As part of its Continuing Legal Education curriculum for its members, the New York City Bar Association brought together several hundred attendees for the “White Collar Crime Institute” yesterday.
Crypto and digital assets were a major focus of the agenda which included arguably the most important state regulator in digital assets – New York Department of Financial Services Superintendent Adrienne Harris – and panel participants comprising state and federal regulators as well as digital asset industry legal counsel including:
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- Paul Grewal, Chief Legal Officer, Coinbase
- Shamiso Maswoswe, Chief of the Investor Protection Bureau for the Office of the New York State Attorney General
- Noah Perlman, Chief Compliance Offer, Binance,
- Alixandra Smith, Deputy Chief, Criminal Division, Eastern District of New York
- David Miller, counsel with Greenberg Traurig (panel moderator)
Below a selection of highlights from yesterday’s event…
Adrienne Harris, Superintendent, New York Department of Financial Services (NYDFS)
On NYDFS mandate:
“I have this dual mandate of regulation supervision and also economic development. I think the thing that surprises most people is to learn that New York both has the most rigorous regulatory framework for digital assets in the country -and probably in the world. If you look at investment in the US – venture capital and private equity investment in digital assets – most happens in New York, which is 2x Silicon Valley, 8x Miami (…). So we see that transparency, that regulatory certainty really helps protects consumers, but it also draws the economic activity.”
On other enforcement entities entering NYDFS’ jurisdiction (such as NY Attorney General):
“I think about it much more cooperatively. We work a lot with Federal law enforcement or U.S. Attorney’s offices, FinCEN, OFAC and after that, you know, the Attorney General in New York has some good authorities and she brought some good cases for unlicensed entities that have not come through the front door – so that’s a very important partnership. But, you know, the thing that’s really made New York a leader is that we have this clarity and transparency around the rules until now, as the federal government goes to put a framework in place for cryptocurrencies for stablecoins, they come to us….”
“There really isn’t a bill that comes through Congress that we’re not asked to weigh in on. There are jurisdictions here in the US and internationally, that come to DFS and say, “We want to provide that same clarity – maybe we want to have that same expertise – how do you build it?” As in the UAE – three weeks ago, there was [interest] to copy and paste what we’ve done in DFS.”
“Illinois, California, UK, Singapore, -they’re all really looking at what we do in [New York State in] different jurisdictions. So I think it’s really that transparency, that clarity and certainty…. We’ve issued guidance, so as the industry rapidly changes, we’re able to put guidance around activities… “Here are our regulatory expectations around blockchain analytics around. (…) And I think it’s that knowledge of the space -we’ve now built a team of 60 people that expertise that allows us to be so nimble go and given us a leadership position.”
Alixandra Smith, Deputy Chief, Criminal Division, Eastern District of New York
An overview of the primary federal agencies in the digital assets “white collar” space…
“In the ‘white collar’ space, the major agencies to be thinking about, obviously, the Department of Justice, all the U.S trades offices as well as the Justice components, primarily the Criminal Division and the National Cryptocurrency Enforcement Team.”
“At its core, the Justice Department is looking at how crypto is being used, also the traditional frauds…. individuals and entities being deprived, market manipulation, but really through the lens of this new technology. And there’s also a lot of focus on sanctions as well. (…)”
“In terms of other federal agencies (…), obviously you have the Securities and Exchange Commission (SEC), which is focused on crypto assets that could be considered securities under the Howey Test, which are recognized as evidence for discussion on how that’s being applied in a [crypto] project. We should be thinking about how we test.”
“And then on the other side is the Commodity Futures Trading Commission (CFTC), which is obviously regulating virtual currencies that can consider commodities.”
“We also have FinCEN – The Financial Crimes Enforcement Enforcement Network at Treasury – which is looking at Bank Secrecy Act and regulating virtual currencies and other digital assets for anti-money-laundering purposes (…)”
“There’s the Office of the Comptroller of Currency, which is looking at crypto in the banking space along with the FDIC.”
“OFAC (Office of Foreign Assets Control), [this is] Treasury as well, [which looks at] sanctions problems. (…)
“And then, we operate in a global economy, so in addition to the Federal government of the United States, it’s important to keep up with federal agencies from other countries.”
“The EU just passed make MiCA – the crypto enforcement act. A very major regulator there is going to be the European Securities and Markets Authority (ESMA) to do some of the major operating in the EU.”
“In the UK right now to the [Financial Conduct Authority (FCA)], although there’s not the same legislation that was passed in Europe. So, the FCA is focused on money laundering and sanctions right now, but we expect there will be additional enforcement in the crypto space for the FCA as well.”
“Depending on what countries you operate in, there’s gonna be a whole other layer of regulators overseas.”
Paul Grewal, Chief Legal Officer, Coinbase
On the need for legislation…
“Our engaging with policymakers and lawmakers is very much in focus on building a bipartisan consensus on the areas where we really don’t disagree.”
“For example, is there really any serious debate to be had that we need to have a spot market regulator for commodities like Bitcoin? We don’t currently have it in the current Federal regime. I think that’s a part of a legislative solution if we all come around.”
“Regardless, I think there is a strong consensus, for example, among most that stablecoins really do require separate protections for investors: audited financial statements, transparency, digital reserve requirements… It’s one of the reasons why, for example, even if we may not agree with every element of the New York Attorney General’s (CRPTO legislation) proposal, there’s a lot to be commended.”
“And perhaps most of all – the process by which standards are being proposed and ultimately implemented: there’s a process set forth that respects the rule of law; there is legislation that is drafted; there is a public transparent process that provides for an opportunity for members of the public – not just the industry – to have some input on what the rules are – that should be [implemented].”
On interaction with regulators…
“I think another thing that’s very important as we struggle to get the clarity that we all want is for industry participants and others to be as transparent as we can about the nature of our engagement with different regulators in different circumstances. It’s one of the reasons why Coinbase, for example, has acknowledged a rather unorthodox approach in describing our engagements with the SEC.”
“We have tried to lay out for public review any criticism of how we have described the business, the nature of our engagements through the [Wells] process and – frankly, that they prevail over anyone and everyone with an interest – the opportunity to draw their own conclusions about whether our positions about some of the issues that are raised are the right ones or not.”
“But I do think that given the nature of this technology, it is critical that there be transparency.”
On special treatment versus accommodations…
“The last think I have to say that I think it’s also very, very important, particularly when it comes to the application of the federal securities laws. It’s sometimes suggested that the digital asset industry is looking for special treatment or a special deal. And look, there may very well be some in the industry who are looking for just that… but, I think it’s wrong to conflate that approach with an approach which merely looks for adaptation of existing standards, existing frameworks to the particulars of this technology. That is not something that is new. That is something that we do all the time when it comes to the application of the Federal securities laws.”
“For example, we make accommodations when it comes to disclosures by issuers, when it comes to particular industries when they have unique characteristics, oil and gas for example. Mortgage backed securities have their own sets of rules. We allow for trading of securities – in certain circumstances – on registered ATS’s with broker dealers, rather than national securities exchanges where it makes sense given the nature of the market, and given the nature of the risks to investors.”
“So we can make accommodations. We do this all the time, for some reason, for some particular cause. We aren’t yet willing to do that in digital assets, and that’s where it needs to be talked about openly, respectfully, politely and transparently.”
On SEC Chair Gensler’s House Financial Services SEC Oversight hearing in April…
“…I can’t help but observe, for example, that even when it comes to testimony before the Congress. The Congress – part of our government charged with oversight of the [Securities and Exchange] Commission – a simple question, such as ‘Is ETH a security or not?’ can’t draw a simple answer. That’s remarkable. Why is that such a difficult question to answer when ETH has been trading for how many years? -whether in futures contracts with ETH as an underlying asset and regulated by the CFTC now for three, four or five years.”
“So I can’t speak to ‘why,’ I can only speak to the ‘what.’ I think the ‘what’ is what is particularly troubling and perplexing – when we see the States, moving in a certain direction, actively care [and] acting with responsibility. And most critically, we see other countries (…) racing ahead of the United States and adopting frameworks, legislative standards, and the like, that are drawing real capital, real investment, real jobs to places outside the United States.”
Shamiso Maswoswe, Chief of the Investor Protection Bureau, New York State Attorney General
On the authorities the New York Attorney General’s office has under the Martin Act (learn more), Section 354 general business laws, and executive laws and how it’s used to police the crypto space….
“354 is a mechanism that allows us to file a complaint to get a court-ordered examination that will be public and court-ordered separately -so if we have a potential defendant who is not being cooperative with us, who is not showing up for examinations, is not providing the documents that they’re supposed provide to us when they’re supposed to provide it to us.”
“It’s a unique facet of the Martin Act that has been very productive for us and effective for us with folks that would like to just ignore subpoenas – to comply and to do that in an open forum.”
“And then 63-12 is our Executive Law, which allows us to pursue any persistent fraudulent conduct in the conduct of business. And so any separate practice … in the conduct of business would be a violation of our Executive Law…. And, just to circle back to this ‘war on crypto’ and whether or not there are ‘good’ actors or ‘bad’ actors, I agree 100% with (Alixandra) that this isn’t a ‘war with crypto.’ This is a an attempt to help real-life New Yorkers. Every day, our office gets innumerable complaints that are filed with us about how they’ve been taken advantage of, lied to and deceived. These are from the 26,000 New Yorkers who were a part of Celsius and now has over $440 million of their money is tied up in a bankruptcy process.”
“It’s almost a billion dollars from Gemini Group in that product that also is tied up in the bankruptcy process. These are people’s retirement savings, their life savings, and they trust these companies that say they are regulated, that say that their products are the safest thing, but then when it comes down to it, Genesis goes down, Celsius goes down – all of these go down. There is no FDIC there. There is no one to help them and recoup that.”
“So this isn’t about a ‘war on crypto.’ It’s about a war on life savings and war on retail investors. It’s about protecting this multi-trillion dollar market. That is is is on the backs of these investors. So innovation and business and all of that is great, but when it comes on the backs of retail investors, then that’s where we get interested and get involved. We need to ensure that investors are not marked.”