State Attorneys General Are Paying Attention To Crypto! – Technology

While active in the space for several years, state attorneys
general have taken increasingly aggressive action over the last
year to regulate crypto-based products and services and prosecute
those abusing this otherwise exciting innovation. In this article,
we summarize the basics of crypto, as well as recent actions by
state attorneys general involving crypto-based products and
services.

Crypto in a Nutshell

As a digital currency, cryptocurrency does not exist in any
physical form, cannot be placed in a leather wallet like cash, and
is not held in a bank with four walls and a villain-proof vault.
Built on blockchain technologies, the most popular cryptocurrencies
employ cryptography to manage and record transactions on
decentralized and distributed ledgers.

Because they employ decentralized and distributed ledgers,
cryptocurrencies and cryptocurrency-based financial product are not
tied to financial institutions nor directly 
controlled by many of the laws and regulations that govern
financial institutions¹ — and that’s a
sore spot for some regulators concerned that a lack of regulation
has already facilitated all sorts of abuse.

Although not (yet) used for most financial transactions, the
value of cryptocurrencies — and the related potential for
abuse — has grown enormously. As of April 2021, the total
market value of the various publicly available cryptocurrencies
went as high as $2 trillion,² and just last month,
the FTC noted that since October 2020, nearly 7,000 people have
reported losses of more than $80 million in cryptocurrency-related
scams.³

To address these growing concerns, a number of state and federal
regulators have taken steps to regulate cryptocurrencies. But at
least at present, that’s resulted in a patchwork of state and
federal laws, rather than a comprehensive and coherent regulatory
regime. As Treasury Secretary Janet Yellen noted this May,
“While there are several agencies that arguably have some
ability to address [cryptocurrency] through regulation, I frankly
don’t think we have a framework in the United States that is
quite up to the task.”⁴

That said, state attorneys general are doing what they can
– and are certainly paying attention to consumer protection
issues related to crypto-based products and services.

State Action

Some states have taken steps to encourage crypto-related
innovation. As recently as May 2021, Nebraska Governor Pete
Ricketts signed legislation that created a state bank charter for
digital asset depository institutions and allows existing
state-chartered banks in the state to open cryptocurrency banking
divisions, which could spur growth in Nebraska for the crypto
market.⁵ Yet, the more prominent trend is
aggressive enforcement activity challenging crypto-related
financial products and services.

For example, in September 2020, Massachusetts Attorney General
Maura Healey sued Stripe, Inc. for inappropriately facilitating
transactions by individuals engaged in an initial coin offering
(ICO).⁶ Attorney General Healey alleged that these
individuals fraudulently sold PlexCoin, resulting in the fraudulent
and unregistered offer and sale of
cryptocurrency.⁷ In addition to a $120,000 payment,
Stripe agreed to improve its risk monitoring procedures, including
enhancing duplicate screening procedures for accounts with shared
bank accounts, improving merchants’ websites monitoring,
revising its procedures for handling law enforcement requests, and
conducting employee training for risk monitoring.⁸

In February 2021, New York Attorney General Letitia James
entered into a settlement agreement with Tether, a cryptocurrency
trading platform that purported to offer a “stablecoin”
backed by the U.S. dollar.⁹ Attorney General James
alleged that Tether made false statements about its cryptocurrency,
which was not fully backed by U.S. dollars.¹⁰ In
the settlement agreement, Tether agreed to pay $18.5 million in
penalties, cease trading activity with New Yorkers, and provide
more transparent disclosures about the backing of its
stablecoin.¹¹

Also in February 2021, Attorney General James filed an action
against Coinseed, Inc. and two of its top executives. Attorney
General James alleged that the Coinseed defendants unlawfully
traded cryptocurrencies without registering as broker-dealers, and
that they failed to disclose certain fees connected with trading
virtual currencies on their investors’
behalf.¹² More recently in May, Attorney General
James filed a motion in the Coinseed lawsuit, asking the court for
a temporary restraining order, a preliminary injunction, and the
appointment of a receiver to immediately block the Coinseed
defendants from making additional unauthorized
trades.¹³

What’s Next?

We expect more regulatory scrutiny of crypto-based products and
services. As their recent activity demonstrates, state attorneys
general will stay at the forefront of this action.

Footnotes

1 For a more detailed understanding of cryptocurrency,
review the article, “What is Cryptocurrency?” by Kate
Ashford and Josh Schmidt. https://www.forbes.com/advisor/investing/what-is-cryptocurrency/.

2 Noah Manskar, “Cryptocurrency Market Value Tops $2
Trillion for First Time.” The New York
Times (Apr, 6, 2021), https://nypost.com/2021/04/06/cryptocurrency-market-value-tops-2-trillion-for-first-time/.

3 “Cryptocurrency buzz drives record investment scam
losses.” Federal Trade Commission (May 17, 2021), https://www.ftc.gov/news-events/blogs/data-spotlight/2021/05/cryptocurrency-buzz-drives-record-investment-scam-losses.

4 “Yellen Says U.S. Lacks Adequate Regulatory
Framework for Crypto.” Bloomberg Tax (May
4, 2021), https://news.bloomberglaw.com/daily-tax-report/yellen-says-u-s-lacks-adequate-regulatory-framework-for-crypto?context=article-related.

5 Jared Austin, “Cryptocurrency to be Regulated in
Nebraska.” 1011 Now (May 26, 2021), https://www.1011now.com/2021/05/27/cryptocurrency-to-be-regulated-in-nebraska/.

6 “Payment Processor to Pay $120,000 in Connection
with Cryptocurrency Scheme.” Office of Mass. Att’y General
(Sept. 18, 2020), https://www.mass.gov/news/payment-processor-to-pay-120000-in-connection-with-cryptocurrency-scheme.

7 Id.

8 Id.

9 “Attorney General James Ends Virtual Currency
Trading Platform Bitfinex’s Illegal Activities in N.Y.”
Office of N.Y. Att’y General (Feb. 23, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal.

10 Id.

11 Id.

12 “Attorney General James Sues to Shut Down Illegal
Cryptocurrency Trading Platform and Virtual Currency, Seeks to
Recoup Defrauded Funds for Thousands of Investors.” Office of
N.Y. Att’y General (Feb. 17, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-sues-shut-down-illegal-cryptocurrency-trading-platform-and.

13 “Attorney General James Seeks Court Order
Immediately Halting Continued Fraud by Illegal Virtual Currency
Trading Platform.” Office of N.Y. Att’y General (May 7,
2021), https://ag.ny.gov/press-release/2021/attorney-general-james-seeks-court-order-immediately-halting-continued-fraud.

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