, a bill that Attorney General Letitia J. proposed on Friday, would give the New York Department of Financial Services greater authority to regulate digital asset exchanges, and require them to reimburse their customers in cases of fraud.

James stated that “we’re proposing commonsense steps to protect investors, and stop the fraud and dysfunction which have become hallmarks of crypto.”

New York’s legislation could be a direct opposition to some of the core tendencies for crypto companies, which include trading platforms, custody, and brokerage services. This all-in one approach would be considered a conflict of interest under the proposal by the attorney general. The bill also aims to prohibit marketplaces from holding customer funds.

James tweet Friday that she has been taking action against crypto companies Celsius and KuCoin, claiming they are commodities or securities, despite the gray area in the law. The bill would give her additional enforcement powers. New York is the de facto leader of U.S. crypto regulation in the absence of federal oversight. Other states, including California and Illinois, have tried to follow suit but have not yet implemented regulations.

The proposed legislation is aimed at a wide range of stakeholders, from crypto issuers to exchange platforms and digital asset influencers. All will be subject to detailed disclosure obligations. James’ tweet stated that investors would receive details about risks and conflicts of interests, and crypto companies would not be allowed to borrow or loan customers’ assets.

A press release from Friday stated that the bill would give the Attorney General the authority to enforce any law violation, issue subpoenas and impose civil penalties up to $10,000 per violation for an individual or $100,000 for a firm. It would also collect restitution and damages and penalize businesses who engage in fraud.

The New York Department of Financial Services (NYDFS) supervises the controversial “BitLicense” in the state. However, the support for James’ bill from members of the legislature of the state suggests that the regulator did not have sufficient authority to oversee this sector.

State Senator Kevin Parker, who represents Westchester County in the state legislature, said that the legislation was “groundbreaking”.

Brad Lander, New York City Comptroller, said that the lack of transparency in the crypto industry is causing immense harm to many investors. This includes low-income New Yorkers as well as people of color. They bear a disproportionate amount of losses.

A spokesperson for NYDFS told CoinDesk that it was the “only prudential regulatory authority” in the U.S. that had crypto-specific jurisdiction. “DFS’s priority is to ensure that markets and consumers are protected, and that New York remains the global financial centre.”

The spokesperson stated that “Recent DFS guidelines have made clear expectations regarding the use of Blockchain analytics technology, U.S.-dollar-backed stablecoins, banks engaging virtual asset activity, as well as consumer protections due to insolvencies.” The Department of Financial Services was the first regulator in the world to deal with Binance. It ordered Paxos not to mint Paxos BUSD. This prevented harm to consumers. After an investigation, the Department reached a settlement of $100 million with Coinbase. The investigation revealed that Coinbase was susceptible to serious criminal activity such as money-laundering, suspected child abuse material, and possible narcotics.

James filed a suit in March against KuCoin, claiming that tokens such as ether (ETH), should have been registered at her office. In a lawsuit against CoinEx , the claimed the same thing about the LUNA token associated with the now defunct stablecoin, terraUSD.

Alex Mashinsky (founder of Celsius) denied earlier this week that James claimed that he misled investors regarding the crypto lender prior to its bankruptcy filing last year. He said that James had cherry-picked statements made to investors.

James’ bill codifies NYDFS authority to license, oversee, and regulate crypto brokers, markets, investment advisors, and issuers before operating in the State.

Andrew Hinkes, partner at K&L Gates law firm, tweeted the bill is ” doomed to fail“, because it misunderstands crypto. Hinkes stated that it won’t possible to apply these provisions to decentralized organisations, and there is no market to provide the type of auditing and insurances James proposes.

It must be approved by the state legislature before it becomes law.

On Friday, the Wall Street Journal as well as Bloomberg both reported on this bill.

UPDATE (5 May 2023, 14.00 UTC): Adds details to James’ tweet.

Update (May 5, 2023 at 14:10 UTC). Added a quote by Andrew Hinkes.

UPDATE (5 May 2023, 1620 UTC) Updates the sourcing and adds details from the bill and press release.

UPDATE (5 May 2023, 22:50 UTC). Adds a statement from NYDFS.

Parikshit and Jesse Hamilton edited the book.