NYAG Warning to Crypto Firms Blurs Regulatory Waters | Sheppard Mullin Richter & Hampton LLP


New York’s leading law enforcement agency recently squandered an opportunity to provide much-needed advice to the digital asset space. On October 18, the Office of New York Attorney General Letitia James (“NYAG”) issued a press release warning of New York businesses offering interest-bearing accounts to clients who deposit virtual currency with of them without having registered under the general business law § 352, et seq. (the “Martin Law”) that they are breaking the law.

The Martin Law establishes the regulatory framework that companies must follow when trading securities and commodities in New York State. The press release cites a list of instruments set out in Martin Law that are considered securities, the trading of which would require registration under the law. The statement goes on to say that “the nature and function of the most common virtual currency lending products or services demonstrate that they clearly fall within one of the many categories of ‘security’ under Martin Law.” However, the statement also presents contrasting uncertainty, failing to specifically identify the aforementioned categories and noting that the legal list is “not exhaustive” and that the legal definition of security should “be read broadly”.

The press release highlights that the NYAG is ready to take action against what it calls “high-risk virtual currency systems,” revealing that the NYAG has already issued two cease and desist letters and three letters of cease and desist. request for information in its crackdown on unregistered businesses, providing a redacted example of each letter. The cease and desist letter provides additional information about the legal status of the NYAG and orders the recipient to cease any illegal activity or explain why the NYAG should not take further action, while the letter of request d The information inquires about the recipient’s virtual currency deposit operations.

The NYAG warning follows actions taken in the digital asset space by various state and federal regulators. Over the past two months, the SEC and Blue Sky authorities in Alabama, Kentucky, New Jersey and Texas have attacked companies offering interest on their clients’ virtual currency deposits, arguing that such offers constitute unregistered securities transactions.

While the NYAG press release, cease and desist letter, and request for information letter (collectively, the “Communiqué”) are long and harsh, they are short on the type of meaningful analysis that an innovative industry eager for advice sought. for over half a decade. The New York opening salvo lacks the definitional clarity, factual context, and legal rationale needed for crypto companies to make informed decisions about their operations.

The release focuses on activities related to “virtual currencies”, but does not define the term or direct readers to a current legal definition. In recent years, courts and regulators have notoriously struggled with the proper classification of various types of digital assets into currencies, securities, commodities or any other instrument. Making no reference to this heated debate and instead resorting to the generic concept of virtual currency, the release fails to move the dialogue forward and provide industry players with concrete advice they can use to determine whether their products fall within the scope of the NYAG warning.

The release also provides few factual details regarding the problematic products at issue, except to indicate that they offer a return on virtual currency deposits and “claim to deliver those returns, among other things, by negotiating with or lending more to them.” this. virtual assets. Its legal justification is also lacking. For example, the cease and desist letter states that these products constitute “securities under Martin Law because they promise a rate of return to investors and deliver that return in (for example) [REDACTED] negotiate with, or lend or mortgage these virtual assets ”, and cites two cases in support of this position: All Seasons Resorts vs. Abrams, 68 NY2d 81, 87 (1986); People c. Van Zandt, 43 Various 3d 563, 569 (Sup. Ct., Bx. Cnty. 2014). However, the release lists these case captions without applying the law to the facts, leaving readers to infer potential legal theories. In All seasons, the court ruled that campground memberships did not constitute securities based on an analysis to determine whether the devices fell within the listed or catch-all definitions of security under Martin Law. In Van Zandt, the court assessed on a case-by-case basis whether several financial instruments, which bore varying degrees of resemblance to the cryptographic instruments covered by the discharge, constituted transferable securities. The statement’s failure to apply the cited law to new developments represents another missed opportunity by the regulator to provide clarifying advice.

The release of NYAG does not happen in a vacuum. The vigorous debates of recent years regarding the appropriate classification of various digital assets have borne fruit. By building on the general concept of virtual currency without providing a factual and legal context that would allow industry players to discern precisely which digital assets are targeted by the warning, the release does little to move the conversation forward. As the NYAG appears poised to enter the market with enforcement action targeting these new instruments, the release misses a valuable opportunity to provide a growing struggling industry with actionable advice that would foster responsible innovation. Without such guidelines, frustration could mark the relationship between New York regulators and digital asset companies for the foreseeable future.

About Harold Shirley

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