New York AG Demands Crypto Platforms Cease Operations

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On October 18, 2021, New York’s Attorney General (NYAG) issued cease-and-desist letters to two cryptocurrency platforms, demanding that they discontinue all operations in New York within ten days for alleged violations of the Martin Act. The NYAG’s office also sent requests for information to three other cryptocurrency firms focused on “tethers,” a type of “stablecoin” cryptocurrency that is tied to the US dollar.

The cease-and-desist letters were reportedly issued to Nexo Financial LLC and another unnamed firm. The NYAG alleged that they offered securities and commodities for sale to New York residents and were not registered to do so as required by the Martin Act, which imposes registration requirements in connection with the sale of securities and commodities in New York. The letters identified the failure to register with respect to the provision of interest-bearing products and securities and unregistered dealing in virtual currencies. Nexo has disputed the NYAG’s claims and notes that it has controls in place to prevent prohibited transactions with New York residents. According to Nexo, it does not permit New York residents to participate in its “Earn and Exchange Program” and implemented IP blocking technology designed to block access based on a user’s geographic location to aid in enforcement of its policy. The NYAG actions against these two crypto firms appear likely to further define the nature of controls that companies operating in the cryptocurrency will be expected to adopt by federal and state financial regulators.

The NYAG’s information requests to the other three crypto firms were not accompanied by orders to cease-and-desist operations. Instead, these letters seek a general description of the firms’ practices and make a specific inquiry for information related to whether the firms offer tethers for sale on their own platforms. Stablecoins generally, and particularly those issued by Tether Holdings Ltd. (called “tethers” or “USDT”), which make up over half of the stablecoin market, have recently fallen in the crosshairs of regulators. This type of cryptocurrency is tied to stable assets, like the US dollar or gold, as a means of avoiding the volatility characteristic of other cryptocurrencies. This stability purportedly enables the coins to function as a bridge between traditional currencies and cryptocurrencies. Stablecoins are also marketed to allow owners of cryptocurrencies to cash out other crypto-holdings at a USD based exchange rate without ever having to transfer their positions into traditional currency.

The NYAG reached a settlement with Tether Holdings Ltd. earlier this year which prohibits the sale of the company’s tethers in New York. Just last week, Tether Holdings signed an agreement with the CFTC to settle charges that it had made misleading statements to investors in connection with its sale of tethers, allegedly having represented that tethers were pegged to fiat currency and entirely backed by fiat assets.

Regulators have raised several concerns related to stablecoins and in recent enforcement actions against Tether allege that the coins are not as stable as they purport to be, thereby providing investors with a false sense of security. Underscoring these efforts by regulators is the uncertainty whether stablecoins should be treated like bank deposits or like securities for regulatory purposes. Until Congress or regulators clarify their expectations for stablecoins, issuers and holders should brace themselves for increased scrutiny under uncertain standards.

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