Katherine Ross

CoinEx, a Hong Kong-based crypto trading platform, has agreed to pay out $1.7 million to the <a href="https://blockworks.co/tag/nyag">New York Attorney General</a> and cease operations in New York.&nbsp;



Of the $1.7 million sum, $1.1 million will go toward refunds for nearly 4,700 New Yorkers. The other $600,000 will go to pay state penalties.&nbsp;



The exchange is <a href="https://blockworks.co/tag/tether">Tether</a>-based, and predominantly trades bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and <a href="https://blockworks.co/price/usdt">USDT</a>, with no USD pairings.&nbsp;



The New York Attorney General’s office <a href="https://ag.ny.gov/press-release/2023/attorney-general-james-sues-cryptocurrency-platform-failing-register-new-york">sued</a> CoinEx back in February, alleging that it violated the Martin Act by not registering with the state.&nbsp;



The <a href="https://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?referer=&amp;httpsredir=1&amp;article=1010&amp;context=jbtl">Martin</a> Act — established in 1921 — makes it illegal for anyone offering to sell or selling securities as a dealer, broker or salesman without registration.&nbsp;



Because CoinEx claimed to be an exchange and wasn’t registered with either the Commodities Futures Trading Commission or the SEC, it was in violation of the Act, the New York Attorney General’s office <a href="https://ag.ny.gov/search?term=martin+act&amp;sort_by=relevance&amp;sort_order=DESC">claims</a>.



“Today’s agreement should serve as a warning to crypto companies that there are hefty consequences for ignoring New York’s laws. My office will continue to crack down on crypto companies that brazenly disregard the law, mislead investors, and put New Yorkers at risk,” NY Attorney General <a href="https://blockworks.co/tag/Letitia-James">Letitia James</a> said in the press release.&nbsp;



The CoinEx settlement is the latest case in a string of crypto-related suits and settlements — <a href="https://blockworks.co/news/crypto-market-ether-security-nyag">including one against KuCoin</a> — brought forth by the New York Attorney General’s office. The attorney general has <a href="https://blockworks.co/news/crypto-fraud-needs-order">also expressed plans to bring a bill to state legislators</a> which would require crypto firms to complete audits, submit financial statements and boost fraud protection.



“Rampant fraud and dysfunction have become the hallmarks of cryptocurrency and it is time to bring law and order to the multi-billion-dollar industry,” James said in May.



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Hong Kong-based CoinEx to exit New York, pay $1.7M in NYAG settlement

Sebastian Sinclair

Digital assets took a beating Thursday following revelations New York Attorney General Letitia James had called out ether as a security in a lawsuit against crypto exchange KuCoin.



James <a href="https://blockworks.co/news/eth-security-alleges-nyag">filed a lawsuit</a> against Seychelles-based KuCoin, alleging a breach of securities laws by providing certain token offerings which include ether, luna and the TerraUSD stablecoin.



KuCoin has been operating in New York without registering itself as a securities and commodities broker-dealer, James said in the suit.



The NYAG’s claim could set a precedent in the broad digital asset sector and cause a ripple effect to other jurisdictions, Jeff Yew, founder of digital asset manager Monochrome told Blockworks.



Blue chip digital assets bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>) both fell more than 8% in a flurry of trades that dragged prices to their lowest point in almost two months. The pair last traded around $19,800 and $1,390 near their daily lows.



The recent sell-off in ether, in particular, is likely coming from Coinbase, Ho Chan Chung, head of marketing at on-chain analysis platform CryptoQuant told Blockworks.



CryptoQuant’s <a href="https://cryptoquant.com/asset/eth/chart/market-data/coinbase-premium-index?window=DAY&amp;sma=0&amp;ema=0&amp;priceScale=linear&amp;metricScale=linear&amp;chartStyle=line" target="_blank" rel="noreferrer noopener">Coinbase Premium Index</a> for ether has dipped to levels last seen on Jan. 18 at -0.01, indicating a greater level of selling pressure from the publicly-traded exchange Chung said.



The total market capitalization of the crypto market has also dipped below $1 trillion for the first time since Jan. 14, after shedding 7.8% of its value to $960 billion, <a href="https://www.coingecko.com/en/global-charts" target="_blank" rel="noreferrer noopener">CoinGecko data</a> shows.



<h2 class="wp-block-heading">Regulation through litigation</h2>



Ever-increasing pursuits of regulation through enforcement and litigation from leading US agencies, namely the Securities and Exchange Commission (SEC), are forcing a rethink to what had been a good run for digital assets this year.



Crypto is now entering its &#8220;Passion of the Christ&#8221; phase, Jehan Chu, founder of Hong Kong trading firm Kenetic, told Blockworks.



“The SEC and NYAG are doing their best to crucify the industry once and for all against a backdrop of an increasingly hawkish Fed and contagion now infecting banks like Silvergate and Silicon Valley Bank.”



Rich Falk-Wallace, CEO of crypto data analytics platform Arcana agrees, pointing to today’s negative move across the crypto markets as a function of several factors.



That included crypto’s lockstep moves with the US stock market, as reflected by a 1.8% decline in the SPDR S&amp;P 500 ETF (SPY) and broad enforcement actions.



An elevated regulatory risk across liquid staking stablecoin as well as crypto bank Silvergate’s intentions to wind down its operations was also feeding the sell-off.



“The fact that the SEC has brought actions against Kraken’s liquid staking product and Paxos’ stablecoin have created the perception that more, even larger, regulatory enforcement actions are likely to be brought across the ecosystem,” Falk-Wallace said.



Silvergate announced Thursday it would <a href="https://blockworks.co/news/silvergate-intends-wind-down-operations">fold its business</a> following a particularly poor quarter and a run on the bank that drained it of some $8 billion in assets.&nbsp;



The run was sparked by regulatory concerns around the use of its payment network to enable thousands of FTX customer transfers to flow into accounts of Alameda Research.



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Crypto Market Sinks Following Ether Security Label by NYAG

Shalini Nagarajan

<div id="highlights-block_62e8ec1381568" class="highlights">
 <ul>
 <li>New Yorkers let down by crypto platforms are encouraged to contact the Attorney General&#8217;s office</li>
 <li>“Investors were promised large returns on cryptocurrencies, but instead lost their hard-earned money,” New York&#8217;s Attorney General wrote</li>
 </ul>
 
</div>



New York Attorney General Letitia James has called on crypto buyers in the state who’ve been “deceived” or affected by the recent crash to contact the Investor Protection Bureau.



The Office of the Attorney General (OAG) wants to hear from New Yorkers locked out of their digital asset accounts, unable to access their investments or otherwise done wrong by crypto startups, it said in an <a href="https://ag.ny.gov/press-release/2022/investor-alert-attorney-general-james-urges-new-yorkers-deceived-crypto-platforms" target="_blank" rel="noreferrer noopener">alert</a> issued on Monday.



Crypto industry workers have also been encouraged to file whistleblower complaints if they have witnessed misconduct.



The alert comes after crypto markets faced contagion following TerraUSD’s crash and the collapse of high-profile lenders such as <a href="https://cms.blockworks.co/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">Celsius</a> and <a href="https://cms.blockworks.co/voyager-files-for-bankruptcy-days-after-freezing-withdrawals/" target="_blank" rel="noreferrer noopener">Voyager Digital</a>. Withdrawal freezes on these networks, among others, have blocked investors from accessing their funds as firms work on their insolvency issues.



“The recent turbulence and significant losses in the cryptocurrency market are concerning,” James wrote in a statement. “Investors were promised large returns on cryptocurrencies, but instead lost their hard-earned money.”



But despite massive liquidations across May and June, demand for crypto assets remains relatively strong.



Cryptocurrency&#8217;s collective market value jumped more than 8% over the past week, now sitting at just under $1.1 trillion, although that&#8217;s still down by more than half over the year to date. Bitcoin’s price is up more than 7%, <a href="https://www.blockworksresearch.com/assets/btc/" target="_blank" rel="noreferrer noopener">Blockworks Research</a> shows, while ether has risen 12%.



Eliézer Ndinga, director of research at 21Shares, told Blockworks in an interview that given recent price developments and the fact that there have been more inflows into bitcoin exchange-traded products, there is a lot more market enthusiasm on social media.&nbsp;



“Many investors are in the money, and that&#8217;s basically a testament to the fact that we are outside the capitulation zone,” he said.



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New York Attorney General Issues Call for Crypto Industry Whistleblowers

Sam Reynolds

<div id="highlights-block_616f32858f66b" class="highlights">
 <ul>
 <li>A day after the New York Attorney General announced an investigation into Celsius and other stablecoin protocols, Celsius CEO Alex Mashinsky explained in the Financial Times its lending relationship with Tether </li>
 <li>In the NYAG’s inquiry letter, they specifically asked about the lender’s credit relationship with Tether which has been banned in New York since earlier this year</li>
 </ul>
 
</div>



Alex Mashinsky, CEO of Celsius Network, is the latest person to claim that Tether’s stablecoin tokens aren’t fully backed by dollar reserves.&nbsp;



For the last four years, Tether has been <a href="https://www.cnbc.com/2018/10/15/bitcoin-other-cryptocurrencies-jump-as-dollar-pegged-tether-falls.html" target="_blank" rel="noreferrer noopener">at war with those skeptical that its token</a> is fully backed by dollars. This has been an expensive war for the company, with settlements from <a href="https://cms.blockworks.co/tethers-settlement-with-the-nyag-a-positive-for-industry/" target="_blank" rel="noreferrer noopener">regulators in New York</a> and the <a href="https://cms.blockworks.co/tether-settles-with-cftc-for-42-5m/" target="_blank" rel="noreferrer noopener">Commodity Futures Trading Commission</a> costing the company tens of millions of dollars.



Tether has always held the party line that the stablecoin is fully backed — barring some administrative oversight of money being in different accounts — but it is now facing a new challenger to that claim from one of its largest customers.&nbsp;



“If you give them enough collateral, liquid collateral, bitcoin, ethereum and so on . . . they will mint tether against it,” Mashinsky told the <a href="https://www.ft.com/content/0035016c-29ad-4e6f-9163-2a17df490aa5" target="_blank" rel="noreferrer noopener">Financial Times</a>. He explained that new USDT is issued directly for the loan, and then destroyed after so it doesn’t permanently increase the amount of Tether in circulation.



Should this occur as Mashinsky describes, it would be in contradiction of Tether’s own terms of service: “Tether will not issue Tether Tokens for consideration consisting of the Digital Tokens (for example, bitcoin); only money will be accepted upon issuance.”



Blockworks reached out to Mashinsky and Celsius but did not hear back by press time.&nbsp;



For its part, Tether has made public statements that a “small, select group of customers are able to borrow USDT that has been secured by collateral in Tether’s possession well in excess of 100 percent of the loan proceeds.”



In August, Tether <a href="https://tether.to/wp-content/uploads/2021/08/tether_assuranceconsolidated_reserves_report_2021-06-30.pdf" target="_blank" rel="noreferrer noopener">published a report from Moore Cayman</a> showing that it held reserves to match the number of USDT tokens — albeit only 10% of the reserves were in cash or bank deposits. &nbsp;



“Our lending programme was first disclosed long ago in our reserves breakdown and is not a secret. The extent of the programme is currently disclosed in our assurance opinions, published quarterly. This practice is common to other stablecoin issuers,” the company said in a statement. “This lending is undertaken narrowly, efficiently, securely and profitably.”



<h3 class="wp-block-heading">NYAG serves Celsius a request for info</h3>



It might be curious that Mashinsky took to the press with these comments a day after his company was served a request for information by the NYAG. But this might be a case of Celsius trying to get ahead of a problem.&nbsp;



After all, the NYAG’s request specifically asks about how Tether is used by the lending platforms and asks for all contracts, agreements, or other documentation between the lender and Tether including lists of clients (including “any other captured information” like IP addresses) and their collateral details for USDT-backed loans.&nbsp;



“State whether you and/or your lending product solicits, accepts, loans, or accepts as collateral USDT, and provide details regarding the use of USDT in connection with your product,” said the NYAG, which also requested a list of users and clients that have provided, been loaned, or placed USDT as collateral with full transaction details.



Celsius’s eponymous token continues to slide on the news, down 1% during the last 24 hours and 9% on-week. In contrast, Nexo’s token is up around 4.4% on-day according to <a href="https://www.coingecko.com/en/coins/nexo" target="_blank" rel="noreferrer noopener">CoinGecko</a>.&nbsp;