The Office of New York Attorney General Letitia James ("OAG" or "NYAG") directed two cryptocurrency lending platforms to cease operations within the next 10 days, and three other platforms to provide more information on their activities.

In a redacted demand letter, the OAG asserted that two unregistered crypto lending platforms, which (i) offer interest-bearing products that deliver returns through virtual asset trading or further lending and (ii) deal in Bitcoin, violated the Martin Act ("Fraudulent Practices in Respect to Stocks, Bonds and Other Securities"). The OAG explained that while Section 352(1) ("Investigation by the Attorney General") of the Martin Act defines categories of securities, this list is not "exhaustive" and "other instruments or arrangements can be (and have been) deemed securities under the Act." The OAG argued that the Martin Act is meant "to be read broadly to effectuate its remedial nature," and that the digital assets traded on these platforms fall within the definition. Further, the OAG noted that New York State has the authority to regulate commodity broker-dealers pursuant to Martin Act Section 359-(e)(14) ("Definitions. Registration Requirements") and, as such, the platforms operated as unregistered commodity broker-dealers when dealing with virtual currencies. The OAG said that if the platforms disagree with the assessment, then they must explain why the OAG should not pursue further action.

In a separate informational letter directed toward three additional platforms, the OAG requested that each of the platforms submit certain information by November 1, 2021, including, among other things:

  • a description of each "lending, loan, interest, or deposit/earnings product" that it offers;
  • whether the platform deals in U.S. dollars or "fiat" currency across any product or service;
  • all jurisdictions in which the platforms deal;
  • due diligence processes that concern the identification and verification of user identities, the reporting of suspicious transactions and whether the platform allows for "unverified accounts"; and
  • any current registrations or licenses.

The OAG instructed all five platforms to retain all data (whether active, archived or deleted) relevant to the letter that each was sent.

Commentary: Steven Lofchie

Enforcement actions involving crypto have picked up.

Beyond the timing, there are a number of noteworthy aspects of the action by NYAG Letitia James. First, the actions in regard to the issuance of the interest rate products follow closely on the very public complaint by Coinbase that it was prevented by the SEC from issuing an interest-bearing product that was very similar to others being offered in the market.

Second, the NYAG pointed to its authority under the Martin Act to directly regulate "commodity broker-dealers." This is authority that neither the CFTC (which regulates commodity derivatives, but not commodities directly other than with respect to fraud) nor the SEC has. (The SEC does not regulate commodities.) The NYAG's statement makes explicit that firms that deal in the "cash market" (as opposed to the derivatives market) in cryptocurrencies are subject to registration and regulation in New York State if they do business there.

Commentary: Sebastian Souchet

These enforcement actions by the NYAG should serve as an important reminder to digital asset market participants to pay close attention to state regulation of digital assets. Even while uncertainty remains regarding federal regulation of the digital asset space, a number of states have taken legislative and regulatory action (often in the context of state "money transmission" laws) to address digital assets such as virtual currencies. Furthermore, a unified regulatory approach to digital assets does not appear to exist among the states that have taken such action. Thus, digital asset market participants - virtual currency businesses, in particular - should consult counsel before undertaking business involving digital asset products in a particular state.

Cadwalader's Steven Lofchie contributed to this comment.

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