InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Crypto platform to pay $22 million to resolve NY AG suit
On December 13, the New York State Supreme Court entered a stipulation and consent order resolving a suit brought in March against a crypto platform for operating as an unregistered broker-dealer, among other things. As previously covered by InfoBytes, the suit was brought by New York State Attorney General Letitia James who noted this was one of the first times a regulator claimed in court that one of the largest cryptocurrencies available in the market qualified as a security.
As a result of the consent order, the platform is obligated to refund over $16.7 million worth of crypto in its control “by allowing users to withdraw those balances and transferring any remaining balances after ninety days to a third-party fund administrator,” to more than 150,000 investors in New York. In addition, the platform must pay an additional $5.3 million to the state. As part of the agreement, the platform is barred from trading securities and commodities in New York or from making its platform available to New York residents.
Unregistered crypto platform to pay $1.8 million to New York
On June 15, the New York attorney general announced a settlement with a Hong Kong-based cryptocurrency platform to resolve allegations that the company failed to register as a securities and commodities broker-dealer and falsely represented itself as a crypto exchange. The respondent’s platform enables investors to buy and sell cryptocurrency. An investigator was able to create an account on the platform using a New York-based IP address to buy and sell tokens even though the respondent was not registered with the state. (Under New York law, securities and commodities brokers are required to be registered.) The respondent is ordered to refund more than one million dollars to investors and pay more than $600,000 to the state. According to the settlement, investors will receive their refunds in the form of cryptocurrency within 90 days. Additionally, the respondent must cease operating in the U.S., and implement geoblocking to prevent New York IP addresses from accessing its platform. The platform is also banned from offering, selling, or purchasing securities and commodities in New York, and must send weekly emails to its investors in New York, advising them to withdraw their funds from their accounts, or their funds will be transferred to the AG’s office. “Unregistered crypto platforms pose a risk to investors, consumers, and the broader economy,” the AG said, further warning of the serious consequences to other crypto platforms that do not follow New York law. This settlement follows other crypto-related legislation and suits from the New York AG (covered by InfoBytes here).
New York proposes “landmark” crypto legislation
On May 5, New York Attorney General Letitia James announced proposed legislation to increase oversight of the cryptocurrency industry. Calling the “landmark legislation” the “strongest and most comprehensive set of regulations on cryptocurrency in the nation,” James said the bill would increase transparency, eliminate conflicts of interest, and impose “commonsense” investor protection measures consistent with other financial services regulations. Among other things, the bill would strengthen NYDFS’ regulatory authority over digital assets and codify the Department’s ability to license digital asset brokers, marketplaces, investment advisors, and issuers prior to engaging in business in the state. NYDFS would also be given jurisdiction to enforce violations of law within the crypto industry, including by issuing subpoenas; imposing civil penalties of $10,000 per violation per individual or $100,000 per violation per firm; collecting restitution, damages, and penalties; and shutting down businesses found to be engaging in fraud and illegal activities.
The bill would also strengthen investor protections by enacting and codifying “know-your-customer” protections, “[b]anning the use of the term ‘stablecoin’ to describe or market digital assets unless they are backed 1:1 with U.S. currency or high-quality liquid assets as defined in federal regulations,” and requiring crypto platforms to reimburse victims of fraud, similar to a bank’s responsibility under the EFTA. Other provisions would, among other things, (i) implement protections to stop conflicts of interest, including by preventing common ownership of crypto issuers, marketplaces, brokers, and investment advisers and preventing such persons from engaging in more than one of those activities; and (ii) require public reporting of financial statements to increase transparency and mandate that companies be required to undergo independent audits and publish audited financial statements, among other things.
The proposed bill will be submitted by the attorney general’s office to the New York Senate and Assembly for their consideration during the 2023 legislative session.
Crypto platform reaches $1.2 million settlement on alleged compliance failures
On May 1, NYDFS issued a consent order against a cryptocurrency trading platform for engaging in alleged violations of the state’s cybersecurity regulation (23 NYCRR Part 500). According to the consent order, during examinations conducted in 2018 and 2020, NYDFS identified multiple alleged deficiencies in the respondent’s cybersecurity program, as required by both the cybersecurity regulation and the state’s virtual currency regulation (23 NYCRR Part 200). Following the examinations, NYDFS initiated an investigation into the respondent’s cybersecurity program. The Department concluded that the respondent failed to conduct periodic cybersecurity risk assessments “sufficient to inform the design of the cybersecurity program,” and failed to establish and maintain an effective cybersecurity program and implement a reviewed and board-approved written cybersecurity policy. Moreover, NYDFS claimed the respondent’s policies and procedures were not customized to meet the company’s needs and risks. Under the terms of the consent order, the respondent must pay a $1.2 million civil monetary penalty and submit quarterly progress reports to NYDFS detailing its remediation efforts.
New York AG continues crackdown on unregistered crypto trading platforms
On March 9, the New York attorney general filed a petition in state court against a virtual currency trading platform (respondent) for allegedly failing to registeras a securities and commodities broker-dealer and falsely representing itself as a cryptocurrency exchange. The respondent’s website and mobile application enable investors to buy and sell cryptocurrency, including certain popular virtual currencies that are allegedly securities and commodities. The AG noted that this is one of the first times a regulator is making a claim in court that one of the largest cryptocurrencies available in the market is a security. According to the announcement, this cryptocurrency “is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders.” As such, the respondent was required to register before selling the crypto assets, the AG said, further maintaining that the respondent also sells unregistered securities in the form of a lending and staking product. According to the AG, securities and commodities brokers are required to register with the state, which the respondent allegedly failed to do. Additionally, the respondent claimed to be an exchange but failed to appropriately register with the SEC as a national securities exchange or be designated by the CFTC as required under New York law. Nor did the respondent comply with a subpoena requesting additional information about its crypto-asset trading activities in the state, the AG said, noting that the respondent has already been found to be operating in multiple jurisdictions without proper licensure. The state seeks a court order (i) preventing the respondent from misrepresenting that it is an exchange; (ii) banning the respondent from operating in the state; and (iii) directing the respondent to undertake measures to prevent access to its mobile application, website, and services from within New York.
Last month the AG filed a similar petition against another virtual currency trading platform alleging similar violations (covered by InfoBytes here).
New York AG sues crypto trading platform for failing to register
On February 22, the New York attorney general filed a petition in state court against a virtual currency trading platform (respondent) for allegedly failing to register as a securities and commodities broker-dealer and falsely representing itself as a cryptocurrency exchange. The respondent’s website and mobile application enable investors to buy and sell cryptocurrency, including certain popular virtual currencies that are allegedly securities and commodities. According to the AG, securities and commodities brokers are required to register with the state, which the respondent allegedly failed to do. The AG further maintained that the respondent claimed to be an exchange but failed to appropriately register with the SEC as a national securities exchange or be designated by the CFTC as required under New York law. Nor did the respondent comply with a subpoena requesting additional information about its crypto-asset trading activities in the state, the AG said. The state seeks a court order (i) preventing the respondent from misrepresenting that it is an exchange; (ii) banning the respondent from operating in the state; and (iii) directing the respondent to undertake measures to prevent access to its mobile application, website, and services from within New York.
DFPI announces $22.5 million multistate settlement with crypto platform
On January 26, the California Department of Financial Protection and Innovation (DFPI) announced that it entered into a $22.5 million settlement agreement with a Cayman Islands digital asset firm to resolve a securities enforcement action regarding its interest-bearing virtual currency account. As previously covered by InfoBytes, in September 2022, the New York attorney general sued the firm for allegedly offering unregistered securities and defrauding investors. A North American Securities Administrators Association working group—composed of the DFPI and state regulators from Washington, Kentucky, New York, Oklahoma, Indiana, Maryland, South Carolina, Vermont, and Wisconsin—collaborated in the investigation into the firm. The states alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance. According to the New York AG’s complaint, the platform promoted and sold securities through an interest-bearing virtual currency account that promised high returns for participating investors. The New York AG said that a cease-and-desist letter was sent to the platform in October 2021, and that while the platform stated it was “working diligently to terminate all services” in the state, it continued to handle more than 5,000 accounts as of July. The complaint charges the platform with violating New York’s Martin Act and New York Executive Law § 63(12), and seeks restitution, disgorgement of profits, and a permanent injunction. The announcement also noted the SEC entered into a separate settlement with the firm for the same penalty amount, alleging that it to register the offer and sale of its retail crypto-asset lending product (covered by InfoBytes here).
Crypto platform reaches $100 million settlement to resolve alleged compliance failures
On January 4, NYDFS issued a consent order against a cryptocurrency trading platform for engaging in alleged violations of New York virtual currency, anti-money laundering, transaction monitoring, and cybersecurity regulations. According to the consent order, in 2020, NYDFS found significant deficiencies across the respondent’s compliance program, including its Know-Your Customer/Customer Due Diligence (KYC/CDD) procedures, Transaction Monitoring System (TMS), OFAC screening program, and AML risk assessments. As a result of these findings, the respondent agreed to improve its BSA/AML and OFAC compliance programs, including engaging an independent consultant to develop a remediation plan and improve its compliance program.
In 2021, NYDFS launched an investigation to determine whether the respondent’s compliance deficiencies had resulted in any legal violations. The investigation found “substantial lapses in [the respondent’s] KYC/CDD program, its TMS, and in its AML and OFAC sanctions controls systems, as well as issues concerning [the respondent’s] retention of books and records, and with respect to meeting certain of its reporting obligations to the Department.” NYDFS noted that in late 2020 and 2021, the respondent took steps to remediate the issues identified by the Department and the independent consultant; however, substantial weaknesses remained, and its compliance system was inadequate to handle the growing volume of the respondent’s business.
Under the terms of the consent order, the respondent must pay a $50 million civil penalty to NYDFS and invest $50 million in its compliance program. Additionally, an independent third party will continue to work with the respondent for another year, which may be extended at the Department’s sole discretion. NYDFS noted that the respondent has already taken steps to build a more effective and robust compliance program under the supervision of NYDFS and the NYDFS-appointed independent monitor. According to the respondent’s press release, the company “has taken substantial measures to address these historical shortcomings” and “remains committed to being a leader and role model in the crypto space, including partnering with regulators when it comes to compliance and other areas.”
States accuse crypto platform of offering unregistered securities
On September 26, the New York attorney general sued a cryptocurrency platform for allegedly offering unregistered securities and defrauding investors. New York was joined by state regulators from California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont who also filed administrative actions against the platform. The states alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance. According to the New York AG’s complaint, the platform promoted and sold securities through an interest-bearing virtual currency account that promised high returns for participating investors. The NY AG said that a cease-and-desist letter was sent to the platform last year, and that while the platform stated it was “working diligently to terminate all services” in the state, it continued to handle more than 5,000 accounts as of July. The complaint charges the platform with violating New York’s Martin Act and New York Executive Law § 63(12), and seeks restitution, disgorgement of profits, and a permanent injunction.
California’s Department of Financial Protection and Innovation (DFPI) said in a press release announcing its own action that it will continue to take “aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts.” DFPI warned companies that crypto-interest accounts are securities and are therefore subject to investor protection under state law, including disclosure of associated risks.
NYDFS imposes $30 million fine against trading platform for cybersecurity, BSA/AML violations
On August 2, NYDFS announced a consent order imposing a $30 million fine against a trading platform for alleged violations of the Department’s Virtual Currency Regulation (23 NYCRR Part 200), Money Transmitter Regulation (3 NYCRR Part 417), Transaction Monitoring Regulation (3 NYCRR Part 504), Cybersecurity Regulation (23 NYCRR Part 500), and for failing to maintain adequate Bank Secrecy Act/anti-money laundering (BSA/AML) obligations. According to a Department investigation, the platform’s BSA/AML compliance program contained significant deficiencies, including an inadequate transaction monitoring system. Among other things, the platform failed to timely transition its manual system to an automated transaction monitoring system, which was unacceptable for a program of its size, customer profiles, and transaction volumes, and did not devote sufficient resources to adequately address risks. The Department also found “critical failures” in the platform’s cybersecurity program, which failed to address operational risks, and that specific policies within the program did not fully comply with several provisions of the Department’s cybersecurity and virtual currency regulations. According to the press release, pursuant to NYDFS’s Transaction Monitoring Regulation and Cybersecurity Regulation, companies should only file a Certificate of Compliance with the Department if their programs are fully compliant with the applicable regulation.
In light of the program’s deficiencies, NYDFS stated that the platform’s 2019 certifications to the Department attesting to compliance with these regulations should not have been made and thus violated the law. The platform also “failed to comply with the Supervisory Agreement by failing to promptly notify the Department of (a) actual or material potential actions, proceedings, or similar process that were or may have been instituted against [the platform] or any affiliated entity by any regulatory body or governmental agency; and (b) of the receipt by [the platform], or any affiliated entity, of any subpoena from any regulatory body or governmental agency in which [the platform], or any affiliated entity, was the target of the investigation.” NYDFS determined that in addition to the penalty, the platform will be required to retain an independent consultant that will perform a comprehensive evaluation of its compliance with the Department’s regulations and the platform’s remediation efforts with respect to the identified deficiencies and violations.
A Buckley Special Alert is forthcoming.