New York AG offers law to crack down on backfire-happy cryptocurrencies
It's time to take out the trash
New York State Attorney General Letitia James has proposed a law that would ban cryptocurrency exchanges from trading their own tokens, which in turn might save folks from burning their fingers on erratic or errant assets and investments.
The draft Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act [PDF] is wide-sweeping legislation that would crack down on the crypto-coin industry and perhaps prevent future market meltdowns.
Under CR_PTO – insert your own letter – blockchain businesses creating coins or tokens would be barred from operating as brokers of their digital assets. People managing those companies would not be allowed to trade those coins either, to avoid market manipulation or embezzlement. Cryptocurrency exchanges would not be allowed to keep hold of customer funds like a bank, while brokers would not be allowed to borrow or lend customers' digital assets.
This is all meant to save people from losing their money on coins that were created and managed by exchanges and brokers – a startling conflict of interest, potentially – and from losing their money when a biz secretly bets their savings or account holdings on iffy investments.
"Rampant fraud and dysfunction have become the hallmarks of cryptocurrency and it is time to bring law and order to the multi-billion-dollar industry," James said in a statement. "New York investors should have the peace of mind that there are safeguards in place to protect them and their money.
"All investments are regulated to account for every penny of investors' money — cryptocurrency should be no exception. These commonsense regulations will bring more transparency and oversight to the industry and strengthen our ability to crack down on those that don't pay respect to the law."
James pointed to the downfall of Terraform Labs as an example of what can happen when companies mine and trade their own cryptocurrencies. The startup's TerraUSD stablecoin, whose value was claimed to be pegged to the US dollar, saw its token value crash which caused billions in losses for people.
Similarly, the cryptocurrency exchange FTX also went under last year when its token FTT collapsed, and it was revealed that the company secretly funneled customers' assets to its sister biz Alameda Research, a hedge fund that executed risky trades on their behalf. James said the new rules outlined in CPRTO would prevent financial conflicts of interest.
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CPRTO also called for cryptocurrency companies to be independently audited, and would ban the term "stablecoin" unless a coin really was backed 1:1 with the US dollar or high-quality liquid assets. Cryptocurrency brokers and lenders would also be forced to reimburse customers who have lost assets due to fraudulent transfers made by miscreants breaching personal accounts.
To punish unlawful behavior, the Attorney General would be allowed to issue fines of up to $10,000 per violation per individual, the penalties would be harsher and $100,000 for companies. The US state would be allowed to collect damages and shut down illegal firms.
"Millions of investors have lost hundreds of billions in the value of their cryptocurrency investments because of rampant fraud, including market manipulation, hacking, and opaque business practices. Additionally, as cryptocurrency investments have been marketed directly to minority communities, the people most susceptible to fraud and losing significant funds due to financial collapses are disproportionately vulnerable and marginalized Americans," James' office said.
"Attorney General James' bill seeks to protect New York investors by bringing regulations and oversight that are applied to other financial services to the cryptocurrency industry and addressing risky practices that are unique to crypto." ®