Can the crypto proposal from the New York AG provide investors with more protection?

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As legislators consider new rules put forth by New York Attorney General Letitia James, crypto regulation may soon advance in the Empire State. 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 established a reputation for having a comprehensive compliance structure under the New York State Department of Financial Services (DFS), which has regulated crypto companies under its BitLicense scheme since 2015.

The legislation suggested by James would further bolster the DFS’s jurisdiction, the Office of the New York State Attorney General (OAG) said in a press statement, putting forth guidelines focusing 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 move comes amid a statewide surge in regulatory scrutiny and follows a difficult year for the business, defined by numerous high-profile bankruptcy and thousands of investors burned. The office cited several companies’ actions, including those of the now-defunct cryptocurrency lender Celsius and Terraform Labs, as examples of conduct that would be forbidden.

A series of government regulation moves

The U.S. government has recently undertaken a series of moves aimed at increasing regulation and scrutiny of the crypto sector. Dubbed by some “Operation Choke Point 2.0”, government entities SEC and CFTC have been going after many of the established players in the industry such as Binance, Coinbase and Bittrex, causing many to decide to sever ties with the U.S.

It appears that we are now beginning to see regulation efforts being started not just at the federal level, but at the level of individual states. Previously, we have heard of regulation efforts in New York State in regards to environmental concerns.

The Office of the New York State Attorney General 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 measure draws on regulations that already exist in traditional finance, which might be considered as notable in terms of legitimizing the digital assets industry, General Counsel at Hashflow Rahsan Boykin told Decrypt.

This is a step in the right direction, he said, increasing accountability and openness.

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 added that state-by-state regulation has the potential to be somewhat counterproductive, forcing companies out of areas with rigorous laws or creating a “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 safeguards include banning market players from being token issuers, markets, and brokers at the same time—requiring them to stick with one position.

“Yet, altogether, it’s uncertain how effective the new rules would be or if they might avoid crypto’s next collapse,” Head of Compliance at Zeebu and Valuit Timothy Cradle said in an interview with Decrypt.

“I like what the DFS is going for,” he added. However, since these aren’t really original rules, I worry that they won’t be successful in accomplishing their stated goals.

In a blog post, the OAG asserts that disclosure laws could have shielded Celsius’ customers from a surprise last summer, for instance. Cradle contends that audited financial statements for Celsius were available publicly and pre-crash through the UK’s House of Companies.

According to Cradle, forcing private companies to disclose financial information when they would not otherwise be required to do so could be unpopular. He likened it to giving digital asset firms a “ultimatum”: either comply or leave.

He said:

I support the requirement. I just don’t think it will really protect the consumers.

The CRPTO bill also introduces new regulations for stablecoins, prohibiting the use of the word to refer to high-quality digital assets that aren’t entirely pegged to the dollar or to assets that are simple to convert into cash.

Although Cradle acknowledged that the idea was intriguing, he questioned how effective it would be at safeguarding consumers, claiming that astute cryptocurrency marketers could coin a new term with a similar meaning, such as “dollar coin,” for instance.

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