On October 18, the New York Attorney General announced that cease-and-desist letters were issued to two “[v]irtual or ‘crypto’ currency lending platforms”, directing the lending platforms to “immediately cease their unregistered and unlawful activities in New York.” The announcement states also that three other platforms were directed to immediately provide information about their activities and products.

The announcement emphasizes that these actions by the New York Office of Attorney General (OAG) are intended to protect New York investors and the trading markets from exploitation by high-risk virtual currency schemes. The announcement explains that virtual and crypto currency lending platforms are essentially interest-bearing accounts that offer investors a rate of return on virtual currency deposits.  The announcement continues that the New York Martin Act requires that lending platforms of this nature register with the OAG if the platforms are operating within New York or offering their products and services to New York residents. The Martin Act is an anti-fraud law that grants the OAG expansive law enforcement powers to conduct investigations of securities fraud and bring civil or criminal actions against alleged violations of the Martin Act.

Copies of the cease-and-desist letters delivered to the two lending platforms were published on the OAG’s website with the names of the platforms redacted within the text of the letters. However, the OAG’s website displayed the file names of the published letters, one titled “Microsoft Word – Nexo Letter” and the other titled “Microsoft Word – Celsius Letter 10.14.21”, suggesting that Nexo Financial and Celsius Network, which describe themselves as lending platforms, were the recipients of the cease-and-desist letters. The OAG’s website has since been updated to retitle the file names without reference to any company name.

Celsius published a post on its blog on October 19 that “Celsius has not received a cease and desist order in NY[ ]” but it “did receive a request for information (and not a cease and desist) from NY authorities. We are now working on providing regulators in New York with information about our business and offering.” A spokesperson for Nexo Financial confirmed that Nexo received a cease-and-desist letter but denied offering its products and services to New York residents. The spokesperson noted that Nexo uses IP-based geoblocking tools to prevent individuals located in New York from using the platform and its Terms and Conditions explicitly state, “We do not offer our Earn product and Exchange in New York.” At this time, no other company has acknowledged receiving the other cease-and-desist letter or being among the two other companies that received a direction to provide additional information.

New York earned a reputation for setting strict regulation of the crypto industry when it introduced the BitLicense in 2014, which became a requirement for a business that offered certain virtual and cryptocurrency services to New York residents. By August 2015, at least ten crypto-related companies announced that they ceased all business in New York due to the BitLicense requirement. Since 2018, the OAG has also expressed concern about risks posed to New York residents by trading platforms, issuers and exchange services. The published cease-and-desist letters also highlights that the OAG recently published an Industry Alert to remind virtual or crypto currency commodity brokers-dealers, sales persons and investment advisors doing business in New York that they must register with the OAG and other applicable governmental authorities or risk prosecution of fraudulent practice and other crimes under the Martin Act. Notwithstanding the strict regulation, nearly 30 companies have obtained a BitLicense, conditional Bitlicense or a New York Limited Purpose Trust Charter allowing the provision of certain virtual or crypto currency services to New York residents.

Author

Christopher Murrer is an associate in the International Tax and Wealth Management practice groups of Baker McKenzie Zurich. He joined the Firm after practicing for seven years as a domestic tax and estate planning attorney in New York and Washington, DC.