New York Joins Other States in Enforcement Actions Against Unregistered Virtual Currency Lending Platforms | Jones Day


On October 18, 2021, New York Attorney General Letitia James ordered two virtual currency lending platforms to immediately cease their unregistered and allegedly illegal activities in New York City and sent letters to three other platforms seeking credit. information on their products and lending operations. These actions highlight a continuing trend for state regulators seeking to bring cryptocurrency-related products and services into their purview despite regulatory uncertainty at the federal level.

The cease and desist letter sent to the two virtual currency lending platforms alleged that they were illegally selling or offering for sale the securities under New York’s Martin Law to New York or New York. Yorkers without having registered as a broker, dealer or seller in accordance with the regulations of the Office of the Attorney General (“OAG”). The platforms were asked to cease such activity and confirm that the activity has ceased or explain why the OAG should not take further action. The Martin Law sets out a long list of instruments that are declared to be transferable securities, including “any stocks, bonds, notes, evidence of interest or debt or other transferable securities…” It is a formidable anti-fraud law that the BVG frequently relies on it because it has a six-year statute of limitations and, according to the BVG and some judicial interpretations, does not require proof of justifiable intent or confidence. According to the OAG, since the virtual currency lending products at issue promise a fixed or variable rate of return to investors and claim to deliver those returns, among other things, by trading, lending or mortgaging these virtual assets, they “ fall squarely into one of the many categories of “security” under the Martin Act. A spokesperson for one of the platforms that received a cease and desist letter reportedly said that, contrary to the OAG’s claims, the platform did not offer the offending products in New York and used the IP geoblocking to prevent New Yorkers from accessing products.

From the other three platforms, the OAG requested information regarding, among other things, each loan product they offer, how they use the virtual currency deposited on their platforms, the jurisdictions in which they operate, information on New- Yorkers who accessed the platform, and how a stablecoin is used in their lending products.

Thanks to these actions, New York has now joined five other states – New Jersey, Texas, Alabama, Kentucky and Vermont – that have recently taken regulatory action against participants in the cryptocurrency market, despite the regulatory uncertainty regarding decentralized finance (“DeFi”) and cryptocurrency at the federal level. This trend is expected to continue. Market players should monitor state-level developments and prepare for increased regulatory scrutiny from states, in addition to federal regulators like the DOJ, SEC, and CFTC, who continue to be aggressive.

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