The New York Attorney General (NYAG) has brought a lawsuit against cryptocurrency platform CoinEx for allegedly failing to register as a securities and commodities broker-dealer and for falsely representing itself as a crypto exchange. CoinEx is a Hong Kong-based virtual currency exchange platform that allows users to buy and sell virtual currencies, crypto options, and other crypto services and products, including staking services.
The NYAG’s lawsuit includes claims under the Martin Act, New York’s so-called blue sky anti-fraud law, Article 23-A of the General Business Law, as well as Section 63(12) of the Executive Law, which prohibits repeated and persistent fraud or illegality in the conduct of a business. As we have previously noted, New York courts have held that virtual currencies fall within the scope of the Martin Act’s definition of a “commodity.”
The NYAG alleged that CoinEx violated these laws by acting as an unregistered securities and/or commodities broker-dealer, and also unlawfully misrepresented itself as a cryptocurrency exchange, despite not being registered as an exchange with the SEC, CFTC, or otherwise authorized to operate an exchange under New York law. The NYAG stated that its investigation included (i) the creation of a CoinEx account and buying and selling cryptocurrencies with a New York based IP address, for which CoinEx charged fees, and (ii) ongoing tracking of whether CoinEx continued to offer services to New York based IP addresses.
The NYAG further noted that CoinEx failed to respond to a subpoena seeking testimony about its digital asset trading activities. Under Section 353 of the General Business Law, the failure to respond to a Martin Act subpoena is “prima facie proof” that the respondent is engaged in fraudulent practices and may serve as the basis for the entry of a permanent injunction. Accordingly, the NYAG is seeking permanent injunctive relief to prohibit CoinEx from offering its services to New Yorkers, as well as an accounting, disgorgement, and restitution with respect to all of the revenues obtained from allegedly illegal conduct in New York.
This action serves as a reminder that cryptocurrency remains an enforcement priority for the NYAG. Persons operating in this sector should carefully consider federal securities and commodities registration laws, as well.