New York is headed for a political showdown between its two powerful financial regulators over crypto legislation.
After New York Attorney General Letitia James filed a landmark lawsuit in October against two major crypto firms, Gemini and Digital Currency Group, her staff has renewed its lobbying effort on lawmakers to support proposed legislation that would expand her office’s supervision over the tumultuous industry, according to interviews with more than a dozen New York lawmakers, government officials, and political insiders.
First proposed by James’s office in May, the draft bill sparked controversy over its potential to weaken the New York Department of Financial Services, which has carved out a position as the sole regulator in the country with a dedicated crypto regime. The legislation also faced industry pushback, with crypto firms arguing that propping up two regulators would stifle growth.
After the bill failed to find a sponsor during the last legislative session, which ended in June, lawmakers expect the attorney general’s office to make a new push when the next session begins in January. James’s office has been privately pointing to its lawsuit against Gemini, which received regulatory approval from the DFS for its ill-fated Gemini Earn product, as an example of its need for increased supervisory powers.
“It helps keep the issue alive, but I don’t know if it’s going to tip the balance,” said one political strategist, who spoke on the condition of anonymity. “It gives the [attorney general] a really important talking point heading into the next session.”
Butting heads
As crypto legislation has stalled in Congress, New York's Department of Financial Services has sought to expand its influence over regulating digital assets, which it first asserted with the groundbreaking BitLicense program of 2015. Leading U.S. crypto exchange Coinbase and the Winklevoss-led Gemini were among the first companies in the then-nascent crypto industry to sign on to New York's regime.
While the DFS does engage in enforcement actions, including a $100 million settlement with Coinbase in 2023 over compliance violations, its primary function over the crypto industry is supervisory, such as monitoring which tokens licensed entities can custody and offer for trading.
At the same time, the New York attorney general also has regulatory oversight of the financial sector, with the 1921 Martin Act providing the office with anti-fraud powers over securities and commodities. Under James, the office has filed a number of lawsuits against crypto firms, including a settlement in 2021 against the exchange Bitfinex and its affiliated stablecoin, Tether.
While the two offices have coexisted as “frenemies,” as one crypto advisor put it, many saw James’s crypto legislation proposal in May as a slight against the DFS and its superintendent, Adrienne Harris. When James touted a press release with a long list of endorsements, Harris and Gov. Kathy Hochul were noticeably absent. At the time, New York Democratic Rep. Ritchie Torres told Fortune that he was left with the impression that the Department of Financial Services had been “blindsided.”
The bill pushed by James's office would codify the DFS's BitLicense into law, but it would also expand the attorney general’s supervisory powers which could create an awkward—and cumbersome—process for crypto firms operating in the state, as they would now need to seek approval from two regulators.
“There was overlap with the DFS’s existing regulation,” said Laurel Loomis Rimon, a former federal prosecutor who now works as the fintech co-chair of Jenner & Block. “Some of it covers things that DFS already covers.”
Many in the crypto industry, who already characterize the BitLicense process as unwieldy, viewed the proposed legislation as a poison pill and actively lobbied against it.
“We don’t see a reason for a redundant intervention by an enforcement agency,” said Kathryn Wylde, president and CEO of the Partnership for New York City, a nonprofit advocacy organization that represents business leaders. “We’ve got a regulator.”
Fortune spoke with seven of the state assembly members and senators who endorsed the proposal. All declined to sponsor the bill, which would formally introduce it into either the state assembly or senate, with several noting that the attorney general had released the legislation near the end of the session and failed to get enough support. Assembly member Alex Bores, who sits on the consumer affairs committee, described DFS’s crypto regulation as the “gold standard” in the U.S.
“You don’t necessarily want to change a system so drastically that you lose the trust and signal that already existed,” he told Fortune.
Second wind
In October, James’s office filed a civil lawsuit against two of the giants in the crypto space—Digital Currency Group and Gemini, which had collaborated with the DCG subsidiary Genesis on an investment product called Gemini Earn. Because of its disastrous loans to the failed crypto firms Three Arrows Capital and Alameda Research, Genesis went bankrupt, locking up $1 billion of Gemini customer assets invested in Earn.
Even before the lawsuit, James’s office had pointed to Gemini as an example of the regulatory gap in New York. As a New York trust company, Gemini is regulated by the Department of Financial Services. According to a person familiar, Gemini had sought and received DFS regulatory approval for Gemini Earn. Its counterparty Genesis Capital was not regulated by DFS, allowing for a lack of controls.
In an interview from May with Fortune, a lawyer in the attorney general’s office argued that conflict of interest provisions in its proposed legislation would prevent an exchange from offering investment products that it issued. It was the second lawsuit filed against a DFS-regulated crypto company, with James suing the BitLicense holder Coin Cafe in May.
According to materials viewed by Fortune, the attorney general's office began its investigation into Gemini in 2019 and notified DFS about its concerns over Gemini illegally advertising itself as an exchange.
Once again, many viewed the October lawsuit as a slight against the DFS, which has its own active investigation against Gemini, even though it had failed to prevent the collapse of Gemini Earn.
“While the Department cannot comment on ongoing investigations, DFS is committed to holding Gemini accountable for any failure in program oversight and any resulting harm to New Yorkers,” a DFS spokesperson said in a statement shared with Fortune.
Some in the crypto industry also viewed the attorney general's lawsuit as counterproductive and rushed, with Genesis arguing it would complicate bankruptcy proceedings. According to a person familiar, one of the named defendants, DCG founder and CEO Barry Silbert, was never interviewed after he asked for a postponement because his daughter was ill.
"Our investigation was thorough and there are expertly documented examples of fraud and illegal conduct. Any claims to the contrary are self-serving and misleading," said a spokesperson for the Office of the Attorney General in a statement shared with Fortune.
In the wake of the lawsuit, legislative staff for the attorney general began pushing lawmakers on the need for crypto legislation.
“They were a bit more aggressive about it, saying how we need your support, how can we get this done, and talking about the nuts and bolts about why this is necessary after the wake of Gemini,” said assembly member Michaelle Solages, who has focused on the impact of crypto on communities of color.
Bores also recalled conversations with James’s staff highlighting the Gemini lawsuit, telling Fortune that he expects the office to push for a new version of the bill once the new session begins in January.
The debate will pit lawmakers like Bores and Solages, who are supportive of DFS but want more industry oversight, against those who argue that DFS is sufficient. Assembly member Clyde Vanel, who serves on the chair of the subcommittee on internet and new technology, told Fortune that he found the attorney general’s proposal “problematic.”
“You can’t give the keys to the entire regulatory regime to the sheriff,” he said.
The attorney general’s main obstacle will be attracting a sponsor. Her supporters told Fortune that any crypto legislation still needs to foster innovation and ensure that DFS’s regulatory powers remain intact—a difficult balance to achieve. James remains a powerful political force in New York, and while DFS will still have the governor in its camp, the attorney general's office can lean on a deep bench of lawmakers in Albany for support next session.
“DFS has been doing a good job trying to regulate, but they don’t have a lot of powers, and the attorney general has the hammer,” said Solages. “We just got to get working together.”
