New York Attorney General Letitia James proposed a state law to tighten regulations in the crypto sector, which is marked by “rampant fraud and dysfunction” and in need of “law and order,” she said Friday.
“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,” she said.
The Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act, if enacted, would mandate independent public audits of crypto exchanges and block individuals from owning brokerages and tokens to halt conflicts of interest.
One such conflict of interest such a bill would have prevented, according to James’ announcement, resulted in the collapse of the Terra/Luna ecosystem: “[C]rypto company Terraform Labs created a token, Luna, and also created a lending platform, Anchor, that promised 20 percent interest to customers who invested in Luna on Anchor. But investors could only access the 20 percent returns if they purchased another token created by Terraform Labs called Terra. Because Terraform Labs owned Luna and Terra and promised these unsustainable high interest rates, the actual value of the digital assets was masked from everyday investors and set the table for market disaster.”
Crypto platforms should also be required by law to reimburse customers who are the victims of fraud, much like banks’ obligation under the federal Electronic Fund Transfer Act.
These “commonsense regulations” would be the nation’s “most comprehensive set of regulations on cryptocurrency” and would strengthen the New York State Department of Financial Services’ regulatory authority in the digital asset space, the public statement said.
James has come down hard on the crypto world this year, suing ex-Celsius CEO Alex Mashinsky for allegedly defrauding investors, bankrupt crypto exchange Voyager Digital for illegally serving New Yorkers, and KuCoin for failing to register as a security in New York.
Investors have lost hundreds of billions of dollars in crypto investments, James noted. Much of that value has been lost during the ongoing crypto winter, which has seen the value of the prominent cryptocurrency Bitcoin fall from an all-time high of $68,789 in November 2021 to a low of $15,649 almost exactly one year later.
In recent months, some of that value has been gained back; and as of 12:30 p.m., the price of Bitcoin was $29,584.
Some of crypto’s price volatility, James noted in the bill’s announcement, was due to “market manipulation, hacking, and opaque business practices.”
“Currently, the cryptocurrency industry lacks a robust regulation regime that would prevent or intercept fraud and market failures,” the announcement said. “While there are millions of investors who have lost significant investments because of these failures, lower income investors and people of color have been disproportionately harmed by the risks of crypto.”
“Additionally, as cryptocurrency investments have been marketed directly to minority communities, the people most susceptible to fraud and losing significant funds due to financial collapses are disproportionately vulnerable and marginalized Americans,” the announcement said.
The bill would aim to bolster investor protections by requiring crypto firms to enact and codify “know-your-customer” provisions, and require crypto brokers and marketplaces to conduct business only with firms that comply with KYC provisions.
Several lawmakers expressed support for James’ proposed bill in the announcement.
Assembly member Michaelle Solages said it would “create a level playing field for crypto firms and traditional financial institutions.”
“With communities of color increasingly drawn to investing in crypto, it's essential that we introduce common-sense protections to prevent them from facing higher financial risks. The legislation's provision to hold institutions accountable for fraudulent activities and unauthorized transfers will empower customers to make informed investment decisions and safeguard their assets,” Solages said.