The Empire State made two appearances on the regulatory stage last week, and neither was entirely reassuring. On April 25, bill S8839 was proposed in
The Empire State made two appearances on the regulatory stage last week, and neither was entirely reassuring.
On April 25, bill S8839 was proposed in the New York State (NYS) Senate that would criminalize “rug pulls” and other crypto frauds, while two days later, the state’s 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 “ban” was temporary and principally aimed at energy providers.
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 “private key fraud,” “illegal rug pulls” and “virtual token fraud.” According to the bill’s summary:
“With 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.”
Critics were quick to pounce, however, assailing the bill’s relevance, usability, overly broad language and even its constitutionality.
The Blockchain Association, for instance, told Cointelegraph that the bill as currently written is “unworkable,” with “the biggest nonstarter being the provision obligating software developers to publish their personal investments online, and making it a crime not to do so. There’s nothing remotely like this in any traditional industry, finance or otherwise, even for major shareholders of public companies.”
The association further added that all the specified offenses were already covered under New York State and federal law. “There’s no good reason to create new offenses for ‘rug pulls.’”
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 “an 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.”
A threat to trust
On the other hand, it’s hard to deny that fraud dogs the cryptocurrency and blockchain sector — and it doesn’t seem to be going away. “Rug pulls put 2021 cryptocurrency scam revenue close to all-time highs,” headlined a Chainalysis December report. The analytics firm went on to declare these activities a major threat to trust in cryptocurrency and crypto adoption.
The Thomas bill concurred, noting that “rug pulls are now wreaking havoc on the cryptocurrency industry.” 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, “often hundreds of thousands of percent.” Meanwhile, these malefactors have stashed away a huge supply of tokens for themselves before “selling them all at once, causing the price to plummet instantly.”
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, “soared 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:”
“In 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.”
Are the proposed fixes workable?
Some were baffled by some of the remedies proposed in the bill, however, including a provision that token developers who sell “more than 10% of such tokens within five years from the date of the last sale of such tokens” should be charged with a crime.
“The provision that makes it a fraud for developers to sell more than 10% of tokens within five years is preposterous,” 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:
“Worse, it’s sloppy legislative drafting. The rule is easily circumvented by creating a massive amount of ‘not for sale’ tokens that simply get locked in a vault, to prevent any sale from crossing the 10% threshold.”
Others criticized the bill’s lack of precision. With regard to stablecoins, the bill would require an issuer “not” to advertise, for example, said David Rosenfield, partner at Warren Law Group. By comparison, most bills of this type “will mandate certain disclosures or prohibit certain language.” The legislation’s vague and overbroad language “permeates and infects the bill fatally, in my view,” he told…
cointelegraph.com