New York’s Attorney General, Letitia James, unveiled a 25-page bill last week to tighten state crypto regulation. In a related press release, more than two dozen state politicians, former regulators, and policy experts endorsed the bill, hailing it as a major step forward in bringing the volatile industry to heel.
Despite the apparent support for the proposed legislation, it touched off a behind-the-scenes debate as influential figures warned it would undercut the authority of another powerful agency—the New York Department of Financial Services. The office, run by Superintendent Adrienne Harris, is already a leading crypto regulator in the U.S. thanks to its groundbreaking BitLicense virtual currency program.
In an interview with Fortune, New York Congressman Ritchie Torres (D-N.Y.), a strong proponent of federal crypto legislation, argued that parts of the bill duplicate existing regulation, which could touch off a turf battle between the two state agencies. Torres fears this could hurt broader efforts to regulate the crypto industry overall, adding the bill could also preempt the DFS’ traditional regulatory powers.
“DFS is the most effective and exacting regulator of crypto not only in the country, but in the world,” Torres told Fortune. “As the old saying goes, why fix what ain’t broken?”
The attorney general’s office strongly rejects this characterization, and there are clear signs that relations between the two agencies are strained.
A regulatory jump ball
Politicians and regulators of all stripes are clamoring to regulate crypto, but the task of doing so has become a quagmire, not least because financial services are overseen by a warren of different agencies.
At the federal level, financial market regulation is split between the Securities and Exchange Commission and the derivatives-focused Commodity Futures Trading Commission. Meanwhile, the task of overseeing banks is divvied up between three additional agencies: the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.
Then there are the states. In New York, political leaders in 2011 formed the DFS out of a merger between the New York State Banking Department and the New York State Insurance Department and tasked it with overseeing banks and bank-like products, including currencies and money transmission. The attorney general’s office, meanwhile, regulates securities and commodities, and enjoys strong enforcement powers thanks to the 1921 anti-fraud Martin Act.
In 2015, DFS waded into the nascent field of crypto, creating the BitLicense program and cementing New York as the first state to create a regulatory framework. After it was launched, critics blasted the program as slow and laborious, and some crypto firms—notably Kraken—left the state in protest.
Nonetheless, other leading crypto firms like Coinbase, Paxos, and Gemini have obtained BitLicenses and trust charters from DFS and touted them as evidence of their commitment to heed regulation. In the last year, as crypto regulation stalled in Congress, many have come to regard the DFS as one of the few offices at any level with a coherent plan. The office, meanwhile, touts a track record of effective oversight—pointing, for instance, to the fact that FTX US was never approved for a charter before the rot of its parent company became widely known.
The Office of the New York State Attorney General also believes it has a leading role in policing the crypto space. It has been aggressive with crypto enforcement actions, including a 2021 penalty for $18.5 million that was part of a settlement to force Bitfinex and Tether to cease activity in New York. This year, the agency filed a lawsuit against Alex Mashinsky, the former CEO of the bankrupt lending platform Celsius, among a bevy of other actions.
A lawyer for the OAG, who declined to be named, explained to Fortune that the proposed bill would shore up gaps in crypto regulation in New York by addressing systemic problems, including conflict of interest and transparency. They pointed to Gemini, the crypto exchange and custodian, which has a trust charter with DFS but is currently facing a lawsuit from the SEC for selling unregistered securities rooted in a partnership with the bankrupt crypto lender Genesis.
“Gemini and Genesis had a financial interest to Gemini customers on the Gemini exchange outside of the existing regulatory structure that was not part of the oversight that DFS was engaged in,” the attorney said. “We shouldn’t have to do after-the-fact enforcement—we should limit the kind of conflict of interest that exists when a licensed exchange is selling an investment product.”
The bill also codifies the BitLicense as statute and includes a section that specifies that nothing in the legislation would limit the DFS’s role as a supervisor. Maria Vullo, a former DFS superintendent from 2016 to 2019, argued that codifying DFS oversight would strengthen the department’s authority. “Regulation is a great thing,” she told Fortune. “But regulations can be changed by future superintendents.”
Shifting power
The proposed New York bill has critics beyond Torres who question both the substance and drafting of the legislation. “There’s always tension between the attorney general and the executive branch,” said one former DFS employee, who spoke on the condition of anonymity. “DFS took some power away from the AG when the department was created, and now they’re trying to steal some of that power back.”
A second-term congressman, Torres has argued that blockchain technology can improve payment products like check cashing and remittances, which are popular in his home borough of the Bronx. As Democrats in Congress have pushed back on implementing crypto legislation in the wake of FTX’s collapse, Torres has supported both fraud-prevention measures and market structure bills at the federal level.
Even so, Torres is wary of the OAG’s proposed bill, telling Fortune that his main concerns come from having two regulators rather than one. “I worry that the legislation would create overlapping jurisdiction, which would create a muddle,” he said. “One could easily imagine a court concluding that the new legal regime that exists by statute trumps the pre-existing DFS regime that exists by rule.”
“I worry that the weakening of DFS would weaken the argument for a state-by-state option,” he added.
Austin Campbell, the former chief risk officer at New York-based Paxos and a consultant for crypto firms, said that the legislation was well-intentioned from its first principles of preventing investor harm, but that its structure could undermine the state’s current regulatory structure. Specifically, he pointed to overlapping authority that could mean BitLicense and trust holders would be subject to separate regulators.
“That’s not going to lead people to be like, 'New York regulation is valuable,'” he said. “That’s going to lead them to leave New York.”
Vullo, the former DFS superintendent, disagreed that the new bill would hurt innovation.
“Those companies that are regulated appropriately are the ones that actually succeed profitably, because the bad actors are harmed and leave,” she told Fortune.
A spokesperson for DFS declined to comment on the specifics of the bill. “The New York State Department of Financial Services is the only prudential regulator with virtual asset-specific authority in the United States,” they said in a statement.
The bill is now in the hands of the New York State Legislature, which just finalized a $229 billion state budget, where it will be decided which committee will take it up and how to proceed with changes.
Missing endorsements
Another point of contention has turned on the extent to which DFS was consulted in the drafting of the bill. Among the endorsements for the legislation in the press release, DFS is notably absent, along with the governor’s office. A source familiar with the matter said that DFS did not see a final version of the proposed bill until it was released to the public.
“I was left with the impression that the agency felt blindsided,” Torres told Fortune.
The OAG rejected the characterization. In a timeline provided to Fortune, they said that they have been communicating with DFS and the governor’s office for nearly a month prior to speaking about the bill publicly. Conversations include a briefing with Harris and a separate briefing with senior DFS staff, a meeting with the governor’s office, and the sharing of bill language.
According to the OAG, DFS canceled a briefing on April 14. After DFS specified that subsequent conversations should be held with the governor’s office on April 17, the governor’s office canceled multiple meetings to discuss legislation. A source familiar told Fortune that the superintendent was informed at 9 p.m. on May 4, the night before the press release, that the bill would be made public.
A spokesperson for DFS declined to comment on the specifics of conversations.
“Governor Hochul is proud of our State's nation-leading record on crypto regulation,” a spokesperson for the governor’s office said in a statement to Fortune. “We will review the legislation if it passes both houses of the legislature.”
They added that their office is working closely with the attorney general on the matter.
Tension over the bill process reflects the challenges of crypto regulation, where oversight is often split between agencies at both the state and federal levels, leading to jockeying between offices. The OAG and DFS are no exception.
“Historically," said Campbell, also an adjunct at Columbia Business School, "you would describe them as 'frenemies.'"
