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Crypto regulation could soon take a step forward in the Empire State, as lawmakers weigh new rules proposed by New York Attorney General Letitia James. The goal is to make a nascent industry look a bit more like Wall Street, at least in terms of how it's overseen.
The state has already garnered a reputation for having a robust compliance framework under the New York State Department of Financial Services (DFS), which has regulated crypto firms under its BitLicense regime since 2015.
The legislation proposed by James would further bolster the DFS’s authority, the Office of the New York State Attorney General (OAG) said in a press release, putting forth rules focussed on conflicts of interest, transparency, and investor protections.
“The multi-billion-dollar industry lacks robust regulations,” it claimed, adding that the proposal puts forth the “strongest and most comprehensive set of regulations on cryptocurrency in the nation.”
The proposal comes amid a nationwide uptick in regulatory scrutiny and follows a turbulent year for the industry, defined by several high-profile bankruptcies and thousands of investors burned. The office called out the conduct of several firms like the defunct crypto lender Celsius and Terraform Labs as examples of behavior that would be outlawed.
The OAG said it will submit the bill—the Crypto Regulation, Protection, Transparency, and Oversight Act, or CRPTO Act—to state lawmakers for consideration during the 2023 legislative session, which will end on June 8.
The bill draws on regulations that already exist in traditional finance, which could be viewed as notable in terms of legitimizing the digital assets space, General Counsel at Hashflow Rahsan Boykin told Decrypt.
“This is a positive move towards greater transparency and accountability,” he said. “The new legislation [...] is aimed at imposing the same rules on crypto firms that many current security industry participants have to comply with.”
However, Boykin noted that state-by-state regulation has the potential to be somewhat counterproductive, pushing companies out of areas with stringent regulations or creating an “uneven playing field” for those that stay.
And while Boykin believes that New York’s CRPTO bill is good, he added that a national regulatory structure would ultimately be best, ensuring the industry is regulated consistently.
A major portion of the bill is devoted to preventing conflicts of interest. Some measures include preventing market participants from being token issuers, marketplaces, and brokers at the same time—requiring them to stick with one role.
Yet, overall, it’s unclear how effective the new rules would be or if they could prevent crypto’s next collapse, Head of Compliance at Zeebu and Valuit Timothy Cradle told Decrypt.
“I like what the DFS is going for,” he said. “However, these aren’t novel rules, and I have concerns that they won’t be effective in achieving their intended aims.”
The OAG claims in a blog post that public disclosure requirements could’ve prevented Celsius’ customers from being blindsided last summer, for example. Cradle contends that audited financial statements for Celsius were available publicly and pre-crash through the UK’s House of Companies.
Requiring private companies to open up their books when they otherwise wouldn’t have to could also be unpalatable, Cradle said, describing it as somewhat of an “ultimatum” toward digital asset firms to comply or stay away.
“I support the requirement,” he said. “I just don’t think it will genuinely protect the consumers.”
The CRPTO bill also includes new rules regarding stablecoins, banning the term from being used to describe digital assets that aren’t fully backed by U.S. dollars or high-quality assets that can easily be converted into cash.
Cradle said it seems like an interesting concept, but he cast doubt on how effective it would be at protecting consumers, saying clever crypto marketers could come up with a new, similar term like “dollar coin,” for example.