{"id":10457,"date":"2022-05-02T15:18:30","date_gmt":"2022-05-02T15:18:30","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/crypto\/has-new-york-state-gone-astray-in-its-pursuit-of-crypto-fraud\/"},"modified":"2022-05-02T15:18:33","modified_gmt":"2022-05-02T15:18:33","slug":"has-new-york-state-gone-astray-in-its-pursuit-of-crypto-fraud","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/crypto\/has-new-york-state-gone-astray-in-its-pursuit-of-crypto-fraud\/","title":{"rendered":"Has New York State gone astray in its pursuit of crypto fraud?"},"content":{"rendered":"
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The Empire State made two appearances on the regulatory stage last week, and neither was entirely reassuring.\u00a0<\/p>\n

On April 25, bill S8839 was proposed in the New York State (NYS) Senate that would criminalize \u201crug pulls\u201d and other crypto frauds, while two days later, the state\u2019s Assembly passed a ban on non-green Bitcoin (BTC) mining. The first event was met with some ire from industry representatives, while the second drew negative reviews, too. However, this may have been more of a reflex response given that the \u201cban\u201d was temporary and principally aimed at energy providers. <\/p>\n

The fraud bill, sponsored by State Senator Kevin Thomas, looked to steer a middle course between protecting the public from scam artists while encouraging continued innovation in the crypto and blockchain sector. It would criminalize specific acts of crypto-based chicanery including \u201cprivate key fraud,\u201d \u201cillegal rug pulls\u201d and \u201cvirtual token fraud.\u201d According to the bill\u2019s summary:<\/p>\n

\u201cWith the advancement of this new technology, it is vital to enact regulations that both align with the spirit of the blockchain and the necessity to combat fraud.\u201d\u00a0<\/p><\/blockquote>\n

Critics were quick to pounce, however, assailing the bill\u2019s relevance, usability, overly broad language and even its constitutionality.\u00a0<\/p>\n

The Blockchain Association, for instance, told Cointelegraph that the bill as currently written is \u201cunworkable,\u201d with \u201cthe biggest nonstarter being the provision obligating software developers to publish their personal investments online, and making it a crime not to do so. There\u2019s nothing remotely like this in any traditional industry, finance or otherwise, even for major shareholders of public companies.\u201d<\/p>\n

The association further added that all the specified offenses were already covered under New York State and federal law. \u201cThere\u2019s no good reason to create new offenses for \u2018rug pulls.\u2019\u201d <\/p>\n

Stephen Palley, partner in the Washington D.C. office of law firm Anderson Kill, seemed to agree, telling Cointelegraph that New York State already has the Martin Act. This is \u201can existing statutory scheme that is one of the broadest in the country that, in my view, likely already covers much of what this bill purports to criminalize.\u201d <\/p>\n

A threat to trust<\/h2>\n

On the other hand, it\u2019s hard to deny that fraud dogs the cryptocurrency and blockchain sector \u2014 and it doesn\u2019t seem to be going away. \u201cRug pulls put 2021 cryptocurrency scam revenue close to all-time highs,\u201d headlined a Chainalysis December report. The analytics firm went on to declare these activities a major threat to trust in cryptocurrency and crypto adoption.\u00a0<\/p>\n

The Thomas bill concurred, noting that \u201crug pulls are now wreaking havoc on the cryptocurrency industry.\u201d It described a process in which a developer creates virtual tokens, advertises them to the public as investments and then waits for their price to rise steeply, \u201coften hundreds of thousands of percent.\u201d Meanwhile, these malefactors have stashed away a huge supply of tokens for themselves before \u201cselling them all at once, causing the price to plummet instantly.\u201d<\/p>\n

The summary went on to describe a recent rug pull that involved the Squid Game Coin (SQUID). The token began life at a price of $0.016 per coin, \u201csoared to roughly $2,861.80 per coin in only one week and then crashed to a price of $0.0007926 in less than five minutes following the rug pull:\u201d <\/p>\n

\u201cIn other words, the SQUID creators received a 23,000,000% return on their investment and their investors were swindled out of millions. This bill will provide prosecutors with a clear legal framework in which to pursue these types of criminals.\u201d<\/p><\/blockquote>\n

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Are the proposed fixes workable?<\/h2>\n

Some were baffled by some of the remedies proposed in the bill, however, including a provision that token developers who sell \u201cmore than 10% of such tokens within five years from the date of the last sale of such tokens\u201d should be charged with a crime.<\/p>\n

\u201cThe provision that makes it a fraud for developers to sell more than 10% of tokens within five years is preposterous,\u201d Jason Gottlieb, partner at Morrison Cohen LLP and chair of its White Collar and Regulatory Enforcement practice, told Cointelegraph. Why should such activity be considered fraudulent if conducted openly, legitimately and without deception, he asked, adding:<\/p>\n

\u201cWorse, it\u2019s sloppy legislative drafting. The rule is easily circumvented by creating a massive amount of \u2018not for sale\u2019 tokens that simply get locked in a vault, to prevent any sale from crossing the 10% threshold.\u201d<\/p><\/blockquote>\n

Others criticized the bill\u2019s lack of precision. With regard to stablecoins, the bill would require an issuer \u201cnot\u201d to advertise, for example, said David Rosenfield, partner at Warren Law Group. By comparison, most bills of this type \u201cwill mandate certain disclosures or prohibit certain language.\u201d The legislation\u2019s vague and overbroad language \u201cpermeates and infects the bill fatally, in my view,\u201d he told Cointelegraph.<\/p>\n

The bill also stipulates that a trier of fact must \u201ctake into account the developer\u2019s notoriety,\u201d he added. Again, it isn\u2019t really clear what this means. Ask 10 people to define notoriety, and one might receive 10 different answers. Or, take the provision that software developers publish their personal investments. \u201cThis unconstitutionally stigmatizes a class of citizens and developers without a compelling reason that would pass constitutional muster,\u201d Rosenfield said. \u201cThis whole bill will not pass Constitutional requirements.\u201d <\/p>\n

Cointelegraph asked Clyde Vanel, who chairs the New York State Assembly\u2019s Subcommittee on Internet and New Technologies \u2014 and who introduced a companion bill to S8839 in the lower house \u2014 about the criticism that rug pulls and other sorts of crypto fraud are already covered by existing statutes, including the state\u2019s Martin Law. He answered:<\/p>\n

\u201cWhile the Martin Act provides some jurisdiction for the Attorney General to address fraud, we must provide clear authority for New York prosecutors in the cryptocurrency space. This bill provides clear authority regarding cryptocurrency fraud.\u201d<\/p><\/blockquote>\n

When asked for an example of how the bill aligns with \u201cthe spirit of blockchain,\u201d as claimed in the summary, Vanel answered, \u201cInterestingly, one of the main tenets of blockchain technology is trust. This bill will provide the much-needed trust for certain cryptocurrency investments and transactions.\u201d<\/p>\n

Was Vanel \u2014 a self-described entrepreneur \u2014 worried that the legislation might discourage software developers, in particular, the requirement that software developers publish their personal investments online? <\/p>\n

\u201cI want to make sure that New York is a place with a free, open and fair marketplace for entrepreneurs, investors and all to participate,\u201d Vanel told Cointelegraph. \u201cThe disclosure obligation applies exclusively to a developer\u2019s interest in the specific token created. It does not apply to other investments outside of the specific token in question.\u201d<\/p>\n

Gottlieb took issue with some of this characterization, though. \u201cThe bill is not aligned with the spirit of blockchain,\u201d he declared. The bill might use some blockchain terminology, like rug pull, but that doesn\u2019t mean it has grasped the true nature of blockchain. \u201cThe bill has serious flaws that would impede legitimate developers, and the true spirit of blockchain is to encourage development while protecting participants,\u201d he said.<\/p>\n

What is driving the state\u2019s legislators?<\/h2>\n

One suspects this bill may have been hurriedly drafted, given some of the imprecise language cited above. It bears asking, then: What is motivating New York\u2019s lawmakers? A need to catch up with a new technology that many still don\u2019t understand? A desire not to be outdone by other states and locales like Wyoming, Texas and Miami that are busy staking their claims in the crypto territory?<\/p>\n

\u201cRead the 20-page criminal complaint in the recent charges against Ilya Lichtenstein and his wife, Heather Morgan,\u201d answered Rosenfield. He referenced the recently arrested couple charged with stealing crypto valued at $4.5 billion at the time of writing from the Bitfinex exchange in 2016, \u201cand you will appreciate what a challenge legislators and regulators have in combating the ever-increasing level of cryptocurrency fraud, especially in New York State.\u201d More regulation is arguably needed, he added, \u201cbut this bill certainly isn\u2019t it.\u201d<\/p>\n

On the matter of the lawmakers\u2019 motivation, Palley said, \u201cA generous view is that the market is in fact rife with misconduct and in some cases outright fraud, and that legislators wish to make a mark and add laws to the books to address that behavior.\u201d <\/p>\n

On the other hand, a cynic might hazard that it\u2019s nothing more than legislative theater. \u201cThe truth probably lies somewhere in between,\u201d Palley told Cointelegraph, adding: <\/p>\n

\u201cRegardless, I\u2019m just not sure that the new nature of the asset class really calls for new laws to address behaviors that are as old as commerce itself.\u201d\u00a0<\/p><\/blockquote>\n

Wherefore crypto mining?<\/h2>\n

As noted, S8839 was closely followed last week by the passage in the NYS Assembly of a two-year ban on non-green Bitcoin mining. Is the state\u2019s long-simmering crypto wariness beginning to boil over?<\/p>\n

Gottlieb suggested the two events really weren\u2019t comparable. \u201cThe Bitcoin mining legislation, while misguided and faulty, at least comes from an understandable desire to safeguard our environment in interactions with a new technology,\u201d he said. <\/p>\n

The new rug pull legislation, in comparison, may also come from a desire to safeguard investors and prevent fraud, but it offers nothing new. \u201cExisting law covers that concern perfectly well.\u201d <\/p>\n

The Bitcoin mining \u201cban\u201d seemed to have attracted more attention than the rug pull bill last week, but this may have been partly due to a misapprehension. \u201cThis [mining] bill has been framed in the media as a ban on crypto mining. It is not that,\u201d declared NYDIG Research Weekly in its April 29 newsletter. Rather, it is a two-year suspension on some kinds of crypto mining principally aimed at power companies, not Bitcoin miners, said NYDIG, adding:<\/p>\n

\u201cThe New York State Assembly voted to put a 2-year moratorium on issuing air permits to fossil fuel-based electric generating facilities that supply behind-the-meter energy to cryptocurrency mining.\u201d<\/p><\/blockquote>\n

All told, it may be no surprise that New York State seems to be forging its own path on the matter of blockchain and cryptocurrency regulation. After all, \u201cNew York State is the financial engine of the country,\u201d commented Gottlieb. On blockchain-based finance, however, \u201cNew York\u2019s legislative regime has greatly hampered responsible development in the industry.\u201d He cited the state\u2019s BitLicense requirement as an example of one \u201conerous\u201d and \u201clargely ornamental\u201d requirement. Overall, Gottlieb told Cointelegraph:\u00a0<\/p>\n

\u201cNew York lawmakers need to consider whether they want New York to attract and nurture a burgeoning fintech industry, or whether they want to pass more ill-conceived laws that serve little purpose other than to scare away companies.\u201d<\/p><\/blockquote>\n