New York’s digital asset bill targets blockchain’s Wild West attitudes

New York Attorney General Letitia James is backing a tough new state law that promises to crack down on widespread “fraud and dysfunction” in the blockchain/digital asset industry. The bill’s wording expresses dismay at the way the industry has behaved to date, citing a general lack of transparency and multiple conflicts of interest.

A draft bill, set to pass the New York State legislature despite objections from the “cryptocurrency community,” seeks to amend New York’s general business law, financial services law and tax law with new specifications and definitions for digital assets. It will become law 30 days after a decision in the New York Assembly and Senate.

New York-based companies will soon have to undergo independent audits and publish financial statements, providing more detailed material information to investors about risks and potential conflicts of interest. Digital currency exchanges must publish their asset listing standards, and promoters must register and report any interests they have in individual blockchain projects. Exchanges may also be required to reimburse those who have lost money to fraud or other wrongdoing involving listed assets.

The state also wants to be tougher on companies with official home bases outside its jurisdiction, but which openly target and provide services to New York residents. This point was of particular concern at a recent Senate hearing on fintech and blockchain, where the Bitcoin Association’s Bryan Daugherty testified about his concerns and also the benefits of BSV.

Too many loopholes so far

The absence of clear regulation at the federal level in the US has allowed digital asset companies (mainly exchanges and brokers) to exploit money laundering and fraud loopholes since Bitcoin first appeared over a decade ago.

James said: “It is time to bring law and order to the multi-billion dollar industry. Investors should rest assured that safeguards are in place to protect them and their money. All investments are regulated to account for every penny of investors’ money – cryptocurrency should be no exception.”

Bitcoin was released in 2009 as a technology that allowed cheap, fast digital payments anywhere in the world. The original intent was to facilitate trade and allow new financial opportunities for all, including those historically underserved by the banking system.

While it fulfills this promise (at least, BSV does), the technology has led to thousands of copycat blockchain projects and get-rich-quick investments, those that see digital assets only as commodities to be traded on speculative “bucket shops” – exchanges to earn dollar profit. While some exchanges may have at least a superficial veneer of legitimacy and professionalism, the popularity of digital assets has also led to fraudulent investments and Ponzi schemes that provide no real financial value. The perceived “anonymity” of digital asset transactions (which was strongly promoted by early enthusiasts) also created dark web marketplaces trading in illegal goods, as well as encouraging money laundering and tax evasion.

Blockchain’s promise of anonymous transactions has since proven to be a myth, with criminals from years past discovering that transactions were actually highly traceable. James Zhong of Georgia is one case in point: he thought he had gotten away with a multibillion-dollar theft from the Silk Road Marketplace in 2012, and was sentenced to a prison term last month after a forensic investigation led to a raid. at his house.

Regulation helps reputation

Reducing this type of bad behavior not only benefits society, but also helps the legitimate blockchain industry shake off the stigma it has gained from high-profile media reports of fraud, theft and arrests. Representatives of the digital asset/blockchain industry have publicly resisted new regulations in the name of economic freedoms and privacy, but those complaints sound hollower with each new company’s collapse and large loss of investors’ funds. Stock market founders and “professional” investment managers have become billionaires, while thousands of ordinary users lost their savings.

New York’s law does not target developers or the technology behind digital assets/blockchain, and focuses more on business models that these technologies have created. Many are completely fraudulent, with no connection to actual blockchain technology at all. Others, meanwhile, have exploited blockchain attributes such as difficult-to-trace transactions and near-instant global transactions (as well as general investor naivety) to make big bucks at the expense of ordinary users.

Sam Bankman-Fried’s FTX and Alameda Research have been the most prominent recent examples of this. The two firms commingled each other’s assets, as well as customers’ deposited funds, in ways that should have raised the attention of regulators and several red flags in the “traditional” financial industry. When it all came crashing down in October 2022, it was ordinary investors who took the brunt.

Whether intentional or otherwise, those who oppose the regulations ultimately end up protecting and even encouraging violators. Long-standing regulations in the financial industry developed over decades (even centuries) in an effort to eradicate fraud and exploitation, and there is no good reason for blockchain and its digital assets to seek exemption from these rules. The safer the industry becomes for common users, the more likely it is to be well-managed and reliable, promoting mainstream adoption.

Dr. Craig Wright on CoinGeek Conversations: Crypto regulation will make life easier for BSV

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