Blockchain Legal Resource

On May 5, 2023, New York Attorney General Letitia James released proposed legislation that seeks to regulate all facets of the cryptocurrency industry. Entitled the “Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act,” if enacted the draft bill would substantially expand New York’s oversight of crypto enterprises conducting business in the Empire State.

On March 24, 2022, the US Attorney for the Southern District of New York announced charges against two defendants and alleged an ongoing fraud involving the sale of nonfungible tokens (NFTs). The federal criminal case is among the first involving NFTs and foreshadows further regulatory scrutiny of the popular digital asset class.

In the fall of 2018 we posted a state-by-state summary of smart contract legislation which included an overview of legislation passed in Arizona, Tennessee and Vermont, as well as an update on legislation pending in other states at the time. Over the past few years, a multitude of states have tackled smart contract legislation with varying degrees of detail and success. Most state smart contract legislation has fallen into three broad categories: formation of exploratory committees, recognition of basic smart contract concepts and comprehensive treatment of smart contracts and related technologies.

In a letter released to the public on April 10, 2019, New York’s Department of Financial Services (DFS) denied Bittrex’s two separate applications to engage in a virtual currency business and to engage in money transmission activity in New York state. The action came after an extended trial period in which DFS sought to “address continued deficiencies and assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector.”

A vigorous competition among the states to regulate digital assets has begun to develop. Some states, such as New York, have adopted regulations that take a very proscriptive approach to regulation in the interest of consumer protection. States like Wyoming, on the other hand, see an opportunity to stimulate the local economy and take a far more permissive view of digital assets. Two bills now under consideration by the Wyoming Legislature seek to further expand the digital asset economy in the state.

Not only do operators of virtual currency businesses face a growing body of overlapping federal regulations, but they must also contend with a patchwork of state laws as well. Compliance with state money transmitter laws, which typically provide for licensure and supervision of various non-bank financial services companies that handle cash on behalf of consumers, has become a hot-button issue for members of the crypto community. 

On November 1, 2018, the New York Department of Financial Services (“DFS”) announced its approval of the first virtual currency license for an operator of Bitcoin teller machines (“BTM”). According to DFS, to date it has now approved 12 charters or licenses for companies in the virtual currency space.

On Monday, October 22, 2018, Judge J. Paul Oetken of the Southern District of New York granted Alibaba Group Holding Limited’s (“Alibaba”) motion for preliminary injunction in a trademark action against several foreign-based promoters and developers of a new cryptocurrency called “AlibabaCoin.” In doing so, the court considered several novel issues around personal jurisdiction and blockchain.

A new report from the New York Attorney General (“NYAG”) summarizes the findings of its recent Virtual Markets Integrity Initiative (the “Initiative”). The NYAG concluded that crypto trading platforms vary significantly in their risk management strategies and in the ways they fulfill customer responsibilities. The NYAG also identified three broad areas of concern: (1) potential conflicts of interest, (2) lack of serious efforts to impede abusive trading activity, and (3) limited protections for customer funds.

On September 10, 2018, the New York Department of Financial Services (“DFS”) authorized Gemini Trust Company and Paxos Trust Company to each offer a price-stable cryptocurrency, also known as a stablecoin, pegged to the U.S. dollar. Both Gemini and Paxos hold limited purpose trust company charters under the New York Banking Law and are authorized to offer services for buying, selling, sending, receiving and storing virtual currency. Gemini is controlled by the Winklevoss brothers, whose application for a Bitcoin ETF was recently denied by the SEC.

Recently, several states have passed legislation allowing the use of smart contracts and blockchain technology in various commercial contexts. A “smart contract” is commonly defined in such legislation as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared and replicated ledger that executes a contract or any provision(s) of a contract by taking custody over and instructing transfer of assets on the ledger. 

Recently, the International Law Section of the New York State Bar Association published its annual International Law Practicum issue featuring an extensive collection of articles discussing cryptocurrency regulation in various jurisdictions around the world. Hunton Andrews Kurth partner Torsten Kracht served as editor of the issue, and associate Mayme Donohue contributed an article called “Blockchain and Cryptocurrency: An Introduction and Primer.”

Articles are reprinted with permission by the New York State Bar Association, One Elk Street, Albany, NY 12207.

On July 12, 2018, a federal judge of the U.S. District Court for the Eastern District of New York reaffirmed its view that cryptocurrency fraud is subject to the U.S. Commodity Futures Trading Commission’s (“CFTC’s”) anti-fraud and anti-manipulation enforcement authority. The ruling involved a federal civil enforcement action filed by the CFTC in January 2018 against Patrick McDonnell and his company, CabbageTech, Corp. d/b/a Coin Drop Markets (“CDM”), charging the defendants with fraud and misappropriation in connection with purchases and trading of the virtual currencies Bitcoin and Litecoin. The CFTC’s complaint alleges that McDonnell and CDM operated a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM in exchange for purported virtual currency trading advice, and for virtual currency purchases and trading on behalf of customers under McDonnell’s direction.