NYAG's Warning To Crypto Businesses Muddies Regulatory Waters; Compliance Requirements Remain Elusive

• Published date: 02 December 2021
• Subject Matter: Corporate/Commercial Law, Government, Public Sector, Technology, Government Contracts, Procurement & PPP, Securities, Fin Tech
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Mr Christopher Bosch

New York's chief law enforcement agency recently squandered an opportunity to bring much needed guidance to the digital assets space. On October 18, 2021, the Office of New York Attorney General, Letitia James ('NYAG'), issued a press release warning New York businesses that offer interest-bearing accounts to customers depositing virtual currency without having registered under New York General Business Law ' 352, et seq. (the 'Martin Act') are breaking the law.

The Martin Act establishes the regulatory framework businesses must follow when trading securities and commodities within the State of New York. The press release cites a list of instruments set forth in the Martin Act that qualify as securities, the trading of which would require registration under the statute. The release goes on to state that the 'nature and function of the most common virtual currency lending products or services demonstrate that they fall squarely within any of several categories of 'security' under the Martin Act.' However, the release also fails to identify specifically the aforementioned categories of 'security,' noting that the statutory list is 'not exhaustive,' and the statutory definition of security is to 'be given a broad reading.' The NYAG's warning follows on the heels of action in the digital assets space taken by various other state and federal regulators. In the last two months, the U.S. Securities Exchange Commission ('SEC') and Blue Sky authorities in Alabama, Kentucky, New Jersey, and Texas have taken aim at businesses offering interest on customers' virtual currency deposits, arguing that such offerings constitute unregistered securities trading.

The NYAG press release emphasizes that the NYAG stands ready to take action against what it calls 'high-risk virtual currency schemes,' revealing that the NYAG already has issued two cease-and-desist letters and three information request letters in furtherance of its crackdown on unregistered businesses, providing a redacted example of each letter. The cease-and-desist letter provides additional information regarding the NYAG's legal position and directs the recipient to cease all unlawful activity or explain why the NYAG should not take further action. The information request letter inquires as to the recipient's virtual currency deposit operations.

Though the NYAG's press release, cease-and-desist letter, and information request letter (collectively, the 'Release') are long on tough talk, they are short on the...