Last week, the Empire State made two visits to the regulatory stage. Neither of them were very reassuring.
On April 25, the New York State Senate (NYS) approved bill S8839, which would make “rug pulls” and other crypto frauds criminalized. Two days later, the Assembly of the state passed a ban against non-green Bitcoin mining. Industry representatives were furious at the first event, and they also had negative reactions to the second. This may have been more reflexive, as the ban was only temporary and was primarily aimed at energy providers.
Kevin Thomas sponsored the fraud bill. He wanted to find a compromise between protecting the public and encouraging innovation in the blockchain and crypto sector. The bill would criminalize certain acts of crypto-based chicanery, including “private key fraud,” illegal rug pulls and “virtual token fraud.”
“With the development of this new technology, regulations are vital that they both conform with the spirit and combat fraud.”
Critics quickly pounced, however, slamming the bill’s relevancy, usability, and overly broad language, as well as its constitutionality.
For instance, the Blockchain Association told Cointelegraph that the bill is unworkable as it stands. The biggest problem was the requirement for software developers to publish personal investments online. It would be a crime to not do so. This is not the case in traditional finance, or any other industry. It’s also not applicable to major shareholders of public companies.
Further, the association stated that all of the listed offenses are already covered by New York State and federal laws. “There is no reason to add new offenses for ‘rug pulling.’
Stephen Palley, a partner at the Washington D.C. law firm Anderson Kill, appeared to agree with Cointelegraph, stating that New York already has the Martin Act. This “existing statutory scheme is one of our broadest and covers most of what the bill purports criminalize.”
Threat to trust
However, it is hard to deny the fact that cryptocurrency and blockchain fraud plagues the sector. It doesn’t seem like it will be stopping. Chainalysis’ December report stated that “Rug Pulls brought 2021 cryptocurrency scam revenues close to all-time highs.” These activities were deemed a significant threat to crypto adoption and trust by the analytics company.
Thomas bill agreed, noting that “rug pullings are now wreaking havoc upon the cryptocurrency industry.”
This summary also described a recent rug draw that involved the Squid Game Coin. The initial price for the token was $0.016. It then “soared to approximately $2,861.80 per coins in just one week, and then crashed to $0.0007926 in less that five minutes after the rug pull.
In other words, SQUID creators got a 23,000,000% return on investment while their investors were conned out of millions. This bill will give prosecutors a clear legal framework to pursue these types criminals.
Are the suggested fixes possible?
Some people were confused by the proposed remedies in the bill. However, the bill included a provision that token sellers who sell “more then 10% of such tokens within five year from the date of their last sale of such tokens,” should be prosecuted.
Jason Gottlieb, partner in Morrison Cohen LLP and chair for its White Collar and Regulatory Enforcement practices, said that “the provision that makes developers sell more than 10% tokens in five years is preposterous.” He asked why such activity should be considered fraudulent when it is conducted openly, legally, and without deception.
It’s also sloppy legislative writing. This rule can be easily circumvented by creating large quantities of tokens “not for sale” that are simply locked away in vaults to stop any sales exceeding the 10% threshold.
Others were critical of the bill’s lackluster precision. David Rosenfield, partner at Warren Law Group, stated that the bill would mandate stablecoin issuers “not” advertise. Comparatively, most bills of this nature “will require certain disclosures or prohibit specific language.” Rosenfield told Cointelegraph that the bill’s vague and broad language “permeates” and “infects the legislation fatally.”
He also stated that the bill requires that a trier must “take into consideration the developer’s notoriety.” It is not clear what this means. If you ask 10 people what notoriety means, they might give 10 different answers. Consider the fact that software developers are required to publish their investments. Rosenfield stated that this “unconstitutionally stigmatizes an entire class of citizens and developers, without any compelling reason that would be constitutionally valid.” “This bill in its entirety will not be approved by the Constitutional requirements.”
Cointelegraph asked Clyde Vanel — who chairs the New York State Assembly Subcommittee on Internet and New Technologies and introduced a companion bill for S8839 in lower house — about his criticism of the claim that rug pulling and other types of crypto fraud were already covered by existing statutes including the state’s Martin Law. He replied:
“While the Martin Act gives some jurisdiction to the Attorney General for fraud investigation, we must give clear authority to New York prosecutors for cryptocurrency-related matters. This bill gives clear authority to combat cryptocurrency fraud.”
Vanel was asked to give an example of how the bill fits with “the spirit blockchain” as stated in the summary. He replied, “Interestingly, trust is one of the key tenets blockchain technology.” This bill will give cryptocurrency investors and traders the trust they need.
Vanel, a self-described entrepreneur, was concerned that the legislation might discourage software development, especially the requirement that developers post their personal investments online.
Vanel stated to Cointelegraph, “I want New York to be a place that has a free, fair, and open marketplace for investors, entrepreneurs, and all to participate.” “The disclosure obligation only applies to the developer’s interest within the token created. It does not apply for other investments than the token in question.
Gottlieb disagreed with some aspects of this description. He stated that the bill was not in line with blockchain’s spirit. Although the bill may use blockchain terminology such as rug pull, it doesn’t necessarily reflect its understanding of blockchain’s true nature. He stated that the bill had serious flaws and would hinder legitimate developers. The true spirit of blockchain is to promote development while protecting participants.
What drives the state’s legislators to act?
Given the impractical language and hurried draft, one suspects that this bill was rushed to be written. The question is: Why are New York’s legislators so motivated? Need to keep up with a new technology many don’t yet understand. The desire to not be outdone in crypto territory by other states or locales such as Wyoming, Texas, and Miami.
Rosenfield replied, “Read the 20-page criminal case in the recent charges against Ilya Lightenstein and his wife Heather Morgan.” Rosenfield referred to the recent arrest of a couple for stealing cryptocurrency valued at $4.5 million at the time of writing on Bitfinex in 2016. “You will see how difficult legislators and regulators face in combating the ever increasing level of crypto fraud in New York State,” he said.
Palley stated that Palley was generous in his assessment of legislators’ motivation. “The market is indeed rife in misconduct and in some instances fraud, and that legislators want to make a mark by adding laws to the books in order to address that behavior.”
A cynic, on the other hand might think it’s just legislative theater. Palley said that the truth lies “probably somewhere in between” and added:
“Regardless, I don’t think the new nature asset classes requires new laws to address old behaviors as well as commerce.
Crypto mining is the answer.
S8839, as noted, was closely followed by the NYS Assembly’s passage of a two year ban on non-green Bitcoin miners. Does the state’s crypto wariness, which has been simmering for years, finally boil over?
Gottlieb said that the events were not comparable. He said that the Bitcoin mining legislation, although flawed and misguided, was at least based on a desire to protect our environment when we interact with new technology.
While the new legislation regarding rug pulling may be inspired by a desire to protect investors and prevent fraud it is not new. “Existing law addresses that concern perfectly.”
Although the Bitcoin mining ban seemed to attract more attention than last week’s rug pull bill, this could have been partially due to misapprehension. “This [mining] bill was framed by the media as a ban against crypto mining. NYDIG Research Weekly’s April 29 newsletter stated that it is not. It is actually a suspension of certain types of crypto mining for two years, which NYDIG said was primarily aimed at power companies and not Bitcoin miners.
“The New York State Assembly approved a 2-year moratorium to issue air permits to fossil fuel-based electric generator facilities that supply behind the-meter energy for cryptocurrency mining.
It may not surprise, then, that New York State is pursuing its own path in the area of cryptocurrency regulation and blockchain technology. Gottlieb stated that “New York State” is the country’s financial engine. However, New York’s legislation has severely hampered responsible finance in blockchain-based finance. Gottlieb cited as an example the BitLicense requirement by the state, which he described as “onerous” but “largely ornamental”. Gottlieb stated that overall, Cointelegraph was satisfied with the following:
“New York legislators need to ask themselves if they want New York’s fintech industry to grow and thrive, or if they want to pass more poorly thought laws that only scare away companies.”
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.