The New York State Attorney General’s regulatory proposal signals a rather disastrous year 2022 in the cryptosphere. Fraud, market manipulation, conflicts of interest, opacity and endemic dysfunction have intertwined over the past year and led Letitia James to submit to legislative debate in her state what is “the strongest and most comprehensive set of regulations in the country on cryptocurrencies”. This gives a fairly precise list of the risks to which the investor is exposed.
On a capitalization basis alone, the crypto-asset market eroded 60% year-on-year last year, down some 75% from its peak in 2021. But while followers of these assets are used to volatility, the shock wave came mainly from the collapse of the FTX exchange and the bankruptcy of the Celsius Network platform.
The major shortcomings repeatedly criticized for this digital universe have crystallized and underlie Letitia James’ bill tabled on May 5. It would give the Attorney General’s office broader enforcement power over cryptocurrency businesses that do business in the state, while codifying the power of the New York State Department of Financial Services to license participants. industry and oversee the state’s digital asset licensing regime, writes the wall street journal.
“This sector lacks strong regulations, which makes it subject to dramatic market fluctuations, and it has been used to conceal and facilitate criminal behavior and fraud,” says the prosecutor, who draws inspiration from the regulations imposed on other financial services. Here is an overview of the draft Crypto Regulation, Protection, Transparency, and Oversight Act, which sums up a year 2022 rich in “cryptodramas”.
Conflicts of interest
Prevent common ownership of cryptocurrency issuers, exchanges, brokers and investment advisers and prevent any participant from engaging in more than one of these activities;
Prevent cryptocurrency brokers and platforms from carrying out transactions for their own account;
Prohibit the same people from issuing tokens and owning the platforms where those tokens are traded;
Prohibit platforms and investment advisers from holding client funds;
Prohibit brokers from borrowing or lending client assets;
Forbid markets to steer [les investisseurs] to investment services in exchange for remuneration.
Transparency
Submit to a mandatory independent audit and publish audited financial statements;
Provide investors with material information about issuers, including risks and conflicts of interest;
Require exchanges to establish and publish listing standards;
Require cryptocurrency promoters to register and declare their interests in connection with any issuer whose cryptoassets they promote.
Investor Protection
“Cryptocurrency companies — unlike banks — don’t have insurance for customer deposits, which puts them at significant risk of a ‘bank run’ if something goes wrong. Additionally, they often lack comprehensive oversight and reserve requirements to ensure they can meet consumer demand or meet their obligations,” says Letitia James. His bill therefore also provides for:
Promulgate and codify “know your customer” provisions and requiring cryptocurrency brokers and platforms to only do business with companies that comply with these provisions;
To forbid the use of the term “ stablecoin (indexed cyber token) to describe or market digital assets, unless they are collateralized 1:1 by US currency or high quality liquid assets;
Require platforms that they reimburse their customers who are victims of unauthorized transfers or resulting from fraud.