NYAG's Warning To Crypto Businesses Muddies Regulatory Waters

• Published date: 16 November 2021
• Subject Matter: Finance and Banking, Technology, Financial Services, Commodities/Derivatives/Stock Exchanges, 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, the Office of New York Attorney General Letitia James ("NYAG") issued a press release warning New York businesses offering interest-bearing accounts to customers who deposit virtual currency with them without having registered under General Business Law ' 352, et seq. (the "Martin Act") that they 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 exhibits contrasting uncertainty, neglecting to specifically identify the aforementioned categories and noting that the statutory list is "not exhaustive," and the statutory definition of security is to "be given a broad reading."

The press release emphasizes that the NYAG stands ready to take action against what it calls "high-risk virtual currency schemes," revealing that the NYAG has already 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, while the information request letter inquires as to the recipient's virtual currency deposit operations.

The NYAG's warning follows on the heels of action in the digital assets space taken by various state and federal regulators. In the last two months, the 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.

While 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 type of meaningful...