NY OAG Tries Its Hand at Crypto Regulation: Expert Take

As announced in its press release, the OAG sent information requests to thirteen cryptocurrency trading platforms, including some with no nexus to New York, as exchanges such as Kraken and Bitfinex purport to block New York users.

The OAG press release cites that the OAG, as New York's chief law enforcement agency, has an interest in the requested information as it is "The Attorney General's duty to protect [New York] consumers and ensure the fairness and integrity of financial markets." The press release cites undisclosed "Published reports" which indicate the "Sector" has "Attracted fraudsters, market manipulators, and thieves" which, in their view, brings the whole "Sector" into the purview of the OAG as it "Is responsible for protecting consumers and investors from these bad actors and ensuring the fairness and integrity of New York's financial markets."

Given New York State's history of interactions in the crypto space, which include the BitLicense but also more recently the announcements of electricity tariffs that hit crypto mining companies, many are speculating as to the purpose of the Inquiry as well as the intent behind the broader Initiative.

The OAG, seemingly somewhat self-aware enough to acknowledge that they are potentially stepping into the existing realm of jurisdiction of New York State's Department of Financial Services, again as far as it relates to the Exchanges with an actual nexus to New York, notes that their role in this sector is "Is separate from, but complementary to," that of DFS, which, in their words "Established a first-in-the-nation licensing protocol that requires virtual currency trading platforms and other firms engaged in virtual currency business activities to receive approval to operate and follow certain regulatory requirements."

While it is also notable that the language in the request itself contains less bravado than the press release and is more conciliatory, the OAG will be able to change its tune to the extent New York residents have wrangled their way onto Exchanges despite efforts to block them.

The request describes the recipients as being targeted due to their status as "Major virtual currency trading platforms" rather than alleging that all have a substantiated nexus to New York and words the Inquiry as a "Request [of] the participation of in OAG's Virtual Markets Integrity Initiative, which seeks to protect the interests of New York residents who trade virtual currency and related investment products."

"The OAG acknowledges the potentially tenuous nature of any assertion of jurisdiction over other Exchanges in the sample through the footnote stating that the OAG is"aware that certain trading platforms have formal rules barring access in New York and may not have a license to engage in virtual currency business activity in New York." Among other topics, we are asking platforms to describe their measures for restricting trading from prohibited jurisdictions.

The OAG is well aware of this, when prompted on Kraken's refusal to engage them, subsequently citing that they have enforcement jurisdiction over foreign and out of state companies that operate in New York.Next Steps in the Space.

To the extent pursued actively by Mr. Scheiderman's successors, it may well be the state's first step into regulating the crypto markets under New York's Martin Act, which gives the OAG broad authority to investigate violations of the same.

Despite the long term direction of the Virtual Markets Integrity Initiative, this seems to be another shaky step forward by New York in its attempts to produce cutting edge regulatory oversight in the crypto space and one that does not seem well coordinated with New York's existing regulations under DFS or federal regulators.