As we first reported in April, the New York Attorney General has been locked in a complicated dispute with a virtual currency exchange operator over the authority of the Attorney General to investigate its activities. In its defense in court proceedings, the crypto exchange asserted that the Attorney General lacked both personal jurisdiction and subject matter jurisdiction over it because of its efforts to avoid doing business in New York state. In a ruling ultimately siding with the Attorney General, a New York trial court on August 19 permitted the regulatory investigation to continue. The judge’s opinion underscores the difficulty faced by crypto entrepreneurs seeking to avoid contacts with U.S. customers in order to avoid the jurisdiction of U.S. courts and regulators.
Central to the court’s analysis was the myriad contacts the exchange had in New York state. Although the exchange modified its terms of service in January 2017 to bar New York customers from using its trading platform, the Attorney General was investigating conduct beginning as early as 2015. Notwithstanding the change in the terms of service, the Attorney General also alleged that the exchange subsequently maintained “substantial ties” to New York, including the following:
- allowing New York-based customers and traders to continue to transact business on the trading platform after January 2017;
- agreeing to loan its stablecoin to another New York-based virtual currency trading platform as recently as 2019;
- opening accounts and utilizing services of New York-based banks; and
- employing a New York-based executive who resided in and conducted work from the state.
Based on this information, the court concluded that “the sum total of these contacts, along with [the exchange]’s pre-2017 connections to New York, is enough at this point to justify the court’s continued enforcement and oversight” of the Attorney General’s investigative demands.
In turning to the exchange’s subject matter jurisdiction claims, the court ultimately concluded that the exchange misperceived the respective roles of the Attorney General and the court. While not a rubber stamp, the court reaffirmed that the Attorney General has broad statutory authority to initiate investigations of potential violations of New York’s antifraud statute, the Martin Act, and the courts have a general mandate to enforce the Attorney General’s investigative demands. The court also ruled that it was premature to determine whether the digital assets at issue in the case were securities or commodities for purposes of New York law, and it would instead be appropriate to consider those issues if and when the Attorney General actually charges the exchange with a violation of law. Issues of personal and subject matter jurisdiction could also be relitigated in such an action.
The case underscores the difficulty that crypto entrepreneurs face in seeking to avoid the jurisdiction of individual states or the entire United States in an effort to minimize their U.S. legal compliance burden. While barring customers from individual states (or the entire country) can be a viable strategy if structured appropriately and sufficiently monitored, numerous traps for the unwary remain. As the Attorney General alleged, the exchange continued to permit trading activity in New York, notwithstanding its own terms of service. The exchange also had other contacts with the state, such as maintaining New York bank accounts and employing a New York-based executive, which are common business practices for enterprises of all types.