NYAG Takes Action Against Five Crypto Lending Platforms – Technology

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NYAG Takes Action Against Five Crypto Lending Platforms

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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 regardingfederal 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 involvingdigital asset products
in a particular state.

Cadwalader’s Steven Lofchie contributed to this

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