The New York attorney general issued a stern warning to crypto companies and crypto investors on Monday. Crypto firms doing business in the state must play by the rules or face consequences, she said. And to investors, she underscored the hazards of dabbling in the crypto markets.
The two-part warning from NY attorney general Letitia James comes on the heels of a settlement agreement with Bitfinex and Tether, wherein the two closely related companies agreed to pay an $18.5 million penalty. And an effort to shut down Coinseed, a crypto-trading app that prosecutors allege ignored securities laws and defrauded thousands of investors.
An unstable market
In a warning to investors, the NY attorney general underscored the numerous risks of investing in bitcoin. Namely, volatility, difficulty in cashing out, conflicts of interest, market manipulation and limited protection from fraud.
“I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses,” she said in a tweet.
“Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests,” she said.
She went on to add that “even if you purchase a well-established virtual currency from a more reputable trading platform, the price could crash in an instant.”
In effect she appeared to be saying that even if you are buying bitcoin on a regulated exchange, such as Coinbase in the U.S., your money could be here today, gone tomorrow.
Heed the law
In the second part of her warning, an industry alert, the NY attorney general warned crypto firms that deviation from the law will not be tolerated.
“If you don’t play by the rules, we will not hesitate to shut down your operations,” Attorney General James in a tweet.
Commodity broker-dealers, salespersons, and investment advisors in New York need to register with the Office of the Attorney General. And under the law, virtual currencies qualify as commodities—or securities. New York crypto firms that don’t register with the OAG, are in violation of the Martin Act.
Penalties include “permanent injunction from selling, offering to sell, or acting as a broker or investment advisor concerning securities or commodities in New York, as well as disgorgement of profits and restitution to victims.”
What does this mean?
Before the hammer comes down on Tether, which could cause a crash in the price of bitcoin and other cryptocurrencies, we can expect to see more warnings from regulators and prosecutors about the perils of investing in crypto.
If Tether is shut down and the price of bitcoin collapses as a result—regulators want to make sure that investors are well aware of the risks they face in buying bitcoin or any other cryptocurrency.
The NY attorney general isn’t the one done playing around. Treasury Security Janet Yellen issued a warning about bitcoin last week, saying it is inefficient for transactions and often used for “illicit finance.”
And if Gary Gensler is confirmed as the new chair of the SEC,* we may see a slap down on coins that fail the Howey test—including some of those listed on Coinbase, a firm that is planning to go public soon.
Updated March 2, 2021, to clarify that Gensler is Biden’s pick for chair. He still needs to be confirmed.
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Amy Castor 
The signs of a Tether Doomsday scenario: divergence of BTC price between banked and unbanked exchanges… got me thinking. Where does the “official” bitcoin price come from? Is there an official price? Is the Coinbase quote a de facto official price? What about trading volume, for that matter? I find a bunch of different numbers and it’s not at all clear exactly what they mean. One reads all kinds of things about the total trading volume. I have no idea what’s true, or if anyone knows. Does anyone even try to estimate how much of the volume is arb bots? Or just out-and-out wash trades by the exchanges?