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Any business that deals in virtual currencies in New York may need to register with more than one regulator, recent enforcement cases suggest.
On September 13, New York attorney general (AG) Letitia James announced the closure of two enforcement actions against businesses involved in virtual currency activities.
In a case that began in February, the AG secured a judgment against the virtual currency trading platform Coinseed, banning it from offering its services in New York. The AG alleged that Coinseed unlawfully sold unregistered securities in the form of a digital token.
In another case, announced the same day, GTV Media and its parent company, Saraca Media Group, agreed to pay $479.9m to settle the AG’s claims that they unlawfully sold stocks and two digital instruments, marketed as cryptocurrencies, without registering with state authorities.
Earlier this year, James’ office shut down Bitfinex’s and Tether’s trading activity involving entities in New York, settling charges that the companies falsely claimed that their virtual currency was fully backed by U.S. dollars.
The AG began all these actions under the state’s Martin Act, which gives her authority to issue writs in the name of the people of the state to enjoin fraudulent practices.
In early March, the AG warned virtual currency commodity broker-dealers that failure to register with the office amounted to fraud, which is a crime under the act. The office also noted that people who offer virtual currencies that are securities in New York law must register as securities dealers.
James also reminded industry participants that, in accordance with an Appellate Division decision in July 2020, the Martin Act’s definition of a commodity was broader than the federal definition in the Commodity Exchange Act.
The Coinseed and GTV Media cases are the first cases in which the AG has actually pursued virtual currency businesses that have failed to register as commodities or securities dealers under the Martin Act.
Nonetheless, the AG is not the only public authority with which cryptocurrency firms have to register. Businesses that deal in virtual currencies in New York must also obtain licenses from the New York State Department of Financial Services (NYDFS).
They can apply either for so-called BitLicenses or for limited-purpose trust company charters with additional approval to conduct virtual currency business.
The NYDFS can investigate unlicensed activities which may result in civil penalties, referral to law enforcement, and criminal enforcement actions.
Although neither of the businesses involved in the AG’s cases obtained licenses from the NYDFS to do virtual currency business in New York, there is currently no clear guidance from the agencies as to whether businesses holding BitLicenses are exempt from the Martin Act’s requirement to register or whether they are required to register with both the AG and the NYDFS.
