With the virtual currency and NFT industries moving, growing, and changing so rapidly, it can be difficult to create laws that keep up. New York has been leading the way in cryptocurrency regulation and NFT laws for more than a decade. 

The bulk of the laws are intended to protect consumers from financial fraud while keeping businesses transparent and honest in order to maintain purity in the marketplace. They have also served as examples for other states to follow and many have, borrowing key requirements from NY’s comprehensive regulations.

Virtual currency and associated assets are proving to be much more than a passing fad as was believed in the beginning. As crypto and bitcoin take hold in the marketplace, they are becoming a standard form of currency as well as a form of investment for many individuals and businesses.

What are NFTs?

Non-fungible tokens, NFTs, are cryptographic tokens. They are unique, with digital watermarks that denote ownership of a wide variety of assets, mainly digital. This includes unique digital artwork, social media content like tweets, intellectual property, and even real estate property rights.

NFTs are linked to blockchain tech. They are digital assets that have assigned to them specific attributes such as scarcity, value, and ownership which are used to transform digital collectibles into legitimate assets that can be verified.

They are expanding the marketplace for digital assets and have a global appeal.

Is Cryptocurrency NFT?

Cryptocurrency is not an NFT. Crypto is a fungible token that signifies a unit of value. There are some very important differences between FTs and NFTs.

  • Fungible Token (FT) – An interchangeable unit of value. Tokens that are the same type have the same functionality and value, much like our paper currency. A dollar bill has a face value of $1 and all $1 bills have that same face value. Fungible tokens can be divided, exchanged, or traded without the token losing its value. The use and value of an FT depends on the blockchain that it is on.
  • Non-Fungible Token (NFT) – A unique asset that has been tokenized by a blockchain. Each token bears specific and unique metadata and identification codes that make it different from other tokens. The information that the tokens in imprinted with makes them one of a kind. They can be exchanged or traded for other NFTs, cryptocurrencies, and money, depending on the current value within the market and the value that the owner has assigned.

What are the New York regulations on NFTs?

Federal securities laws guide state-level regulations of NFTs for New York as well as most other states. However, new legislation is being proposed. New York Attorney General, Letitia James, proposed legislation in early May 2023 regulating digital asset businesses that are operating within or from the state.

These regulations included crypto as well as NFTs, casting a vast net that would increase the enforcement authority of the Office of the Attorney General. It applies to digital asset brokers, digital asset investment advisers, digital asset issuers, and digital asset marketplaces.

More regulations are expected to be proposed and introduced as the world of NFTs and crypto is rapidly changing and growing. The more these digital assets become ingrained in our mainstream consumerism, the more laws there will be to keep it safe and secure customers’ personal identifiable information.

Can NFT projects be sued?

As the popularity and use of NFTs become more widespread, regulatory agencies will carry the burden of maintaining compliance. This is already happening.

In August 2023, the U.S. Securities and Exchange Commission published details of a suit it filed against an NFT project for selling unregistered NFTs. It is the first enforcement action it has taken against a company. While the company that was sued, Impact Theory, is based in Los Angeles, the magnitude of the action can be felt throughout the nation and across the globe.

The company used specific language that persuaded potential investors to treat the purchase of their NFT project, “Founder’s Key,” as not just an investment, but an investment into the business. They even asserted that the investors would see a profit from their “investments” if the company was successful. As a result, hundreds of investors got on board and the company raised close to $30 million.

The SEC viewed the digital assets that Impact Theory offered as a form of investment contracts. This made them securities, thus subject to registration.

While Impact Theory would not confirm or deny the findings that the SEC presented, they did agree to settle the issue by paying in excess of $6.1 million in penalties. The company was also ordered to prevent and eliminate royalties it may collect from indirect or secondary transactions in the market as well as destroy all of its Founder’s Key NFTs.

Do you have to be licensed to sell NFTs?

Typically, you do not need a license to be able to create and sell NFTs. But there are exceptions to this. 

Most NFTs do not fall under the purview of SEC laws because they are not securities or regulated financial instruments. If you sell NFTs that are securities or regulated financial instruments, then you may be required to comply with SEC regulations.

In order to cover all your bases and make sure that you are not breaking any laws, you should talk with an attorney who is knowledgeable in crypto and NFTs and practices digital asset law.

If you sell NFTs you are required to have an NFT License Agreement for each one. An NFT License Agreement protects the intellectual property rights of the original creator as well as their financial interests to and in their NFTs even after it has been sold to someone else.

These licensing agreements are coded into the blockchain of the NFT and allow the creator to assign specific rights to the buyers and original owners. The creator may also include terms that allow them to get a profit from their creation if it is resold.

What is the CRYPTO Act?

The Crypto Regulation, Protection, Transparency, and Oversight (CRYPTO) Act was introduced by New York Attorney General Letitia James on May 5, 2023. It is intended to increase regulations on the cryptocurrency industry, providing protection to consumers, investors, and the economy.

Some of the notable features of the Act include: 

  • The requirement for independent public audits of crypto exchanges
  • Individuals would be prohibited from owning the same companies such as tokens and brokerages in an effort to prevent conflicts of interest
  • Crypto platforms would be required to reimburse customers who were victims of fraud – similar to banks who operate under the federal Electronic Fund Transfer Act
  • The New York State Department of Financial Services would have increased regulatory authority of crypto and other digital assets

The Act was introduced in the wake of multiple incidents of crypto fraud with millions of investors losing billions. This is due, in part, to the fact that the industry is largely unregulated with only a few federal laws in specific areas, but virtually no state laws designed to crack down on unethical and illegal activity. 

It is intended to tamp down on would-be criminals who attempt to use common financial schemes and scams in the crypto marketplace in an effort to defraud individuals. It would place the crypto marketplace under a law that protects investors, customers, businesses, and the larger economy.

What are the New York Laws that apply to Crypto?

New York has several crypto laws that fall under the New York Financial Services Law. The state was one of the first to step up and enact regulations for cryptocurrencies and NFTs – and continues to lead the way. These laws cover licensing, among other actions related to the virtual currency marketplace.

The comprehensive laws cover all aspects of crypto, including licensing, application and fees, compliance, custody and protection of customer assets, books and records, reporting, and more.

There is a significant push for security. Crypto is an online business which means that a good deal of customers’ sensitive PII will also be stored online. This can make crypto businesses especially attractive to hackers and scammers. This means that the security for these businesses must be extremely high in order to provide protection for the consumer.

There is also a large portion of these regulations that are aimed at preventing market manipulation and fraud. Many of the same scams and schemes that are being used to commit fraud using money are also being used to commit fraud using virtual currency. The two are not all that far apart.

There is also a lot of guidance regarding crypto businesses on New York State’s Virtual Currency Businesses page.

What is the Virtual Currency Regulation 23 NYCRR Part 200?

The New York State Department of Financial Services issued a set of rules in 2015 called the Virtual Currency Regulations. Anyone engaging in business activity that involves virtual currency in New York must obtain a “BitLicense” or a charter under the New York Banking Law.

The goal of the regulation is to protect consumers and prevent financial crimes like money laundering as well as promote financial stability in the industry of virtual currency. It provides requirements for holding virtual currency in such a way that customer assets are protected. It also requires very specific and comprehensive maintenance of records and books and implementing anti-money laundering programs and increasing cyber security.

These regulations also give authority to DFS to audit, examine, and impose sanctions on entities that are regulated under these laws when they are not in compliance.

What is the New York Conditional BitLicense?

A BitLicense is a virtual currency license that grants businesses access to the New York marketplace. It does this through licensed businesses which gives New York citizens access to a broad array of virtual currency products within a well-regulated arena that ensures consumer protection.

Essentially, it is a safety measure for New Yorkers who want to shop safely within the crypto marketplace and do business with entities that are compliant with relevant laws and regulations.

Crypto laws are changing fast. An experienced crypto lawyer can help you navigate it all.

The digital asset world is changing fast, and lawmakers are busy creating laws to keep up with the growth. If you are a Bitcoin or crypto customer, investor, or business, you need an attorney who understands the industry and is current on the laws at the local, state, and federal levels.

The crypto team at The Litvak Law Firm has the experience, skill, and knowledge that you need no matter where you are in the digital asset industry. Whether you are starting a business, expanding your operations, making investments, or you’ve been the victim of a crypto scam, we are here to help.

Call today at 718-989-2908 to schedule a consultation and case review. When experience and knowledge count, call us.