New York attorney general proposed sweeping crypto market rules

New York Attorney General Letitia James announced the Crypto Regulation, Protection, Transparency, and Oversight Act on May 5, 2023, proposing a broad state framework for cryptocurrency issuers, brokers, marketplaces and investment advisers.

The 25-page draft, known as the CRPTO Act, would separate business functions commonly combined inside crypto companies, require public financial reporting and expand the supervisory and enforcement authority of both the attorney general and the New York State Department of Financial Services.

The proposal was not law on May 5. It was an attorney general’s program bill intended for consideration by the state Legislature, and its sponsor fields remained blank in the published draft. No company was required to restructure merely because James announced it.

A challenge to vertically integrated platforms

The most consequential provision would prohibit a person or affiliate from acting in more than one of four roles: digital-asset issuer, broker, marketplace or investment adviser. The draft would also prohibit those businesses from employing a proprietary trading agent.

That structure directly challenged the integrated model used across the crypto industry, where one corporate group could operate a trading venue, broker customer orders, custody assets, issue tokens or trade for its own benefit. Under the proposal, marketplaces could take control of customer assets only to complete a specific transaction, while brokers would be prohibited from borrowing, lending, rehypothecating or otherwise encumbering customer assets.

The draft also barred brokers from trading for their own accounts except where permitted by subsequent rules. Marketplaces and advisers could not maintain customer custody under the general framework, and compensated referrals from brokers to issuers or investment advisers would be prohibited.

These provisions represented proposed safeguards, not a finding that every integrated platform had abused customers.

Audits, disclosures and listing standards

Covered issuers, brokers, marketplaces and advisers would have to publish independently audited annual financial statements within 105 calendar days after their fiscal year ended. They would also publish quarterly statements within 17 business days after each quarter.

Marketplaces would have to disclose fees and adopt public token-listing standards. The draft contemplated issuer prospectuses containing material information and required compensated digital-asset promoters meeting its definition of “influencer” to register and disclose interests connected to promoted assets.

The bill’s stablecoin provision addressed marketing terminology rather than banning dollar-linked tokens outright. A business could not describe an asset as a “stablecoin” unless the stated value was backed at a ratio of at least one-to-one by U.S. currency, federally defined Level 1 liquid assets, or both.

Customer transfers and state enforcement

The proposal would create reimbursement duties for specified unauthorized digital-asset transfers, including transfers induced by third-party fraud. Its framework placed evidentiary and investigation obligations on covered brokers and investment advisers after customers reported unauthorized activity.

Violations could expose an individual to as much as $10,000 per violation and another person or firm to as much as $100,000 per violation. The draft alternatively allowed a penalty based on the greater pecuniary gain or loss resulting from the violation. Those were proposed maximums subject to enforcement and court process, not automatic fines imposed on May 5.

The attorney general would receive registration, subpoena, rulemaking and enforcement authority. DFS would retain its existing role and gain express authority to supervise and examine registered digital-asset businesses. That proposed dual structure built on New York’s BitLicense and limited-purpose trust regimes rather than replacing them.

What the announcement established

The defensible May 5 conclusion was that a major financial state had produced a detailed legislative blueprint responding to the failures and conflicts exposed during the 2022 crypto downturn. The proposal could have forced substantial operational separation across exchanges, custodians, token issuers and advisers serving New York.

It did not establish legislative support sufficient for passage, resolve how decentralized protocols or noncustodial software would be treated, or create enforceable customer rights on May 5. Those questions depended on the legislative process and any implementing rules that might follow enactment.