NOW: Reviewing state regulation of digital assets, January 2020

January 13, 2020

Blockchain Technology & Digital Assets Alert

Author(s): Daniel A. Schnapp

State agencies and attorneys general will likely continue to become more active in the digital asset space. New York, Wyoming, and Montana have been the first movers in creating and enforcing state regulations on digital assets, but other states are beginning to step forward.

Why are state attorneys contacting companies and funds that transact in digital assets?

States have concurrent jurisdiction over securities, and thus are players in the digital assets space. The state actions have similar contours to the federal enforcement actions, focusing on violations of state securities laws, fraud, and consumer protection. The New York Attorney General’s Office has been the most active in the space, bringing an action against large crypto exchange Bitfinix in early 2019.

What could happen next?

Regulations and compliance

Some states have begun passing their own regulations specifically addressed to digital assets, something the federal government has yet to do. New York has passed a licensing regime for intermediaries dealing in digital assets, called BitLicense. The New York Department of Financial Services most recently proposed two new measures to the BitLicense program, set to be finalized in early 2020. The new measures provide a framework where companies, once approved, may self-certify their new virtual currencies without being required to seek new approvals. Charting a different path, Wyoming and Montana have each passed permissive laws for digital assets, exempting some digital assets from state securities laws, and providing a regulatory “sandbox,” which encourages collaboration with regulators without the threat of unexpected enforcement.

Civil action

State attorney general actions will vary from state to state depending on the local securities laws. Expect state courts to find that they have jurisdiction when the plaintiff is that state’s attorney general, as is the case in the New York Attorney General’s ongoing suit against the Bitfinex exchange. New states outside of the “early adopters” group are initiating lawsuits as well. The New Jersey Attorney General filed a lawsuit in mid-2019 against a New Jersey company that sold over $400,000 worth of digital tokens, claiming three securities law violations stemming from the sale of a digital token it claims is an unregistered security.

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