New York Attorney General proposes crypto regulation to eliminate conflict of interest and safeguard investors

New York Attorney General Letitia James has proposed a legislation titled the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act. If passed, the act would establish a comprehensive regulatory framework for the cryptocurrency industry in the state. The bill aims to avoid conflicts of interest, improve transparency, and implement reasonable measures to safeguard investors in compliance with regulations that apply to other financial services. The proposed legislation would also require digital asset brokers, marketplaces, investment advisers, and issuers to obtain a license from the Department of Financial Services and comply with reporting requirements.

The proposed crypto regulation notes that the cryptocurrency industry has conflicts of interest that can harm investors and reduce competition. To eliminate these conflicts, the proposed legislation would ban common ownership of crypto issuers, marketplaces, brokers, and investment advisers. The bill would also prohibit brokers and marketplaces from trading for their accounts and prevent marketplaces and investment advisers from holding customer funds.

Another problematic area highlighted by the bill is non-transparency. Some crypto companies misrepresent their financial condition because they are not required to disclose it publicly. To enhance transparency in the cryptocurrency industry, companies would be required to undergo independent auditing, publish audited financial statements, and provide investors with material information. Listing standards would also be established, and cryptocurrency promoters would be required to register and report their interest in any issuer whose crypto assets they promote.

The challenge of investor protection is also taken into account by the bill. Investors risk losing their investments with no recourse when cryptocurrency companies lack insurance and oversight for customer deposits. To strengthen investor protections, this bill intends to implement “know-your-customer” provisions, disallow the term “stablecoin” unless backed by U.S. currency or high-quality liquid assets, and oblige platforms to compensate customers who suffer from unauthorized asset transfers or fraud.

The bill has received support from various state officials and organizations who believe that the lack of transparency in the crypto regulation causes immense harm to investors, especially low-income New Yorkers and people of colour who carry a disproportionate share of the losses. A study by the JPMorgan Chase Institute confirms that cryptocurrency risks have had a greater impact on lower-income investors and people of colour. The findings show how lower-income households purchased crypto at higher prices before the 2022 collapse, resulting in a higher share of losses when the bubble burst.

The Office of the Attorney General will submit this bill to the State Senate and Assembly for consideration during the 2023 legislative session.