Blockchain & Cryptocurrency , Cryptocurrency Fraud , Fraud Management & Cybercrime
New York Tells 2 Cryptocurrency Firms to Cease and DesistAttorney General Tells 3 Others to Provide Information in Latest Enforcement Effort
New York State Attorney General Letitia James on Monday served cease and desist letters to two unnamed cryptocurrency lending platforms that her office says engage in "unregistered and unlawful activities." Three other unnamed platforms were told by James' office to "immediately provide information about their activities and products."
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James' office released redacted versions of the documents. The state's top attorney said the move is an effort to "protect New York investors, and the trading markets more generally, from exploitation by high-risk virtual currency schemes." James emphasized that lending platforms offering investors a rate of return on virtual currencies must register with her office if they are dealing with New Yorkers.
The cryptocurrency lending firm, Nexo Financial, has reportedly been named as one of the parties receiving a cease and desist letter, according to crypto news site Coin Telegraph. Nexo reportedly denies its involvement in any unlawful operations.
A spokesperson reportedly told the site that James' letter was a mix-up regarding intended recipients, and that it uses IP-based geoblocking to prevent New Yorkers from dealing with the services.
The lending platform Celsius confirmed via blog post on Tuesday that it received a request-for-information letter, writing: "Celsius has NOT received a cease and desist from New York state. Celsius has received a request for information ... from New York authorities. We are now working on providing regulators in New York with information about our business and offering."
Celsius continued: "If any regulatory or technical changes are required in a specific jurisdiction, Celsius will provide clear and timely communication as needed."
The Office of the New York Attorney General did not comment further on the announcement when reached by Information Security Media Group. And Nexo and Celsius did not immediately return ISMG's separate request for comment on Tuesday.
'Follow the Law'
The state attorney general noted on Monday: "Cryptocurrency platforms must follow the law, just like everyone else, which is why we are now directing two crypto companies to shut down and forcing three more to answer questions immediately."
The cease and desist letters give the firms 10 days to stop any cited activity, while the request for information sets a Nov. 1 deadline to report back to the OAG.
Michael Fasanello, who has served in various roles within the U.S. Justice and Treasury departments, including for Treasury's Financial Crimes Enforcement Network, or FinCEN, tells ISMG: "[These] actions by New York's OAG should come as no surprise. The State of New York has maintained a highly conservative stance on crypto businesses since around 2015."
Fasanello, who is currently the director of training and regulatory affairs for the firm Blockchain Intelligence Group, adds, "The crypto industry is well aware of the seriousness with which not only domestic regulators, but governments and regulatory bodies worldwide, are treating blockchain technology and cryptocurrency."
Attorneys at the law firm Cozen O'Connor tell ISMG that with the announcement, "James is sending a clear message that crypto companies are not above the law." Meghan Stoppel, a member at the firm, and Keturah Taylor, an associate, continue in a statement: "Oftentimes, state AGs are on the front lines in detecting and addressing consumer protection issues with emerging technologies or 'disruptors' in a given industry. It is key for crypto platforms operating in New York to stay apprised of notices issued to the industry, and enforcement actions such as these."
New York's 'Martin Act'
New York's top attorney noted on Monday: "My office is responsible for ensuring industry players do not take advantage of unsuspecting investors. We've already taken action against a number of crypto platforms and coins that engaged in fraud or that illegally operated in New York. Today's actions build on that work."
Her office is authorized to enforce the state's Martin Act, initially passed in 1921, but used infrequently until the early 2000s, which grants the state attorney general expansive law enforcement powers to investigate and prosecute cases of securities fraud.
The law broadly defines securities instruments - for example, stocks, bonds, notes, foreign currency orders, and others that can be deemed as such.
"The nature and function of the most common virtual currency lending products or services demonstrate that they fall squarely within any of the several categories of 'security' under the Martin Act," James' office said.
She added that the products at issue "promise a fixed or variable rate of return to investors" - delivered by trading with, or lending, those assets. They are deemed securities, then, under the statute, and must register as brokers, dealers, or salespersons, state officials said.
A Nexo spokesperson reportedly told the site Coin Telegraph, however: "Nexo is not offering its Earn Product and Exchange in New York, so it makes little sense to be receiving a cease and desist order for something we are not offering in New York anyway."
The company says it highlights in its Terms and Conditions that it does not offer related products in the state, according to Coin Telegraph.
In February, Bitfinex and Tether settled with James' office in a case alleging that Tether misrepresented its fiat backing. Bitfinex and Tether agreed to pay $18.5 million in damages.
In March, James notified cryptocurrency companies offering similar products that they must register with the state's Investor Protection Bureau.
And last month, James' office won a court order shuttering cryptocurrency trading platform Coinseed, after it allegedly defrauded thousands of investors out of millions of dollars. The court awarded a $3 million judgment against Coinseed and its founder and CEO, Delgerdalai Davaasambuu (see: New York Court Shuts Down Crypto Platform 'Coinseed').
Prosecutors said the platform illegally sold securities and improperly acted as a broker-dealer, and traded in investors' accounts without permission. The activity proceeded, officials said, even after the operation was hit with a lawsuit from James' office in February.
This week's parallel request for information from the three other companies is not legally binding, but in the letter, James' office notes it may rely on subpoena power.
Elsewhere in New York, Governor Kathy Hochul has been asked by businesses and labor groups to deny permits that would convert retired fossil fuel power plants - one just north of Buffalo, the other in the state's Finger Lakes region - into cryptomining facilities. It calls for an environmental assessment, citing immense energy requirements to power mining activity.
This story has been updated to include comments from Celsius.