September 23, 2023

Volume XIII, Number 266


September 22, 2023

Subscribe to Latest Legal News and Analysis

September 21, 2023

Subscribe to Latest Legal News and Analysis

September 20, 2023

Subscribe to Latest Legal News and Analysis

NY Attorney General Proposes to Increase Obligations on Crypto Businesses Operating in NY or with NY Residents

Businesses engaged in certain digital currency activities from or within New York would be subject to enhanced obligations and restrictions if a bill entitled the “Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act proposed by the Attorney General of the State of New York (AG) on May 5, 2023, is enacted into law.  

Among other things, this proposed law is designed to provide (1) the New York Department of Financial Services (DFS) with explicit authority to oversee virtual currency businesses involving New York or with NY residents – as it has been doing since 2015 – and (2) the AG with more expansive enforcement authority over certain enumerated cryptocurrency businesses. The proposed bill, if adopted, would impose significant additional requirements and obligations on relevant digital currency businesses than what are currently required by DFS.

Specifically, the CRPTO Act, if enacted into law, would require every digital asset broker, marketplace, and adviser, as well as every digital asset issuer (such entities, collectively “Covered Entities”) to file a registration statement with the New York Department of Law prior to engaging in business within or from New York. Prior to commencing operation, each such entity would also have to publicly post a certificate of its compliance with all requirements of the proposed law. Afterward, each such entity would have to publicly post independently audited financial statements on an annual basis and unaudited quarterly financial statements.

The proposed law would require Covered Entities to comply with various requirements and obligations aimed to minimize conflicts of interest and enhance transparency. Among other measures, the bill, if enacted, would prohibit:

  • different  Covered Entities from having common ownership, or any one type of Covered Entity from engaging in activities of other types of Covered Entities;
  • digital asset brokers and marketplaces from trading their own accounts;
  • digital asset marketplaces and investment advisers from custodying their customers’ digital assets; and
  • digital asset brokers from borrowing, lending, hypothecating, or encumbering customer assets.

Additionally, as proposed, digital asset marketplaces would have to adopt and publish listing standards for digital assets for which they offer trading. Digital asset brokers would be required to maintain minimum net capital consistent with requirements by the Securities and Exchange Commission for broker-dealers and any requirement enforced by the DFS. Digital asset brokers and advisers would be obligated to provide disclosures to customers regarding customers’ potential liability for unauthorized transfers; the bill also limits or precludes customers’ liability depending on the circumstances. 

If a customer claims a transfer is unauthorized, it is presumed to be unauthorized and digital asset brokers and advisers would have the burden to show that the transfer was authorized, or if unauthorized, to establish the circumstances limiting a customer’s potential liability.

Under the bill, certain trade practice violations (e.g., manipulation, wash sales) would be expressly prohibited in connection with digital asset transactions, and every digital asset broker and marketplace  have to surveil for such types of violations “including those occurring outside of the digital asset broker or digital asset marketplace...”

Prior to issuance of new digital assets, digital asset issuers would have to publish a prospectus setting forth material information regarding the issuer, including, at a minimum, a description of the business, a description of the issuer's financial condition a description of the results of operation, a description of risk factors, a description of conflicts of interest, and the identities of all directors, executive officers, and certain key employees.

For purposes of the proposed law, digital assets appear to be defined as what are commonly known as virtual currencies, namely any type of digital unit that “can be used as a medium of exchange, a form of digitally stored value, or a unit of account.” A digital asset expressly does not include “units that provide an equity interest in a business.” However, other than this reference to equity interests, the definition of digital assets does not clarify when a specific digital asset may be regarded as a non-security or a security.

The bill, if adopted, would also impose obligations on digital asset influencers.

The bill is expected to be introduced during the 2023 legislative session, which expires in June.

©2023 Katten Muchin Rosenman LLPNational Law Review, Volume XIII, Number 151

About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...


From derivatives products to cryptocurrencies, Dan Davis helps clients navigate ever-changing regulatory requirements. Drawing on his years of experience as General Counsel at the Commodity Futures Trading Commission (CFTC), Dan understands how financial services agencies operate. As an experienced complex civil litigation attorney, Dan can defend clients in any forum.

Regulatory perspective meets business-oriented counsel

Clients trust Dan’s experience to help mitigate risks in the face of investigations and enforcement actions and to assess rules issued by financial...