact startups and smaller businesses that are essential to industry innovation but lack the resources to navigate this new regulatory landscape.
Lastly, the bill’s mandate for digital asset intermediaries to reimburse customers for unauthorized and fraudulent transfers might seem like a beneficial consumer protection measure at first glance. However, it could lead to significant financial burdens on companies operating in the crypto space and could drive businesses away from New York State, hurting the local economy and the state’s reputation as a hub for fintech innovation.
While we agree with the goal of creating a safe and transparent environment for cryptocurrency transactions, we urge lawmakers to reconsider the breadth and depth of the CRPTO Act. A more balanced approach would provide clear guidelines, encourage compliance, promote innovation, and ensure that New York remains at the forefront of the digital asset revolution.
Summary of the Legislation
Status: As of May 2023, the bill’s prospects for passage in the New York State Legislature remain uncertain. However, the Attorney General’s press release announcing the draft bill has received positive commentary from numerous political figures, state legislators, and consumer protection advocates.
The Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act proposed by New York Attorney General Letitia James on May 5, 2023, aims to regulate all aspects of the cryptocurrency industry. Here are the key takeaways from the bill:
- Comprehensive Regulation: The CRPTO Act proposes a broad set of measures to regulate the entire cryptocurrency ecosystem. It seeks to expand New York’s oversight of crypto enterprises conducting business in the state, particularly concerning privacy and cybersecurity matters.
- Definition of Digital Assets: The bill defines “digital asset” expansively, including any type of digital unit, such as a cryptocurrency, coin, token, virtual currency, or anything that can be used as a medium of exchange, a form of digitally stored value, or a unit of account. The definition also covers digital units that have a centralized repository or administrator, are decentralized, or can be created or obtained by computing or manufacturing effort, with certain exceptions for tokens used in online gaming, sports wagering, customer loyalty programs, and other favored uses.
- Impact on Various Parties: The CRPTO Act includes provisions that would affect a wide range of parties involved in digital asset transactions. This includes issuers, brokers, investment advisers, marketplaces, and even social media influencers. The bill imposes extensive registration, disclosure, audit, and business conduct rules.
- Rules for Brokers and Intermediaries: Under the proposed legislation, digital asset brokers would be required to maintain net capital similar to securities broker-dealers. Additionally, digital asset intermediaries would have to reimburse customers for unauthorized and fraudulent transfers.
- Restrictions on Practices: The bill proposes to outlaw several common practices in the crypto industry. For example, it would prohibit cross-ownership of digital asset issuers, marketplaces, brokers, and investment advisers; borrowing or lending customer assets; certain trading strategies; and self-custody of digital assets. It would also restrict the use of the term “stablecoin” to describe or market digital assets unless they meet narrow criteria.
- Cybersecurity Requirements: The bill mandates that every digital asset issuer, broker, marketplace, and investment adviser must establish, implement, and maintain a cybersecurity program that complies with state and federal data privacy and cybersecurity laws.
- Verification of Digital Asset Software Code: Digital asset marketplaces would have an additional responsibility to ensure that the digital asset software code aligns with the issuer’s disclosures to purchasers and contains security properties that comply with state and federal laws.
- Enhanced Enforcement and Anti-Fraud Measures: The CRPTO Act proposes new enforcement authority and an anti fraud statute for the Attorney General. If passed, it would grant the Attorney General extensive rule-writing authority.